HOPE Submits Comments on CFPB’s Section 1071 Rulemaking

November 20th, 2020

By: Diane Standaert
Below is a summary of HOPE’s comments. To read the comments and recommendations in full, click here

Section 1071 of the Dodd Frank Wall Street Reform and Consumer Protection Act advances fair lending for small businesses, a critical part of the strategy for closing the racial wealth gap. As, such the Consumer Financial Protection Bureau (Bureau) must implement Section 1071 with the recognition of the current realities faced by Black-owned businesses and other businesses owned by people of color and women. The Bureau must account for, not ignore, these disparities in order to craft a final rule best positioned to help alleviate them.

The current reality is that Black-owned businesses are less likely to have an existing relationship with a financial institution, just as, or more, likely to seek credit, and yet, are more likely to be denied or discouraged than white owned businesses. These gaps in financial relationships exist even among healthy firms. According to the Federal Reserve Bank of New York’s August 2020 report, Double Jeopardy, 73% of healthy or stable white employers have an existing banking relationship, compared to 42% of healthy or stable Black employers.[1] Lack of access to capital is not due to Black businesses not applying for it. In fact, Black-owned firms—both employer and non-employer—apply for financing at equal or higher rates than white-owned firms but are denied at higher rates.[2]

These disparities and experiences were present prior to COVID-19, but the Paycheck Protection Program put them on full display. This was clear from HOPE’s vantage point in serving smaller businesses and businesses of color.[3] Many of the businesses that reached out to HOPE had been underserved or unserved by traditional lenders during the PPP process. The outcomes of PPP and the impact of COVID-19 on small businesses of color, should also be top of mind when implementing 1071 to ensure that minority-owned and women-owned businesses will have access to capital and be included in the country’s economic recovery. Due to a range of structural barriers within PPP, businesses owned by people of color faced greater barriers in accessing these relief funds.

Exclusionary lending practices, which Section 1071 has the opportunity to address, is costly to businesses, lenders, and our economy as a whole. What we need are clear rules of the road and a level playing field, not only for lenders, but more importantly for all borrowers, regardless of their race, gender or geography. The Bureau has the opportunity to accomplish this through its Section 1071 rulemaking.

As the Bureau proceeds with the rulemaking, HOPE urges the following:

1. Expansive coverage, of both lenders and credit, with few exceptions, with robust information gathered to ensure minority-owned businesses are receiving fair access to capital.

2. HOPE’s experience demonstrates such data collection is possible, not cost-prohibitive, and to the extent there is a cost, it is outweighed by the benefits.

3. Robust data collection is beneficial for individual lenders and borrowers, and creates a level playing field for a more robust marketplace.

Importantly, and at the heart of 1071, this data is necessary to close the capital gap for businesses owned by people of color. Prior to COVID-19, the credit gap in the Black business community stood between $7 and $8.5 billion, the highest in the nation on a population-adjusted basis, in terms of unmet needs.[4] Closing the gap in access to small business capital for businesses owned by people of color is a critical pathway to closing the racial wealth gap. Ultimately, closing the racial wealth gap has the potential increase the national Gross Domestic Product (GDP) between $1 and $1.5 trillion by 2028.[5] Lenders and businesses alike will benefit from the resulting economic activity from a fairer, more robust marketplace.

[1] Claire Kramer Mills and Jessica Battisto, Federal Reserve Bank of New York, “Double Jeopardy: Covid-19’s Concentrated Health And Wealth Effects In Black Communities,” Aug. 2020, at 6 https://www.newyorkfed.org/medialibrary/media/smallbusiness/DoubleJeopardy_COVID19andBlackOwnedBusinesses (Double Jeopardy).

[2] Id. (finding “Among Black-owned firms, 28% of nonemployers and 54% of employers applied for financing in the last 12 months, compared to 45% of white employer firms and 25% of white nonemployers).

[3] See e.g., Kiyadh Burt, Hope Policy Institute, “CDFIs Provide Relief to Women and Minority-Owned Businesses,” April 22, 20202, http://hopepolicy.org/blog/cdfis-provide-relief-for-minority-and-women-owned-businesses/

[4] Association for Enterprise Opportunity. Tapestry of Black Business Ownership in America: Untapped Opportunities for Success. Feb. 2017, https://www.aeoworks.org/images/uploads/fact_sheets/AEO_Black_Owned_Business_Report_02_16_17_FOR_WE B.pdf

[5] McKinsey and Company, “The economic impact of closing the racial wealth gap,” Aug. 13, 2019, https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-economic-impact-of-closing-the-racial-wealth-gap