As Americans took to the streets to protest the police killings of George Floyd, Breonna Taylor and others, major banks and lenders were among companies pledging tens of billions of dollars in new initiatives aimed at reduce racial economic inequality, especially for African Americans.
These high-profile public engagements were welcome news. But now, not quite two years later, key players in banking and credit are battling to thwart regulations that will help bridge the racial wealth divide.
We currently do not collect any public demographic data on small business loans from banks, credit unions or any other institution. And banks are fighting to keep it that way, pushing for tight and ineffective regulation by the Consumer Financial Protection Bureau under Section 1071 of the Dodd-Frank reforms passed in 2010.
Lobbyists for big banks and small lenders are working to sabotage the CFPB’s efforts. The Bank Policy Institute and the Consumer Bankers Association each oppose the collection of pricing data, without which regulators and the public would struggle to identify disparate patterns in small business lending. The American Bankers Association, meanwhile, recently claimed that the costs of complying with the robust Section 1071 small business loan data rules would be double or even triple the CFPB’s carefully calculated estimates. – a hyperbolic assertion.
The industry’s battle against the Section 1071 rules has recently expanded beyond formal comment letters to more heavy-handed public relations tactics. Now, bank and credit union lobbyists are telling reporters that lenders will abandon minority and women-owned small businesses if they are forced to report the same basic data already required in the mortgage market.
Along with home purchase loans, small business loans are one of the private sector’s most important tools for strengthening local economies. Banking leaders who have promised to help combat the economic pain and material indignities that define the lives of most communities of color should be thrilled to improve racial equity in business lending — and to find out where it is lacking or needs improvement.
Instead, lender lobbyists are trying to protect a broken status quo. If they succeed, it will be much more difficult to heal the racial economic wounds in our society. These wounds are deep.
The median incomes of black women are $7,000 a year lower than those of white women. This gap is $17,000 for black and white men. Single black mothers have a median wealth of exactly zero dollars, while the median single white mother has a net worth of over $14,000. Three-quarters of all white families own a home, compared to about 45% of all black families. The median wealth of a white American is $160,000, while the median wealth of black Americans is less than $9,000.
Credit institutions actively maintain this catastrophic chasm between the races. Whether by official policy or informal individual bias, the institutions that control the money spigot behave differently when the person applying for a loan is black.
Mystery shopper testing conducted by the National Community Reinvestment Coalition at bank branches in Los Angeles, Atlanta, and Washington, D.C., repeatedly documented differential treatment by bank staff for white and non-white customers of loans to small enterprises. Black and Latino mystery shoppers interested in government-backed Paycheck Protection Program loans during the pandemic were again treated differently from white testers.
This evidence of racial bias in small business lending points to a high likelihood of similar experiences, as well as discriminatory outcomes and underrepresentation in lending, for minorities and women small business owners nationwide. We know this is the case for mortgages because banks are required to collect and report data on mortgages. This data shows that Black, Latino and Native American borrowers remain significantly underserved in the mortgage market.
We can anticipate similar spreads in small business lending, but we are not sure. We do not have meaningful data from lenders. But that is about to change. The CFPB is set to release a final rule that will finally force lenders to start collecting and disclosing more data on the race and gender of small business loan applicants, just like they do for mortgage data. All that remains is to determine what exact rules will be applied and implemented by the CFPB to fulfill the Section 1071 data mandate.
If the rules are shaped by curiosity and social responsibility rather than fear, we can finally see who lenders are serving, and who they are not, to meet the needs of small businesses in their communities. If the bank lobbyists have their way, the rules will be clumsy, fragile and unlikely to bring about meaningful change.
If you are a loan leader with a sincere desire to be part of the solution to the nation’s socio-economic divides, then this is a golden opportunity to embrace a simple data collection effort that will drive real progress for track your public positioning.