New Rules to Prevent Discrimination from Small Business Lenders

The CFPB recently announced a new policy that will require banks, credit unions, savings associations, and non-bank lenders to collect demographic and geographic data. These lenders will have to provide this information alongside their lending decisions and the price of credit. The director of the CFPB made a statement that small businesses sank during the COVID-19 pandemic because they could not access credit under the Paycheck Protection Program, which was allotted $800 billion in federal funds to help small businesses continue operating. Policymakers hope this rule will lead to greater transparency and identify potential barriers to securing small business loans. 

The CFPB was actually mandated to begin collecting and analyzing data for patterns of discrimination back in 2010 when Congress passed the Dodd-Frank Act. After almost a decade of failure to take action, the bureau was sued by the California Reinvestment Coalition. The result was a court order for the agency to issue a final rule by the end of March 2023. 

Precedents for this type of regulation can be found in the residential mortgage arena—bank regulators have collected data on applicants’ race, geography, loan approval status, and loan interest rates since the 1970s. Under the Home Mortgage Disclosure Act of 1975, regulators analyzed this data for “redlining” where banks refuse a loan to someone because they live in an area that is considered a risky financial investment. Similar measures are now being taken in the hopes of increasing investment in small businesses, which create around 60% of new jobs in the U.S.

The small business lending market amounts to about $1.4 trillion, and yet there is little data on how lenders decide who is approved for loans. Banks that originate 2,500 small business loans or more per year will be required to start collecting data in October 2024. Smaller banks will not be required to begin until 2025 or 2026, depending on their size. However, the public may have to wait several more years before useful information becomes available as banks and regulators will need time to build internal systems for collecting and reporting on this data.

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