Consumer Protection Agency Is Increasing Transparency for Small Business Loans
The Consumer Financial Protection Bureau has proposed a rule to improve loan transparency for small businesses, which would imply higher priority in loan applications and accessibility, as well as more transparency and a feedback system for all parties involved. Come learn more about this new regulation!
As the day goes by, the 90-day ultimatum stipulated for public commentary on the proposed rule to raise transparency in accessing loans for small businesses keeps drawing near. There is optimism that people's feedback on this rule will be more than the sixty comments from the public during the proposal outline period.
Small Businesses Deserve Better
"After homeownership, small business ownership is the primary means by which families and communities build wealth," Dave Uejio, the acting director of Consumer Financial Protection Bureau (CFPB), stated while announcing the proposed rule.
The CFPB's proposal requires lenders to release small businesses' information about credit applications, including demographic and pricing data. Moreover, the program will also share information on the reasons lenders deny loan applications. The agency opined that the proposed rule would plug the loopholes revealed during the COVID-19 pandemic, where there was inadequate data to capture key sectors and individuals that needed financial relief.
As a critical sector in the U.S. economy, small businesses created 10.5 million net new jobs, almost twice as large companies, with 5.6 million jobs. Not having enough data that captures how these businesses access loans for their operations stifles innovation and competition within the economy.
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Transparency for the Public Good
Section 1071 of the Dodd-Frank Act mandates the CFPB to collect data about small business lending from expediting the implementation of fair lending laws, so the proposed rule improves transparency in loan accessibility for entrepreneurs and startups.
Lenders are required to give detailed information on the purpose, type, and quantity of applied credit, including the amount approved or originated, census tract, gross annual revenue, industry code, number of workers, time in business, number of principal owners, and critical elements of the cost of the credit.
In the new SME lending regulation, lenders must report whether the business is minority-owned or women-owned and the applicant's principal owners' ethnicity, race, and sex. The demographic information provided for a minor business loan applicant would help the government, lenders, and the public identify areas of business and community development needs, new loan program opportunities, and potential fair lending concerns.
Building a Feedback Database
The CFPB’s SME lending regulations apply to a wide range of credit services such as lines of credit, credit cards, term loans, and merchant cash advances. Getting data on the actions taken by lenders on the application and its reasons will help the government plan policies that increase loan accessibility for small businesses.
Creating a web portal for small businesses to share their stories with the CFPB about applying for credit will aid the regulator's understanding of small businesses' challenges and successes in accessing credit.
Information is power, and the CFPB's proposed rule will undoubtedly help small businesses get more priority in the loan application and accessibility, drive transparency, and provide a feedback system for all stakeholders.
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