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Accounting & Finance

Small-business lending would be more transparent under a new CFPB rule

Posted by Neha De

September 15, 2021

Consumer Financial Protection Bureau Plan

The Consumer Financial Protection Bureau has proposed a rule to raise transparency around loans for small businesses. If finalized, this rule, which is mandated by Congress in the Dodd-Frank Act, would require lenders to disclose information about their lending to small businesses.

This will allow researchers, community organizations, lenders and others to better support small business and community development needs. The proposal pertains to a wide range of credit, including lines of credit, term loans, merchant cash advances and credit cards.

The proposed rule would apply to all businesses with $5 million or less in gross yearly revenue. According to the CFPB, “A business is a small business if and only if its gross annual revenue is $5 million or less for its preceding fiscal year.”

Under the proposal, financial institutions would have to report:

The type and amount of small business credit applied for and extended.
Key elements of the price of the credit offered.
Demographic information about small business credit applicants, including information to show if they are owned by women or minorities.

In its proposal, the CFPB highlights the fact that women- and minority-owned small businesses face particular hurdles; however, the lack of quantitative, comprehensive data has made it tough to understand the extent of these obstacles and, therefore, address them with receptive policy.

By taking a hard look at lending practices in this area, the CFPB believes that “the section 1071 of the 2010 Dodd-Frank Act data would not only foster a culture of compliance but also bring attention to the underserved parts of the small business market that have traditionally faced the greatest obstacles to success. In this way, the proposed rule is intended to help small businesses drive inclusive and equitable growth.”

The U.S. economy and small businesses

Small businesses are a crucial part of the American economy; they form a significant chunk of credit and lending markets. According to the Small Business Administration, small businesses employ almost 60 million Americans, which makes small business ownership a key path to wealth creation for individuals, families and communities.

This shows how small business lending can promote greater equity; whereas, its absence can augment existing inequalities. And failing to make small business lending accessible to those who qualify withholds competitiveness and innovation, apart from hampering U.S. entrepreneurship.

According to the CFPB, the COVID-19 pandemic has called attention to the negative economic impact that happens when policymakers lack the data to properly target financial relief. At the peak of the pandemic, 23% of small- and medium-size businesses shut down.

Additionally, several small businesses struggled to access the small business relief funds appropriated by Congress during the coronavirus emergency. According to a report released by the Select Subcommittee on the Coronavirus Crisis , Treasury and SBA encouraged big banks to provide loans to their wealthy existing clients at the expense of truly struggling small businesses in underserved communities.

“[C]ontrary to Congress’s clear intent, the Trump Administration and many big banks failed to prioritize small businesses in underserved markets, including minority and women-owned businesses. As a result, small businesses that were truly in need of financial support during the economic crisis often faced longer waits and more obstacles to receiving PPP funding than larger, wealthier companies," the report stated.

In conclusion

According to the new proposal by the CFPB, “The current COVID-19 pandemic has shown that transparency is essential, particularly at a time of crisis, when small businesses, especially those owned by women and minorities, may be in urgent need of credit in order to recover from economic shocks.”

The collected data would help the CFPB and other stakeholders to identify and address difficulties small businesses experience in trying to access credit, as well as how current lending practices can be improved. In addition, it will allow investors, policymakers, bankers and community groups to design more effective small business and community development programs across America.

Ultimately, the CFPB and other government agencies will be able to use the data to back their ongoing fair lending, supervisory and enforcement efforts.

Authors

Neha De

Neha De is a writer and editor with more than 13 years of experience. She has worked on a variety of genres and platforms, including books, magazine articles, blog posts and website copy. She is passionate about producing clear and concise content that is engaging and informative. In her spare time, Neha enjoys dancing, running and spending time with her family.

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Accounting & Finance

Small-business lending would be more transparent under a new CFPB rule

Under the proposal, financial institutions would have to report:

The U.S. economy and small businesses

In conclusion

Authors

Neha De

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