NEW YORK (AP) — Banks must begin reporting the demographics and income of small business loan applicants under new rules published Thursday by the Consumer Financial Protection Bureau.
It’s a move that policymakers hope will bring fairness and transparency to the small business loan market, much like other laws that have governed the home loan market for decades.
Under the Dodd-Frank Act, Congress required the bureau to begin collecting data on small business loan decisions to look for patterns of discrimination. Implementation of the rule took more than a decade, and the office was sued by the California Reinvestment Coalition for failing to collect this information.
Bank regulators have for decades collected information on home loan applicants — including race, geography, whether the loan was approved and the interest rate — under a 1970s law called the Home Loan Disclosure Act. The information collected under HMDA has long been used by regulators and the public to look for signs that banks discriminated against borrowers, also known as redlining.
According to the CFPB, the size of the small business loan market is about $1.4 trillion. But there isn’t much data on banks and how banks decide who to approve or deny loans to, and there’s no way to see — beyond anecdotal reports — whether banks have discriminated against black and Latino small businesses.
“The impact of the rule will be in the overall data it produces, which can be used by lenders, borrowers and the general public to get better credit results for small businesses and communities across the country,” said Director Rohit Chopra. In a statement prepared by the office.
Small businesses create 60% of new jobs in the US, and the US government provides billions of dollars to help create new businesses. During the pandemic, Congress gave $800 billion to small businesses through the Paycheck Protection Program to keep them operating.
It took a few years for the public to get the information, even though the bureau issued a final rule on the matter. Banks have to implement systems in place to start collecting the data, regulators need systems to go in, and there is a waiting period before the data is released.
Banks that originate at least 2,500 small business loans per year must begin collecting the data by October 2024, while smaller banks must collect the data in 2025 and 2026, depending on their size.