Thank you for joining us. Today we are taking important steps toward a fairer, more transparent small business lending market. As Congress required in the Dodd-Frank Act, we are proposing a new rule that would shine light on the credit market for small businesses. That credit supports the majority of new jobs created and enables small business entrepreneurs to achieve the American dream. The small business lending rule we are proposing today, if finalized, will help all of us better understand this vital component of the American economy and help ensure that entrepreneurs can access credit free from discrimination and other barriers.
Small businesses are the engines of growth in the American economy and are one of the key drivers of wealth creation and upward mobility. There are over 30 million small businesses in the US, employing nearly half of all private sector workers and generating over 60% of net new jobs. And small businesses do more than create jobs: they are a vital part of the fabric of communities, giving character and identity to neighborhoods and meeting local needs.
Yet we don’t know enough about whether small businesses have fair access to the capital they need to generate new jobs and grow the American economy. Without this information, we cannot reach our potential economic growth as a nation. As we saw all too recently in the original design and implementation of the Paycheck Protection Program, we need to know much more about the credit needs of small businesses if we are to support them adequately in times of crisis and day-to-day. Our rule, if finalized, will shed much-needed light on the credit needs of small businesses, and it will help unleash the true potential of our nation’s entrepreneurs.
This is not the CFPB’s first work on small business lending. Congress not only required us to collect data on small business lending, but it also gave us primary responsibility for enforcing the Equal Credit Opportunity Act. ECOA covers all consumer and business lending, and our examiners began assessing ECOA compliance of lenders’ small business programs in 2015. However, without uniform, detailed, and reliable market-wide data, regulators cannot compare lending patterns across markets to assess where fair lending risks may be highest.
We understand that small business credit is vital to entrepreneurs, their families, and the communities in which they live and work. For example, we know that small farmers depend on access to credit to make it through the growing season and the lean years. And we know the effects of economic downturns can be amplified for small businesses.
The Great Recession and the COVID-19 pandemic are case and point. Small businesses were hit hard by the Great Recession and, in the following years, were often shut out from access to necessary credit due to lenders’ reluctance to lend to any but the applicants perceived to be the safest. The COVID-19 pandemic also hit small businesses hard. At the height of the pandemic, over one-third of small businesses were closed, and many still face difficulties gaining access to much-needed credit. Today’s proposed rule will help us work towards ensuring that credit-worthy small businesses can get the credit they need, when they need it, in times of crisis and in times of prosperity.
In response to the economic threat of COVID-19 on small businesses, Congress created the Paycheck Protection Program, or PPP, to help keep small businesses afloat during the pandemic. And, the lessons learned from the PPP demonstrate why today’s proposed rule is so important. Under the PPP, small businesses could receive loans from private lenders to cover costs including payroll and rent. The loans were fully guaranteed by the Small Business Administration and forgivable if the businesses met certain requirements. Ultimately, almost $800 billion in funding was provided for the program. But the program was plagued with problems—the smallest businesses had trouble accessing the funds, and, at least initially, reports were widespread that Black and Hispanic entrepreneurs had trouble accessing funds as well. For example, testing conducted by the National Community Reinvestment Coalition showed that Black women entrepreneurs, in particular, were seldom, if ever, encouraged by lenders to apply for PPP loans, even though they were as well-qualified as others who were encouraged to apply.
Earlier this year the new administration and the SBA made many needed changes that helped smaller and women- and minority-owned businesses access the PPP funds. But had Congress and the SBA had access to the data that our proposed rule would make available, the program could have been more effective from the beginning, and many more small businesses could still be open today or already be fully recovered.
With today’s proposed rule, we are taking the next step toward gathering critical data that is necessary to shine a spotlight on small business lending. This data will be used to support business and community development and foster fair lending. At its core, this rule is about providing greater transparency into which small businesses get credit and which ones do not, and the increased transparency will give us greater insight into the functioning of this market. We want to understand more about the kinds of credit applications lenders receive, along with how they respond to small business credit applications and at what price credit is given. Accordingly, I’ve decided to use the discretion that Congress gave the CFPB to propose gathering basic information about the cost of credit as this information directly relates to the rule’s purposes of fair lending and access to credit.
This proposed rulemaking has many similarities to an existing rule covering home mortgages. The Home Mortgage Disclosure Act, or HMDA, was enacted more than 40 years ago to improve our understanding of mortgage lending.
HMDA data cover the vast majority of mortgage loans in this country. The data show how lenders are serving the housing credit needs of their communities. Over the past four decades, policymakers, consumer advocates, and industry have all used HMDA data to make the mortgage market work better. In recent years, the CFPB has streamlined the HMDA data submission process, taking advantage of improvements in technology and making compliance easier across the board. The proposed rule’s small business lending data collection requirement incorporates many of those successes into its design.
But, obviously, the differences between mortgages and small business loans are wide and many. So, while we believe that our proposal effectively balances the concerns of various stakeholders, we know there is much we do not know, and we are seeking comment on all aspects of the proposal. In particular, we have heard loud and clear from lenders who will be covered by the rule that it will be important to them to have a simple, straightforward, and clear definition of a small business so that they can know with certainty and minimal effort if they are required to collect and report data for a particular credit application. We know that we will need the Small Business Administration to agree to any simplified definition of what is a small business, for purposes of this rule, and we will continue our active engagement with the SBA. I am confident that we will reach agreement with the SBA Administrator on a workable, simplified definition. We look forward to hearing whether our proposed definition, based on the business’s revenue, meets the need of industry for a bright-line standard. The comments we receive on this proposed rule will provide important additional information to help the SBA Administrator make a final decision on the proposed definition.
We look forward to hearing from everyone—community groups, small business owners, lenders, and others—on what you support in our proposal as well as where and how we can do better. We know this is an important and complex topic, and so we are allowing 90 days for the comment period, from when the rule is published in the Federal Register. We need to hear as many voices as possible to get this important rule right.
To make sure that we hear directly from small business entrepreneurs, and that the work of the CFPB supports them as much as possible, we are today launching a new feature on our website to allow small business entrepreneurs to share their stories about applying for credit. The shared stories will help inform the CFPB’s work to protect all small business entrepreneurs and create a fairer lending marketplace.
Each community is different and so are the credit needs of their small businesses. Policymakers need to be able to craft community development programs that fit local needs. Lenders need to be able to identify market gaps and offer competitive products that help small businesses thrive. And we all need to know if we are doing enough to make sure that every small business owner, regardless of ethnicity, race, or sex, has an equal opportunity to access credit, build wealth, and achieve economic success for themselves, their families, and their communities.
I want to say thanks, and call out the extraordinary efforts of staff, external community groups, industry stakeholders, the small entity representatives from our Small Business Regulatory Enforcement Act process last year, and the SBA for their incredible work and collaboration. All your efforts are the reason that today we are taking this important step forward towards a more transparent, fair, and competitive small business lending market. And that is in everyone’s best interests.