It is a truism that small businesses are a critical engine of economic opportunity and growth. This is especially true for communities of color: businesses owned by people of color account for more than 8.7 million jobs at a total annual payroll of $280 billion, and these businesses generate $1.3 trillion in revenue.

It is also a truism that for small businesses to thrive and grow into larger enterprises they need to be able to access capital. There is now overwhelming evidence that this is far more difficult for businesses owned by persons of color than it is for white-owned businesses. For example, research conducted by a number of Federal Reserve banks has found that in the previous five years, 46% of white-owned businesses with employees accessed credit from a bank compared to just 23% of Black-owned employer firms and 32% of Latino-owned employer firms. Lacking access to credit, 28% of Black owners and 29% of Latino owners relied on personal funds as the primary funding source for their business, compared to just 16% of white business owners.

In large part, these disparate results are attributable to overtly discriminatory practices by lenders. A recent study by the National Community Reinvestment Coalition makes this clear: it found that Black and Hispanic testers when applying for loans were required to produce more documentation to support their loan application and received less information about fees, and less friendly service when visiting a small business lender. But facially neutral practices with disparate effects are also important contributors to the difficulty that Black and Latino business owners have in obtaining credit, as was most recently demonstrated by the Paycheck Protection Program which, by relying on banks as its distribution mechanism, gave a large leg up to existing bank customers, who are disproportionately white, at the expense of businesses owned by persons of color. And, sadly, it is also true that our nation’s historical legacy of racial and ethnic discrimination has seeped into the consciousness of borrowers of color to the point of self-elimination from the lending process.

The data collection envisioned by Section 1071 can provide the insights needed to address all of these issues. It can shed light on discrimination by individual lenders and practices with racially disparate effects; indeed the first purpose of the section is “to facilitate enforcement of fair lending laws.” At the same time, these data can identify unmet credit needs, especially among women-owned and people of color-owned businesses which is the second stated purpose of Section 1071.

CRL is therefore pleased that, at long last, the Bureau is moving forward to implement Section 1071. We look forward to the issuance of the Bureau’s Notice of Proposed Rulemaking (NPRM) and the comment period that will follow. We submit this comment to urge the Bureau to move expeditiously to issue an NPRM which:

  • Limits any exemption from reporting to financial institutions that fall below an activity-based threshold geared to assuring that the loss of data resulting from such exemption does not undermine the purposes of Section 1071
  • Defines “small business” in a manner that is easy to implement and that is consonant with the approach taken with the SBA
  • Covers merchant cash advances as a form of open-end credit
  • Requires the collection and reporting of the key components of pricing
  • Provides for quarterly reporting of data by larger financial institutions

Before turning to these specifics, we pause to make one overriding, threshold point.

More than ten years have passed since the Dodd-Frank Act was enacted and the Bureau was directed to conduct this rulemaking. The need for this rulemaking is even greater today as it was then as the current COVID-19 pandemic, which has had such a devasting effect on communities of color including the small business sector within those communities, has made it more urgent to collect the data needed to eradicate discrimination and address unmet credit and capital needs in these communities.

Over the past year, the Bureau has demonstrated its ability to proceed expeditiously through a rulemaking in order to meet self-imposed deadlines. The Bureau needs to demonstrate the same sense of urgency and discipline in this rulemaking. Specifically, the Bureau should commit to conclude the 1071 rulemaking by the end of calendar year 2021 so that the implementation period can begin by the start of the following year. If to achieve that goal the Bureau needs to defer preliminarily resolving some of the questions posed by the Outline and instead propose alternatives in the NPRM, that would be a worthwhile “price” to pay in order to move this rulemaking forward. Indeed, as we discuss below, there may be some questions that are best deferred to allow the Bureau more time to gather additional data or at least to review data submitted through the comment process. In all events, the goal should be a final rule in 2021.sting financial marketplace -- people who often are targeted for unfair and abusive financial products that leave them worse off. This includes people of color, women, rural residents and low-wealth families and communities.

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