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Memo to the Consumer Finance Protection Bureau on Implementation of 1071


March 11, 2015
The Honorable Richard Cordray
Director, Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552

Dear Director Cordray:

On behalf of the National Women’s Business Council (NWBC), we want to urge implementation of Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1071 calls for the release of data on small business lending, which will enable important, ground-breaking analysis. An understanding of women business owners’ access to capital will provide evidence for potential policy recommendations and shifts to improve the business climate for women.

In this letter, the Council first explains the need and value of small business lending data, and the importance of Section 1017, and then makes recommendations for the data that is collected and the process of collection.

Background Information:

Historically, there has been a notable gap regarding small businesses’ demand for credit. The collection of small business loan data as part of the implementation of Section 1071 of the Dodd-Frank Act represents a huge leap forward for small business research, the policies it informs, and the small business owners that are impacted. Access to capital is a well-acknowledged issue in the small business community, and the ability of small businesses to remain in business, and scale their businesses, is essential to national economic growth. Women-owned businesses—especially those owned by minority women—are growing at a rapid rate, as measured by revenues and employment. In order to maximize their potential to create jobs, we need to make sure they have access to appropriate capital. Anecdotally, women business owners have reported being reluctant to hire employees that they might not be able to pay regularly, and a recent NWBC research study[1] shows that businesses that get less of their financial capital from external sources (such as bank loans) were more likely to go out of business during the study period.

Access to capital is one of the NWBC’s priorities, as well as an ongoing focus of broader discussions on data gaps in small business research. For example, the NWBC participated along with other key stakeholders, such as the Small Business Administration and the Census Bureau, in the 2013 Smarter Data, Smarter Policy initiative, which identified several key questions and called on the CFPB to provide that data:

Key questions we need answered                                                        

  • What is the demand for credit from small businesses?                      
  • How do business owner characteristics affect access to lending?     

Data needed

  • Number of business loan applications, dollars requested, and denial rates quarterly
  • Loan originations, loan $ requested vs. approved, denial rates by group

It is clear that the need for this data is still very strong. In FY2013, the NWBC completed two research projects on access to capital. Due to limited data availability, these reports largely reflect “use” of capital, rather than “access to.” Findings include:

  • Women business owners are more likely to not apply for a loan due to fear of denial, which turned out to be a justifiable concern—women business owners were more likely to have their loans denied (Robb and Coleman 2014).
  • Women-owned businesses secure a lower proportion of capital coming from external debt such as bank loans (Robb and Coleman 2014).

We do not know if women business owners use less external debt because they cannot use it, or because they choose not to use it. For this reason, data on demand for credit is essential.

The small business lending data would enable us to answer the following important questions:

  1. Why are women more likely to have their applications denied? For example, are they asking for too much money or do they not have sufficient collateral?
  2. Are women less likely than men to pursue small business bank loans? If so, why?
  3. When women’s loan applications are approved, are they paying comparable interest rates to men?
  4. Are women able to obtain sufficient low-cost credit, or are they channeled to higher cost lenders or products?
  5. What factors determine the approval of a loan that is not purely scored? Are their different prioritizations depending on the type of applicant?  

Many of these questions echo the Smarter Data, Smarter Policy initiative, further indicating that the need for this data is not unique to the NWBC. For example, a July 2014 report released by the Senate Committee on Small Business & Entrepreneurship stated that women receive just 16 percent of conventional small business loans, and 4 percent of the total value thereof. Without comparing these figures to the percent of loans and loan dollars requested by women, we cannot determine if a disparity exists.

As the NWBC and others continue to do research on women’s access to capital, the need for data on small business demand for credit becomes more pressing. We are currently conducting a research project on undercapitalization as a contributing factor to business failure. Previous NWBC research found that businesses that used a lower proportion of financial capital from external resources were more likely to go out of business. A lingering question is whether these businesses elected not to get external capital, or if they were unsuccessful in attempts to obtain external capital—and why they were unsuccessful. Women business owners may not see a need for external financing and those whose applications are denied may be genuinely unqualified; however, the possibility of unconscious bias among loan officers exists as well.

In addition to determining any disparity in lending practices, understanding aspects women business owners’ demand for credit—such as requested dollar amount or firm age at application—is necessary to developing policies that promote these women’s success in obtaining financing.

Recommendations:

In order to best implement Section 1071, the NWBC recommends the following for the collection of data elements required by Section 1071:

  • Revenue Size of Business: Detailed information on revenue size allows us to understand the flow of capital going to all businesses, in particular microbusinesses which are disproportionately owned by women. Current datasets are not timely or are insufficiently detailed. The Survey of Business Owners (SBO) by the Census Bureau has several revenue size categories, but the survey is done every five years. Community Reinvestment Act (CRA) data tracks only two revenue categories: above and below $1 million.
  • Action Taken on Application: Both the Kauffman Firm Survey (KFS) and the CRA contain data on applications, but it is insufficient. The CRA data only has information on originations. In order to answer long-standing questions about women’s demand for credit, we also need information about applications and denials as well. NWBC research released in 2014 found that women were more likely to be discouraged from applying for loans due to fear of denial, particularly during the financial crisis of 2008-2010. This paper recommended additional research be conducted on this topic, and this data would allow us to do so.
  • Loan Type and Purpose: Business owners may choose from many different products, including non-credit card loans, credit card loans, refinancing, renewals, lines of credit, and personal loans to the business owners. Additionally, business owners have been using newer forms of lending, including factoring, merchant cash advances, peer-to-peer lending and other new forms of lending. Some of these alternate forms of lending have high costs, and it is important to understand if women have been turning to these sources of capital because they are unable to secure lower-cost financing. The CFPB’s data collection must capture a broad set of loan purposes and types so that NWBC and others can complete the analysis to determine if lenders are meeting women’s demand for small business credit.

In addition to the data elements required by Section 1071, the law allows the CFPB to collect additional information. More data will enable the NWBC to conduct more comprehensive and in-depth research, which forms the basis of our policy recommendations. Accordingly, the NWBC recommends that CFPB collect the following additional information:

  • Pricing Data: The high costs of some financial products for small businesses are cause for concern. The CFPB must implement price data disclosure similar to the further enhancements in pricing information in the HMDA data required by Dodd-Frank. The current data collection by the Community Development Financial Institutions (CDFI) Fund can provide a model since it has pricing information and also data on points and fees and loan terms.
  • Creditworthiness: The creditworthiness of small business owners and of the businesses themselves, among other factors, determines the availability and cost of financing. Thus CFPB collection of this data would allow us to analyze the importance of creditworthiness in the lending decision, and if it is prioritized differently between subsets of the population.
  • Number of Employees: Definitions of small businesses vary widely. The Small Business Administration (SBA) defines some types of small businesses as those with up to 500 employees, while a common definition of microbusinesses is five employees or less. The Section 1071 data must have information on the number of employees so that regulatory agencies and the public can track differences in access to credit for small businesses of varying sizes.
  • Other Data: Collateral pledged by borrowers, stage of the business (start-up, growth, maturity), and loan performance are additional data elements that would help the regulatory agencies and the public understand and rectify barriers in access to credit.

Given the proliferation of types of institutions offering financing to women business owners, it is important that CFPB collect data from a variety of entities to create a representative data set. For that reason the NWBC has the following recommendation:

  • Comprehensive Coverage: Section 1071 provides broad authority to the CFPB to collect data from depository institutions and non-depository institutions that make small business loans. In order for regulators and the public to fully understand lending patterns, especially from newer alternative lenders, a comprehensive picture of the lending marketplace is needed. Therefore in addition to the data collected from large banks, CFPB should collect data from smaller banks, credit unions, and non-depository lenders including factors and merchant cash advance specialists. Data disclosure must include these lenders since they serve different types of small businesses with loans featuring various terms and conditions. NWBC analysis shows that community banks make a higher percentage of SBA-backed loans to women as compared to larger banks; including these smaller institutions that may do more relationship lending is key to examine demand for credit from women and other groups.

Once CFPB determines the types and sources of data to collect, it is important to consider the process of collection. To ease the burden on the lending institutions and make the data usable by the public, the NWBC recommends the following:

  • Streamline Data Collection: The CFPB must integrate existing sources of data on small business lending. The federal agencies currently doing their own data collection are the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Small Business Administration (SBA), and the Community Development Financial Institutions (CDFI) Fund. Building on existing procedures for HMDA data collection, the bank agencies (FRB, FDIC, and OCC) can collect data from the banks they supervise and then send the data to the Federal Financial Institutions Examination Council (FFIEC). The SBA and CDFI Fund should do likewise, especially for the data that banks submit to them. Under the oversight of the CFPB, the FFIEC then would compile the data, remove errors from the data (requiring resubmissions from lenders when needed), and then publicly disseminate it.
  • Formatting for ease-of-use: Under Section 1071, the CFPB mandates the format of data that financial institutions provide to the public upon request. The CFPB must require lending institutions to submit their data in easy-to-use formats for data analysis as well as summary tables.
  • Dissemination by the CFPB: Under Section 1071, the CFPB is required to disseminate data to the general public on an annual basis. It must do so in an easily accessible section on its webpage with user guides and data usable for novices to advanced users.

As a diverse council of women business owners and members of women’s business organizations, the NWBC is uniquely positioned to provide independent, non-partisan consultation based on rigorous research of issues regarding women’s entrepreneurship and economic participation.  We are honored to have the privilege of advising you and the Bureau, and look forward to working closely with you as it relates to advancing economic gains for women business owners.  Please do not hesitate to let us know if we can be of assistance.

Sincerely,

Carla Harris                                       Amanda Brown
Chair, NWBC                                     Executive Director, NWBC

 

And Members of the National Women’s Business Council:

  • Roz Alford, Co-principal of ASAP Solutions Group, LLC; representative of Women Presidents’ Organization
  • Marsha Bailey, Chair of the Association of Women’s Business Centers; Founder and CEO of the Women's Economic Ventures and the Small Business Loan Fund of Santa Barbara.
  • Kimberly Blackwell, CEO & Managing Partner, PMM Agency
  • Tina Byles Williams, CEO and Chief Investment Officer of FIS Group
  • Jaime Nack, President of Three Squares Inc.
  • Shelly Kapoor Collins, CEO, Enscient Corporation
  • Pamela Prince-Eason, President and CEO of the Women’s Business Enterprise National Council
  • Rosana Privitera Biondo, President at Mark One Electric Company, Inc.
  • Magdalah Racine-Silva,  President & CEO of DMS International; representative of Women Impacting Public Policy
  • Rose Wang, CEO and Founder of Binary Group, Inc.
  • Kari Warberg Block, CEO, Founder & Farmer in Charge, Earth-Kind
  • Laura Yamanaka, President, teamCFO, Inc; representative of National Association of Women Business Owners

[1] Coleman, Susan, and Alicia Robb. Access to Capital by High-Growth Women-Owned Businesses. Rep. The National Women's Business Council, 18 Aug. 2014.