The 2010 Dodd-Frank law includes a provision that requires banks to compile and submit data whenever loans are made to women-owned and minority-owned businesses.
The idea is that by gathering data on race and gender, it will be easier to enforce fair lending laws.
Banks that are not lending to women and minorities will be very visible, and it will be easy to see how a bank stacks up relative to the competition, which might lead banks to change their lending policies in order to avoid being accused of discrimination.
In addition, gathering all of this data into a central repository should provide for an improved understanding of small business credit needs. What's broken and needs fixing? It's hard to know when you don't have the data.
How It Works
In practice, the banks are required to ask the business owner whether they have women-owned or minority-owned status, but the company requesting a business loan is not required to provide that information.
When the information is provided and the business identifies itself as being women-owned or minority-owned, the banker is not supposed to consider the status when making its lending decision.
Of course, banks have been collecting this type demographic data for mortgage loans for some time, but this is new for business loans.
Now that Dodd-Frank is in place, small business lenders must collect:
- the number of the application and the date on which the application was received;
- the type and purpose of the credit applied for;
- the amount of the credit applied for, and the amount of the credit approved;
- the type of action taken on the application, and the date of that action;
- the census tract in which the principal place of business of the loan applicant is located;
- the gross annual revenue of the business in the last fiscal year of the business loan applicant preceding the date of the application; and ;
- the race, sex, and ethnicity of the principal owners of the business.
Sounds Good, But There's Just One Problem
Since the bill was enacted in 2010, you might think that we now have five years' worth of amazing small business lending data to analyze.
Unfortunately, you'd be wrong.
As the Wall Street Journal points out this week: "the agency tasked with enforcing the requirement, the Consumer Financial Protection Bureau (CFPB), hasn't written a rule to enforce it yet."
The bill was passed in 2010, but, as we've learned, the government moves slowly -- and it's often much easier to pass a law than it is to implement it.
However, this particular issue is starting to get some attention. Last week, 83 congressional legislators voiced their desire to see the CFPB get moving on this part of the law (you can see the PDF version of their letter, if you are interested).
We completely agree, and you should too.
Small businesses are a critical driver of economic growth.
When we know how small businesses are doing then we know how the overall economy is likely to perform.
"The small-business borrowing index has historically tracked ahead of U.S. gross domestic product growth by two to five months, and is a good predictor of capital spending and job growth," confirms Bill Phelan , founder of PayNet, who regularly publishes the Thomson Reuters/PayNet Small Business Lending Index based on lending data from 250 leading U.S. lenders.
The Good News
On the bright side, despite the failure of the CFBP to collect better data on small business lending, it does seem that small business lending is thriving.
Earlier this month, the Thomson Reuters/PayNet Small Business Lending Index hit a historical record high.
Of course, this may be partially driven by growing awareness that the Federal Reserve Bank will soon raise interest rates.
If you own a small business, the best time to borrow is right now.
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