Small business lending looks unequal. Getting the data has been a battle.

You can’t fix a problem you don’t track.

That’s especially true if you’re counting on the federal government to intervene. It’s why, several years after 1968 civil-rights legislation intended to stop housing discrimination, Congress passed a law requiring many financial institutions to report some information about every home mortgage application they receive. 

The race, ethnicity and gender of the would-be borrower. Basic financial and geographic details. Whether the request was approved. It’s publicly reported — without individuals’ names or other identifying information — and helps reveal discriminatory practices.

But for small-business lending, there’s no equivalent. No national public information. It simply doesn’t exist.

Now, though, it’s finally on track to be created.

Getting even that far was a battle.

In 2010, amid the fallout from a financial crisis, Congress mandated the creation of the Consumer Financial Protection Bureau and directed the agency to collect this data. That came decades after the Home Mortgage Disclosure Act. But enacting a rule to get the reporting started wasn’t at the top of the CFPB’s to-do list. 

In 2018, after the agency took some early steps on a rule, it reversed course.

The next year, the California Reinvestment Coalition and several other plaintiffs sued the Trump administration to get the effort restarted. 

“It’s a real problem, and they’re not collecting the data needed to make sure this problem gets at least somewhat resolved,” said plaintiff ReShonda Young, an Iowa entrepreneur who told the court about her troubling lending experiences.

The CFPB quickly settled, agreeing to court-ordered deadlines. In September 2021, the journey to data hit a crucial milestone: an actual proposed rule.

“Having better information about how both applications and originations are functioning for small businesses is incredibly important,” said Kris Andreassen, senior counsel in the agency’s Office of Regulations.

Data like this “is what allows effective regulation to be put in place,” said Didier Trinh with the Main Street Alliance, a group that advocates for small businesses.

But public access to the data is still a ways off — the process could take several more years. And now there’s a new stage in the battle, with banks and other lenders trying to convince the agency to exempt more of them from its requirements, lengthen the time before reporting is necessary or drop the idea entirely.

More than 2,000 comments from opponents and supporters flowed in by the Jan. 6 deadline. 

The Independent Community Bankers of America argued that small business loans are far more complicated than mortgages and “should not be subject to simplified, rigid analysis.” Identical letters submitted by credit union workers and advocates said the requirements “will likely add substantial strain” on the nonprofit, member-owned financial institutions and could cause them to reduce or stop small-business lending. A number of small lenders said larger lenders would be better positioned to comply. 

“We strongly support the need to ensure all small businesses are fairly and well served,” the Community Development Bankers Association wrote in its comment. “Yet, we are also concerned about the costs of data collection.”

Supporters of the rule argue that broadening exemptions would reduce the reach of the data and its effectiveness.

An expansive 2020 paper for the National Bureau of Economic Research, relying on a survey of new-business owners conducted over several years to fill in parts of the information vacuum, found sharp disparities in lending to Black- and white-owned startups. Areas with strong local banks, the authors wrote, were no better for Black owners than communities dominated by national players.

“Black founders are not less afraid of loan denial in these markets; if anything, they are somewhat more likely to report that they did not apply for fear of denial in regions with stronger local banks,” concluded the study, by Robert W. Fairlie, Alicia Robb and David T. Robinson. “In these areas, white-owned startups receive larger amounts of bank debt on average but black-owned startups do not.”

Secret-shopper tests of lenders by the National Community Reinvestment Coalition have found unequal treatment of Black and Hispanic testers compared with less qualified white testers. The tests also found disparities in treatment of women compared with men, particularly Black women. 

But the lack of lender-by-lender, application-by-application data for small business loans is a harmful gap that allows discrimination to continue unchecked, community advocacy groups say.

“This has made it hard, often impossible to enforce fair lending laws, and increase small business loans to women and people of color,” Bethany Sanchez, senior administrator of fair lending for the Metropolitan Milwaukee Fair Housing Council, wrote the CFPB in support of the proposed rule. “We realize that this lack of transparency has been intentional.”

The Paycheck Protection Program, a temporary effort to get forgivable loans to small businesses during the pandemic, shed some light on disparities. Even so, the federal government shared details only about the finalized loans, not all applications, obscuring the experience of business owners who tried to get the help and couldn’t. And early missteps resulted in many lenders failing to consistently report demographic information. 

Ashley Harrington, former federal advocacy director at the Center for Responsible Lending, thinks it would have gone differently if the small-business lending rule had already been in place. 

Unequal lending treatment shows up in ways often difficult or impossible for a customer to detect, she said. A lender turning you down for a loan it gave to a similarly qualified borrower, for instance. Or giving you worse terms.

“Some of this, you don’t even realize it’s happening,” Harrington said. “Because that’s just what it is. That’s just what’s given to you. How would you know?”

You can hear a podcast about lawsuit plaintiff ReShonda Young’s effort to fight the wealth gap in the newest season of The Heist.