Deep South Small Businesses, Community Organizations, and Mission-Based Lenders Urge Strong Fair Lending Rules for Small Businesses

January 13th, 2022

By Kiyadh Burt and Diane Standaert

The Consumer Financial Protection Bureau is in the process of implementing game changing civil rights legislation that will, for the first time, shine a spot light on the demographics of lenders’ small business lending activity. The CFPB is a federal watchdog agency and its charge to implement this legislation comes from Section 1071 of the Dodd Frank Wall Street Reform and Consumer Protection Act, passed in the wake of the Great Recession, to prevent unfair financial services practices.

Over 40 small businesses, community organizations, mission-based lenders and others rooted in and serving the Deep South wrote to the CFPB in support of fair lending for small businesses in our region. In addition to small businesses, organizations signing the letter included those such as the Black Belt Community Foundation in Selma, Alabama, Black Clergy Collaborative in Memphis, TN, the Power Coalition for Justice and Equity in Louisiana, Immigrant Alliance for Justice and Equity in Mississippi, and mission-based lenders Communities Unlimited in Fayetteville, Arkansas and the African American Alliance of CDFI CEOs.

The letter from Deep South constituents to the CFPB notes:

“The proposed rule for collecting small business lending data from financial institutions has the potential to be a significant step toward creating a level playing field for small businesses, ending discriminatory lending practices, and helping close the racial wealth gap here in the Deep South.”

In the Deep South states of AL, AR, MS, LA, and TN, one in three businesses are owned by people of color, and nearly 40% are owned by women. In Mississippi and Louisiana, more than 20% of businesses in the state are Black-owned. They are integral to the fabric of our communities and economies, but yet do not receive equal access to capital as other businesses.

Ensuring fair lending for these businesses is necessary for the economic prosperity of our region. The CFPB’s proposed rule has the potential to provide the necessary accountability and transparency to advance fair lending practices. We are confident this proposal will impact our communities in a positive manner if properly implemented.”

In addition, Hope Policy Institute submitted a letter, providing detailed data analysis and policy recommendations in support of strong fair lending recommendations. Its letter draws on own HOPE’s lending experiences, along with empirical research and the experiences of the communities and small businesses HOPE serves across the Deep South. For example, in terms of evidence of disparities in access to capital for small businesses, HOPE’s letter draws attention to examples such as: in Arkansas, even though Black-owned businesses represent 9% of businesses in the state, they have benefited from just 1.2% of SBA lending in the state. In Tennessee, just 10% of the state-administered small business COVID-relief funds went to businesses owned by people of color. HOPE’s comment also recounts the exclusionary legacy of the Paycheck Protection Program, contrasting with the way in which mission-based lenders worked to fill in the gap to reach businesses otherwise unserved or underserved by mainstream financial institutions. As HOPE notes in its letter to the CFPB,

“Data collected under Section 1071 gives credence to the countless anecdotes of underserved businesses that have been denied capital or relegated to exploitative financing, while their counterparts benefit from a more responsive and supportive financial service system. The proposed rule will quantify and make transparent the extent to which financial institutions serve business owners of color and other marginalized groups. This is critical to eradicating the racial wealth gap.”

Finally, a key provision in the proposed rule which is of significant importance to closing capital gaps and the racial wealth gap in the Deep South is that it will ensure financial institutions report, for the first time, the demographics of their agricultural lending activity. As HOPE noted in its letter to the CFPB, over one-third (36%) of Black-owned farm land in the United States is located in the five states of Alabama, Arkansas, Mississippi, Louisiana, and Tennessee. In a separate letter to the CFPB, more than 30 farmers, food justice organizations, conservation groups, and mission-based lenders urged the CFPB to ensure that agricultural loans remain included in the final version of the new fair lending rules. Specifically, the letter notes: “The challenges Black Farmers face in gaining equal access to credit, or any credit at all, from public and private lenders spans over a century, yet there is still not any systematic way of ensuring lenders are held accountable for their unequal treatment…. The CFPB’s proposal requiring lenders to report on the race, gender, and other demographics of small businesses seeking agricultural loans, along with information about denial rates, approval rates, and loan terms, is a significant step forward in shining a light on – and hopefully preventing – unfair lending practices that have persisted for far too long.”

Over the next several months, the CFPB will be reviewing all of the public input it has received on its fair lending proposal before issuing the final version for implementation purposes. As the CFPB moves through this next phase of the process, to ensure these fair lending rules, adequately address the realities of small businesses owned by people of color and women in the Deep South, the letters from those in the Deep South region urge the CFPB to ensure:

Expansive coverage of lenders, credit products, and small businesses, with few exceptions, to ensure small businesses are receiving fair access to capital;
Collection of the right data points, including credit scores and business structure, to accurately reflect the realities small businesses experience in the Deep South; and
Robust, meaningful, and accessible publication of the collected data.

In an increasingly diverse nation, closing the small business capital gap is key to building wealth in Black communities and necessary for a robust, equitable economy. Small businesses owned by people of color are more likely to employ people of color. Consequently, their stability and growth is necessary for reversing disparate COVID-19 related employment losses. Robust data collection and transparency in lending will give women and people of color more opportunities for financial stability, and strengthen the fight to close racial and gender disparities in banking that have existed for far too long. Hopefully, once implemented, will effectively capture the experiences across Deep South communities while creating a financial marketplace where businesses owned by women and people of color can thrive.