Comment Letter to the CFPB for Information Regarding the Small Business Lending Market
By Jackson Mueller and Aron Betru
Small businesses are the backbone of the American economy and contribute substantially to U.S. economic growth and productivity. Just under 28 million businesses in the United States are classified by the U.S. Small Business Administration as a “small business.” These businesses employ nearly half of America’s workforce.4 Nearly three-quarters of U.S.-based small businesses are operated as sole proprietorships—businesses that are owned and operated by one person only. Given the economic role small businesses play in the U.S., understanding this portion of economic activity and growth is vital to fostering an enabling environment where startups and more mature small businesses can flourish.
And yet, we are often left with incomplete data comprised of approximations and estimates that oftentimes have to be relied upon. Accurate data on the small business lending environments at the local, state, and national levels, in particular, is hard to come by and leaves policymakers and regulators with the task of developing policies and guidance based on rough estimates from an opaque, yet gigantic sector of the economy. At a time marked by the proliferation of data and advanced analytical tools and capabilities, the appropriate course(s) of action to foster, sustain, and grow small businesses is unclear due to the lack of data. The CFPB’s recent RFI seeks to comprehensively address the current shortcomings in small business lending data collection efforts and offers regulators, policymakers, and industry stakeholders the potential ability to more effectively tailor resources and guidance to support small business ecosystems—especially underserved small businesses—at the local, state, and/or national levels.
While we are encouraged to see efforts being made to provide for additional transparency and understanding of the small business lending environment through enhanced data collection, we are also cognizant of what this new data request could mean for lenders of all sizes.
- Additional data could help remove structural barriers in the small business lending space, particularly for minority- and women-owned small businesses. Additional data could illuminate the small business lending space leading to more accurate information, tailored financial products and services, and more right-sized policy and regulatory efforts particularly focused on underserved small business communities.
- Enhanced data collection could reduce or eliminate the application of the Bayesian Improved Surname Geocoding (BISG) method to conduct fair lending analysis in the small business lending market. Additional data covering a small business lenders loan portfolio could remove the need for the use of the proxy method to determine fair lending compliance.
- Agencies should review current definitions, streamline/consolidate data collection requirements, and ensure no additional burden before pursuing a new definition of a “small business.” There are far too many definitions and reporting requirements imposed on small business lenders at the federal level leading to potentially duplicative and overlapping processes. Efforts to add yet a further definition should be tempered, and agencies should develop efforts internally to assess what definitions and reporting requirements remain practical in this day and age.
- The CFPB’s RFI will disproportionately impact different types of lenders operating in the small business space. Community banks, credit unions, community development financial institutions, alternative finance providers, among other sources, are on the front lines serving small business credit needs. Although smaller lenders may show a rationale for being exempt from the additional compliance due to cost, that is not prudent. As such, rather than provide blanket exemptions to certain smaller lenders, the CFPB should review legacy compliance and reporting requirements to determine whether out-of-date or inadequate in the current economic environment.
- The CFPB needs to clarify the type of small business owner and information required to avoid problems that may be raised in the Bureau’s attempts to collect certain data from small business lenders. The CFPB should provide clarity to ensure proper data collection and that the data collected is accurate.