Los Angeles, CA: Field Hearing on Small Business Lending 5/10/2017

Welcome. Welcome to the Consumer Financial
Protection Bureau’s field hearing in Los Angeles, California, at the Japanese American National
Museum. At today’s field hearing, you will hear from Director Richard Cordray and a panel
of distinguished experts, who will discuss issues related to small business lending.
Today, the Bureau issued a Request for Information to learn more about ways to gather and use
new and existing information to identify the financing needs of small businesses, especially
those owned by women and minorities. With this RFI, the Bureau aims to enhance its understanding
of the small business lending industry. The Consumer Financial Protection Bureau,
or the Consumer Bureau, or the CFPB, is an independent Federal agency whose mission is
to help consumer finance markets work by making rules more effective, by consistently and
fairly enforcing those rules, and by empowering consumers to take more control over their
economic lives. My name is Zixta Martinez. I am the Associate
Director for the External Affairs Division at the Consumer Bureau. Our audience today
includes consumer advocates, industry representatives, state and local officials, and, of course,
consumers. We’re delighted that you’re here and we are delighted to be in the city of
Los Angeles. We are grateful to have with us today the Honorable Mike Feuer, City Attorney
for the City of Los Angeles; the Honorable Jan Lynn Owen, Commission of California Department
of Business Oversight; and the Honorable Xavier Becerra, California’s Attorney General. We
are also grateful to be joined by representatives of the Small Business Administration and the
Federal Reserve. So let me spend just a few minutes telling
you about what you can expect at today’s field hearing. First, you will hear from City Attorney
Mike Feuer, then Commissioner Jan Lynn Owen, and then Attorney General Xavier Becerra.
Following their remarks, you will hear from the Consumer Bureau’s Director, Richard Cordray,
who will provide remarks about small business lending and the RFI. Following the Director’s
remarks, David Silverman, the Acting Deputy Director and the Associate Director for the
Bureau’s Research, Markets, and Regulations Division will frame a discussion with a panel
of experts. After the discussion, there were be an opportunity to hear from members of
the public. Today’s field hearing is being livestreamed
at consumerfinance.gov, and you can follow CFPB on Facebook and Twitter. So let’s get
started. Los Angeles City Attorney Mike Feuer has long
been one of California’s leading lawyers and lawmakers. As L.A.’s chief lawyer and prosecutor
since July 2013, he has brought an innovative, problem-solving focus to the office that combines
tough and effective prosecution with creative initiatives to improve public safety and the
quality of life throughout the city. His efforts have also sparked change throughout the state
and the nation. Under the City Attorney’s broad authority, Mr. Feuer frequently has
sued to protect consumers. For example, in September he announced an historic settlement
of a lawsuit against Wells Fargo for opening unauthorized customer accounts. He and the
CFPB joined forces in complementary actions requiring Wells Fargo to pay restitution to
its customers, put protections in place to stop illegal behavior, and pay $105 million
in penalties. Previously, Mr. Feuer served as the Majority Policy Leader of the California
Assembly and Chair of the Assembly’s Judiciary Committee, where he jointly authored the Homeowner
Bill of Rights. Mr. Feuer, you have the floor.
Thanks very much. That’s one of those cases where the introduction was longer than my
remarks. That’s pretty good. Very generous. Thank you so much for doing that.
I want to, on behalf of all of us in the city of Los Angeles, welcome in particular our
Director, Rich Cordray, to our city, and just a word about that collaboration that was just
mentioned. I was extremely proud of the work of our office, some of whose lawyers are here
with us today, in pursuing the Wells Fargo litigation regarding the fake accounts, and
obviously, that’s had a catalytic effect, not only with regard to Wells’ practices but
other banking practices across the country. I want to underscore there is no way that
that litigation could have had the profound impact it has had without the deep collaboration
with the Consumer Financial Protection Bureau under Mr. Cordray’s leadership. We also worked,
as well, with the Office of the Controller of the Currency nationally.
But this collaboration was essential, and in that regard, I must say, today, that while
we’re here, in Washington there are efforts underway to either diminish the authority
of the CFPB or eradicate it altogether. I had the opportunity to be in Washington last
week for multiple purposes, including discussing how we should all work together to assure
the continued viability and strength of the CFPB. Mr. Cordray’s leadership has been remarkable.
That organization has been instrumental in protecting consumers across the nation. And
I would just say today that anybody who cares about consumer protection should be standing
up and loudly denouncing efforts to undermine the CFPB.
I did a radio interview this morning. That got quite an applause from two government
officials. All right. Yeah, okay. Good.
Because that applause was for Rich and his team, not for me, which is where it should
be. I was interviewed this morning on the radio
here, and the purpose of which was not actually about this, but then the commentator shifted
to what was happening here today, and said to me, “Well, do you think, in light of what’s
happening in Washington, the attacks on the CFPB, is the Trump Administration too business
friendly?” And given that this is a focus on small business, I want to really focus
on that point for a second. We should all be business friendly. That is
a key role for government to play. But being business friendly does not mean protecting
businesses who violate the rules at the expense of consumers. Being business friendly does
not mean protecting businesses who violate the rules who are in competition with those
who play by the rules. That’s what being business friendly means. It means supporting businesses
who are playing by the rules to do even better, which is why I’m particularly pleased to be
here today, as we focus on access to capital and other issues that challenge small businesses,
especially small businesses that are located or do business in disadvantages areas of our
nation. With us today is my Special Assistant, Capri
Maddox. Capri is where? Where did Capri go? Capri is here. Capri is in charge of my office’s
outreach to the business community. We are working to connect businesses that are trying
to improve and expand and hire more people, especially in disadvantaged area, to capital,
to training on how they can do better, working with nonprofits to do the same thing.
I’m eager to hear today what more we need to know, and, therefore, what more we need
to do to assure that small businesses can succeed, especially in neighborhoods of our
city, and our nation, where we should be compelled to do better, because everybody who wants
a job should have access to a job, and our small businesses are the way that we’re going
to assure that in America, we are a nation where the dignity of work is elevated to the
place where it needs to be. So Mr. Cordray, Rich, thank you very much
for your leadership, for the collaboration. You’re going to be hearing from two other
partners with whom I am extremely proud to be sharing this room today, Jan Owen and Xavier
Becerra. But for today, I’m eager to learn more so we can do better.
Thanks very much. Thank you for the remarks. They’re greatly
appreciated. Our next speaker is Jan Lynn Owen. Jan Lynn
Owen was appointed to be the first Commissioner of the Department of Business Oversight by
Governor Edmund G. Brown, in July of 2013. Previously, Ms. Owen served as Commissioner
of the California Department of Corporations, appointed by the Governor in December of 2011.
Prior to that, Ms. Owen was the Principal at the Jan Owen Group since 2010. She was
also a Strategic Initiatives Manager at Apple, Inc., from ’09 to 2010; Vice President of
Government Affairs at JPMorgan Chase from ’08 to ’09; State Director of Government Industry
Affairs at Washington Mutual from 2002 to 2008; and Executive Director of the California
Mortgage Bankers Association from 2000 to 2002.
Ms. Owen also has extensive experience in public service. She was Acting Commissioner
of the Department of Financial Institutions from 1999 to 2000, after serving as Deputy
Commissioner from 1996 to 1999. Ms. Owen also served as Executive Director of the Department
of Insurance’s California Organized Investment Network Program, after serving several years
as consultant to the Senate State Banking Committee.
Commissioner Owen, you have the floor.
Every time I hear that introduction I think, oh, holy moly, I’m really old.
I’m going to spend a few minutes today to thank my partners, City Attorney Feuer, Attorney
General Xavier Becerra, which we’re so glad he’s there, and my partner in crime, Director
Cordray, but I’m also wanting to give you some data. We’ve done some data collecting
for California. As the cranky old bank regulator in the corner, we get some information that
I think is important for you to be able to look at as we discuss this issue.
The Department of Business Oversight oversees over 360,000 licensees, from banks, credit
unions, mortgage lenders, payday lenders, securities brokers, dealers, and investment
advisors, money transmitters, and also we supervise franchisees and we approved proposed
state securities permits. Our job is daunting, exciting, and rewarding, and with my partners
it is truly a challenge I wake up and want to do every morning.
In 2015, California’s GDP surpassed $2.5 trillion. Hence, we are the sixth largest economy in
the world. That same year, our non-bank licensees reported to us that they originated $412 billion
in loans, in California. That’s more than the total of 35 states’ GDP. These non-bank
lenders make more than 78 percent of their loans to commercial enterprises, most of which
are small businesses. California is home to more than 3.8 million small businesses. These
firms employ 50 percent of California’s workforce and drive our economy. Our small businesses
are respected globally for their innovation and, frankly, their fortitude. The vast majority
employ 500 or fewer workers, and collectively make up 99 percent of all the businesses in
California. Two years ago, the U.S. Small Business Administration
reported California leads the country in several different categories: number of small business
employees, 6.5 million; number of self-employed individuals, 2.5 million; number of self-employed
minorities, 1.1 million; and the number of self-employed women, 973,000. According to
the U.S. Census Bureau, California leads the nation, with 1.6 million minority-owned businesses.
L.A. County leads the nation with 55 percent of local businesses minority-owned, more than
half of those by Latinos. California is also proud to be the nation’s greatest number of
women-owned businesses, nearly 1.5 million. Women-owned firms employ more than 1 million
people and generate more than $222 billion in annual revenue. Now, the number of women-owned
firms is larger than the number of employees because many are one-woman ventures and many
women own more than one firm, or multiple firms.
To assist them all, the Governor created an office to serve as California’s single point
of contact for economic development and job creation efforts, especially for small businesses.
Affectionately, this department is called GO-Biz. And last week, the Governor proclaimed
May to be the Small Business Month in California. California is the nation’s leading market
for online lending. We are home to headquarters for several most prominent players in the
sector: Lending Club, Prosper, SoFi, Affirm, Funding Circle, and others. The reason I bring
up online lending or the fintech sector, is because from 2010 to 2014, companies reported
online consumer and small business financing activity increased over 900 percent to $2.3
billion. Now, state regulators currently are getting kind of a bad rap, because the fintech
industry says that a state-by-state regulatory system is too costly and carries too much
of a compliance risk, and it inhibits innovation. State regulators do not totally agree with
these criticisms, but I’ll tell you, we do acknowledge that the fintech companies have
some legitimate concerns about the state system, and we are moving to address them.
As the state’s main financial regulator, let me tell you what I expect from the fintech
sector as it stands today. In many ways, we treat them no different than any other licensee.
We expect the same from all of our licensees—compliance, transparency, accountability, sound financial
practices, and most important, fair and honest treatment of our consumers. No one should
think that they can gouge small business borrowers or any consumers because they operate online.
I know the CFPB agrees that regulators will work hard to keep up with technological innovations
and consumer protections will be as sharp and clear as ever.
As the bank regulator, or financial services regulator, I am committed to serving the needs
of California’s small business community, and to being a partner to small business stakeholders
in California. We welcome your feedback. Call us. Call me. Let me know what you’re thinking
and what we can do to help. Thank you, and I look forward to a fruitful
day. Thank you, Commissioner Owen, for the generous
remarks. Our next speaker is Xavier Becerra. Xavier
Becerra is the 33rd Attorney General of the State of California and is the first Latino
to hold the office in the history of the state. The state’s chief law enforcement officer,
Attorney General Becerra has decades of experience serving the people of California through appointed
and elected office, where he has fought for working families, the vitality of Social Security
and Medicare programs, and issues to combat poverty among the working poor. He has also
championed the state’s economy by promoting and addressing issues impacting job-generating
industries such as health care, clean energy, technology, and entertainment.
Attorney General Becerra previously served 12 terms in Congress as a member of the U.S.
House of Representatives. While in Congress, Attorney General Becerra was the first Latino
to serve as a member of the powerful Committee on Ways and Means. He served as Chairman of
the House Democratic Caucus and was Ranking Member of the Ways and Means Subcommittee
on Social Security. Prior to serving in Congress, Attorney General
Becerra served one term in the California Legislature as a representative of the 59th
Assembly District in Los Angeles County. He is a former Deputy Attorney General with the
California Department of Justice. The Attorney General began his legal career in 1984, working
in a legal services office representing the mentally ill.
Attorney General Becerra, you have the floor. I have to make sure I take Zixta everywhere
I go because I love the way she pronounces my name.
Xavier Becerra. I mean, I don’t even say it that well. But I know that Director Cordray
hired her for way more things than the fact that she can pronounce my name really well,
and we are so thrilled that you are here representing us on behalf of the Consumer Financial Protection
Bureau here on the West Coast, what we call the avant-garde, the forward-leaning movement
of America. I want to say, simply, a few things. First,
I have to cheer the man who is our quarterback when it comes to providing consumers, whether
you’re a small business person, whether you’re an immigrant family trying to navigate your
way through this country, or you’re a recent graduate from college hoping to just open
up your wings. Richard Cordray is our quarterback, and we should do everything we can to make
sure he can take the team down the field and score touchdowns all the time, for the men
and women who want to make America work, who generate the jobs.
Because if Richard Cordray succeeds as our Director of CFPB, then he’s keeping doors
open, and that’s all we need. You talk to almost any business man or woman and all they
want to know is, is there some predictability behind what they’re going to do, whether it’s
taxes, regulations, the business climate. If they have a way of knowing the dot on the
horizon and how to get there, they’ll deal with the rest. It’s the uncertainty that causes
the real difficulties for especially small businesses. Richard Cordray is a guy who makes
sure that that door remains open and that we can all shoot for that point on the horizon.
So we have an obligation to help our quarterback, because he has been spectacular, even under
some of the most difficult of circumstances. I am thrilled that Mike Feuer is my, as was
said earlier, partner in crime as well. That word is used often, but in this case it’s
really true. I love committing crime with Mike Feuer—
because, let me tell you, he knows how to do it well. And we’re very fortunate here
in Los Angeles to call him our City Attorney. He’s served us in so many different places
but he does it so well. I feel like—whenever I’m with Mike Feuer, I feel like that marathon
runner that just came in the top 10, and here’s Mike. He’s that Ironman contestant who does
the triathlon like nothing and just sort of whizzes on by me as I’m huffing and puffing.
It’s hard to keep up with Mike, but he’s the best.
And, Commissioner Owen, thank you for what you do, for giving us the perspective we need
to know why California is so important, not just to us but to the nation. You have made
it clear why the numbers count, but why the people make the numbers count.
And I want to just take a moment to mention the micro, because Commissioner Owen talked
about the macro. The micro is this. The micro is you if you have a business, you if you
defend small businesses, or people like my parents, who started their own business, not
knowing what they were getting into. My father with a sixth-grade education, my mother not
coming to this country until she was 18 from Guadalajara, Jalisco, Mexico, but they did.
They knew the micro of starting a business. They bought a little house here, and then
they rented it out. And then they bought another little house there and rented it out. Before
you knew it, they were making more in retirement than they ever made when they were working,
both. And I consider myself a small business person
as well, because I learned from my parents. And I know this—I don’t have time to try
to navigate everything that’s going around in the business world. You know, it’s like
Ghostbusters—who you going to call? Well, when it comes time to making sure your business
is doing okay, Consumer Financial Protection Bureau, Richard Cordray, that’s who you call,
and we need them to be there for us every step of the way.
The Attorney General’s Office is going to do everything it can to partner with the Consumer
Financial Protection Bureau with our partners at the state level, Ms. Owens, and all the
people at the state who try to work on behalf of the people, the 40 million people of the
state, and certainly with our city attorneys, our district attorneys, who try to protect
us every day—but we need your help, and this where these types of workshops and forums
are so important because they get you connected to the people who are ready to help. My job
is to enforce the laws for 40 million people in the state of California. We have a very
robust Consumer Protection Division in the Attorney General’s Office. In fact, one of
the people who I just recently hired to by my Special Assistant dealing with the issues
involving consumers is Ellie Blume, who I stole from the Consumer Financial Protection
Bureau. Yes, yes. And she is right here as well. And I also have Lissa Aleva [ph] who
is here with me also, who is my Head of the External Affairs, so we can reach out to people
and find out what you need us to know, so we can act.
Under the constitution of this state, I have the authority to begin independent investigations
of any activity where Californians are impacted and harmed, and I intend to use that authority
to the hilt, on behalf of the people of this country who are like my parents, who worked
very hard and were able to establish a business, and now have done so much to make it in the
past that college was an unknown to the family, to make it, in the past, that forever we will
only dream of being able to do things for our kids, make it something that’s in the
past to believe, like my father, as a young man, could not walk into a restaurant because
of the signs that said “No dogs or Mexicans allowed.”
That’s all in the past. California is forward leaning, and one of the reasons we have succeeded
in becoming the sixth economic power in the world is because we don’t stop. We don’t look
back. We understand that this is a tough place to do business. Our environment makes it very
difficult to businesses to establish here because our air and our water are tough to
keep clean. And so we have to impose a lot of different requirements on the gasoline
we pump into our cars, on how much can put into this L.A. Basin before it gets so polluted
that your kids can’t go out and play, or they end up with asthma. Forty million people—that’s
tough to organize. And so all of that we do, understanding that
we’re a pretty high-cost state, but we’re pretty high-quality as well. And that requires
a lot of effort on the part of all those who are willing to work with quarterback Richard
Cordray to make sure that we keep those doors open. That’s our job.
And so know that you’ve got the chief law enforcement officer for the City of Los Angeles
sitting with you. Know that you’ve got the person that the Governor has appointed to
make sure that businesses have that opportunity to have those doors open, in Commissioner
Owen here with you. And know that the 33rd Attorney General of the State of California
is ready to work with them, and with you, but most importantly, I’m going to do everything
I can to make sure that regardless of what Washington, D.C., does, we don’t abandon our
quarterback at the Consumer Financial Protection Bureau because we know what success means
when you have Richard Cordray fighting for you. We score lots of touchdowns. In California,
we’re not going to stop scoring, and we’re going to work with Richard Cordray to make
sure that everyone in America benefits the way California has by having a forward-leaning
policy when it comes to the way we deal with consumer issues, and help our people.
So thank you, Director Cordray, for being here. I thank all my colleagues, but principally
I thank you for knowing that it was important to be here this morning.
Have a great day. Thank you, Attorney General Xavier Becerra.
I am now extremely pleased to introduce Richard Cordray. Prior to his current role as the
Consumer Bureau’s first Director, he led the CFPB’s Enforcement Office. Before that, he
served on the front lines of consumer protection as Ohio’s Attorney General. In this role,
he recovered more than $2 billion from Ohio’s retirees, retirees, investors, and business
owners, and took major steps to help protect its consumers from fraudulent foreclosures
and financial predators. Before serving as Attorney General, he also served as an Ohio
State Representative, Ohio Treasurer, and Franklin County Treasurer. Director Cordray?
Thank you. General Becerra referred to football a number of times. My football career peaked
in about the seventh grade, but I do remember Vince Lombardi saying that when the going
gets tough, the tough get going, and it’s great to be here with three of our closest
and most productive, and for me personally, our most dear partners anywhere in the country,
and I thank them all for being here today, but most of all I thank them and their teams
for the work they have done, are doing, and will continue to do with us to stand up for
Americans who expect and deserve the right kind of support and protections from their
government officials. That’s what we mean to do, so thank you for all of that.
And thank you all for coming today. It is good to be here again in Los Angeles. Today,
the Consumer Financial Protection Bureau is announcing an inquiry into ways to collect
and publish information about the financing and credit needs of small businesses, especially
those owned by women and minorities. We are well aware of the key role they play in our
lives. Small businesses help drive America’s economic engine by creating jobs and nurturing
local communities. It is estimated that they have created two out of every three jobs since
1993, and now provide work—and this jibes with what Jan had to say—for almost half
of all employees in the private sector. Yet we perceive large gaps in the public’s understanding
of how well the financing and credit needs of these entrepreneurs are being served.
As you probably know, Congress provided the Consumer Bureau with certain responsibilities
in the area of small business lending, and there is a strong logic behind this. When
I served as the Ohio Attorney General, we recognized the need to protect small businesses
and nonprofit organizations by accepting and handling complaints on their behalf, just
as we did for individual consumers, an approach that proved to be very productive. In addition,
the line between consumer finance and small business finance is quite blurred. We heard
a lot about that at a roundtable we heard this morning, with community and consumer
advocates. More than 22 million Americans are small business owners and have no employees.
And, according to data from the Federal Reserve, almost two-thirds of them rely on their business
as their primary source of income. So this is very much embedded in many people’s lives. Congress specifically has charged the Consumer
Bureau with the responsibility to administer and enforce various laws, including the Equal
Credit Opportunity Act. Unlike other consumer financial laws, the ECOA, as it’s known, governs
not only personal lending, but some commercial lending as well. In fact, we have now conducted
a number of ECOA supervisory examinations of small business lending programs at financial
institutions. Through that work, we are learning about the challenges financial institutions
face in identifying areas where fair lending risk may exist, and we are assisting them
in developing the proper tools to manage that risk. In the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which created our agency, Congress took a further step to learn more
about how to encourage and promote small businesses. To help determine how well the market is functioning
and to facilitate enforcement of the fair lending laws, Congress directed the Consumer
Bureau to develop regulations for financial institutions that lend to small businesses
to collect certain information and report it to the Bureau, that we will then share
with the public. The Request for Information we are releasing today asks for public feedback
to help us better understand how to carry out this directive in a way that is careful,
thoughtful, and cost-effective. We have considerable enthusiasm for this project.
In my own case, I have seen firsthand how small business financing can have a big economic
impact, and I’ll tell you a story about earlier in my life. When I served as the Treasurer
of Ohio, we had a reduced-interest loan program to support job creation and retention by small
businesses. The way the program worked was that the state could put money on deposit
with banks at a below-market rate of interest, and this deposit was then linked to a same-sized
loan to a small business at a correspondingly below-market rate. This so-called “Linked
Deposit” program had been authorized more than 20 years earlier, but had gradually fallen
into disuse. At its core, however, the program made good
sense. Small businesses are often in desperate need of financing to update and expand their
operations, often not at large amounts of money, and if they can get inexpensive financing,
they often can fertilize their ideas for growth and be even more successful. So we diagnosed
this program and found that after its initial success, it had become simply too bureaucratic.
We heard from both banks and businesses that the program, which was still paper-based,
was so slow and cumbersome that nobody wanted to bother to use it. So we changed all that. We put the process
online, rebranded it as the “Grow Now” program, and made specific commitments to those who
wanted to participate in it. We told them they could fill out a typical application
in 30-60 minutes, and we promised them they would have a yes-or-no answer on their application
within 72 hours. That was not easy—some gulps among my staff when I said that—and
it required very close coordination with the banks that took part in the program. But we
did it, and the “Grow Now” program really took off. Only about $20 million had been
allocated when we started, but in less than 2 years we deployed more than $350 million,
helping about 1,500 small businesses create or retain approximately 15,000 jobs across
the state. It was also exciting and interesting to see
how the businesses were able to use the loan funds. I can recall a construction business
in northeast Ohio that needed a loan to buy a large piece of equipment so the company
could compete for new and different jobs. They got the money, they got the equipment,
and they thrived. I recall a manufacturer in northern Ohio that needed money to turn
their factory sideways on their property so they could utilize more space and employ more
people. We funded the build-out, they executed on it, and they met their goals for growth
of output, revenue, and jobs. And I recall a particular company in western Ohio that
started out as a caterer, began making their own tents for events, recognized that they
might be able to succeed as tentmakers, and needed financing to be able to bid on a major
project with the U.S. Defense Department. We got them the loan, they got the bid, and Inc. magazine
named them one of its 500 fastest-growing businesses of that year. The moral of this story is that business opportunity,
especially opportunities for small businesses, often hinges on the availability of financing.
People have immense reserves of energy and imagination. Nowhere is that more true, by
the way, than in the state of California. Human ingenuity is the overwhelming power
that allows human beings to reinvent the future and make it so. These forces unleash what
Joseph Schumpeter called the “gales of creative destruction” that constantly mold and reshape
the patterns of our economic life. Innovation has sharpened our nation’s economic edge for
generation after generation, but when credit is unavailable, creativity is stifled. To make the kind of meaningful contributions
they are capable of making to the American economy, small businesses, particularly women-owned
and minority-owned businesses, need access to credit. Without it, they cannot take advantage
of opportunities to grow. And with small businesses so deeply woven into the nation’s economic
fabric, it is essential that the public, along with small business owners themselves, can
have a more complete picture of the financing available to this key sector. Some things we do know. We are releasing a
white paper today that lays out the limited information we currently have about key dimensions
of the small business lending landscape. According to Census data, and depending on the definition
used, there are an estimated 27.6 million small businesses in the United States. We
estimate that together they access about $1.4 trillion—that’s trillion, not billion—in
credit. Businesses owned by women and minorities play an especially important role in this
space. Women-owned businesses account for over one-third, 36 percent, of all non-farming,
private sector firms. The 2012 Survey of Business Owners, the most recent such information available,
indicates that women-owned firms employed more than 8.4 million people, and minority-owned
firms employed more than 7 million people. Those are huge numbers. By comparison, in
2014, fewer than 8 million people were employed in the entire financial services sector. By
the way, that was the big paragraph on the Facts and Figures. I was inspired to get through
it by you, Commissioner Owen. When small businesses succeed, they send constant
ripples of energy across the economy and throughout our communities. For example, a 2013 study
by the Federal Reserve Bank of Atlanta found that counties with higher percentages of their
workforce employed by small businesses showed higher local income, higher employment rates,
and lower poverty rates. In order to succeed, businesses need access to financing to smooth
their cash flows for current operations, meet unexpected contingencies, and invest in their
enterprises to take advantage of opportunities as they arise. Another study found that the
inability to obtain financing may have prompted one-in-three small businesses to trim their
workforces and one-in-five to cut benefits. Unfortunately, much of the available data
on small business lending is too dated or too spotty to paint a full picture of the
current state of access to credit for small businesses, especially those owned by women
and minorities. For example, we do not know whether certain types of businesses, or those
in particular places, may have more or less access to credit. We do not know the extent
to which small business lending is shifting from banks to alternative lenders. Nor do
we know the extent to which the credit constraints that resulted from the Great Recession persist
and to what extent. The Beige Book, produced by the Federal Reserve on a regular basis,
is a survey of economic conditions that contains a huge amount of anecdotal information about
business activity around the country, but it has no systematic data on how small businesses
are faring and whether or how much they are being held back by financing constraints. Given the importance of small businesses to
our economy and their critical need to access financing if they are to prosper and grow,
it is vitally important to fill in the blanks on how small businesses are able to engage
with the credit markets. That is why Congress required financial institutions to report
information about their applications for credit from small businesses in accordance with regulations
to be issued by the Consumer Bureau, and that is why we are here today for this field hearing. The inquiry we are launching today is a first
step toward crafting this mandated rule to collect and report on small business lending
data. To prepare for the project, we have been building an outstanding team of experts
in small business lending. We are enhancing our knowledge and understanding based on our
Equal Credit Opportunity Act compliance work with small business lenders, which is helping
us learn more about the credit application process, existing data collection processes,
and the nature, extent, and management of fair lending risk. We have also have learned
much from our work on the reporting of home loans under the Home Mortgage Disclosure Act,
which has evolved and improved considerably over the past 40 years. At the same time, we recognize that the small
business lending market is much different from the mortgage market. It is even more
diverse in its range of products and providers, which range from large banks and community
banks to marketplace lenders and other emerging players in the fintech space. Community banks
play an outsized role in making credit available to small businesses in their local communities,
and unlike the mortgage market, many small business lenders have no standard underwriting
criteria or widely accepted scoring models. For these reasons and more, we will proceed
carefully as we work toward meeting our statutory responsibilities, and we will seek to do so
in ways that minimize the burdens on industry. Our Request for Information released today
focuses on several issues. First, we want to determine how best to define
“small business” for these purposes. Despite the great importance of these firms to our
economy, there is surprisingly little consensus on what constitutes a small business. For
example, the Small Business Administration, in overseeing federal contracting, sometimes
looks at the number of employees, sometimes looks at the annual receipts, and applies
different thresholds for different industries. For our part, the Consumer Bureau is thinking
about how to develop a definition that is consistent with the Small Business Act, but
can be tailored to the purposes of collecting business lending data. So we are looking at
how the lending industry defines small businesses and how that affects their credit application
processes. Having this information will help us develop a practical definition that advances
our goals and aligns with the common practices of those who lend to small businesses. Second, we want to learn more about where
small businesses seek financing and the kinds of loan products that are made available to
them. Our initial research tells us that term loans, lines of credit, and credit cards are
the all-purpose products used most often by our small businesses. In fact, they make up
an estimated three-fourths of the debt in the small business financing market, excluding
the financing that merchants or service providers extend to their small business customers to
finance purchases of the sellers’ own goods and services. But we want to find out if other
important financing sources are also being tapped by small businesses. Currently, we
have limited ability to measure accurately the prevalence of lenders and the products
they offer. We also want to learn more about the roles that marketplace lenders, brokers,
dealers, and other third parties may play in the application process for these loans.
At the same time, we are exploring whether specific types of institutions should be exempted
from the requirement to collect and submit data on small business lending. Third, we are seeking comment about the categories
of data on small business lending that are currently used, maintained, and reported by
financial institutions. In the statute, Congress identified specific pieces of information
that should be collected and reported. They include the amount and type of financing applied
for, the size and location of the business, the action taken on the application, and the
race, ethnicity, and gender of the principal owners. Congress determined that the reporting
and disclosure of this information would provide a major boost in understanding small business
lending. At the same time, we are sensitive to the fact that various financial institutions
may not currently be collecting and reporting all of this information in the context of
other regulatory requirements, and we understand that the changes imposed by this rule will
create implementation and operational challenges. So we will look into clarifying the precise
meaning of some of these required data elements to make sure they are understood and consistently
reported. We will be considering whether to add a small number of additional data points
to reduce the possibility of misinterpretations or incorrect conclusions when working with
more limited information. To this end, we are seeking input on the kinds of data different
types of lenders are currently considering in their application processes, as well as
any technical challenges posed by collecting and reporting this data. We will put all of
this information to work in thinking carefully about how to fashion the regulation mandated
by Congress under section 1071 of the Dodd-Frank Act. Finally, the Request for Information seeks
input on the privacy implications that may arise from disclosure of the information that
is reported on small business lending. The law requires the Consumer Bureau to provide
the public with information that will enable communities, government entities, and creditors
to identify community development needs and opportunities for small businesses, especially
those owned by women and minorities. But we also are authorized to limit the data that
is made public to advance privacy interests, so we will be exploring options that protect
the privacy of applicants and borrowers, as well as the confidentiality interests of financial
institutions that are engaged in the lending process. The announcement we are making today, and
the work we are doing here, reflect central tenets of the Consumer Financial Protection
Bureau. We are committed to evidence-based decision-making. We aim to develop rules that
meet our objectives without creating unintended consequences or undue burdens. We want to
see a financial marketplace that offers fairness and opportunity not just to some, but to all,
a marketplace that does so without regard to race, ethnicity, gender, or any of the
other elements of our fabulous American mosaic. We all know that small businesses are powerful
economic engines. They supply jobs that lift people out of poverty or dependence, teach
essential skills, and serve as backbones of our communities. So we mean to meet our obligation
to develop data that will shed light on their ability to access much-needed financing. It
is essential to their future growth and prosperity, and therefore to the growth and prosperity
of us all. Because what Cicero observed in ancient Rome still holds true today. He said,
“Nothing so cements and holds together all the parts of a society as faith or credit.”
Our communities depend on both of those precious things just as much today. As we launch this inquiry, I want to remind
all of you that we value the feedback we get. We take it seriously, consider it carefully,
and integrate it into our thinking and our approach as we figure out how best to go forward
with this work. So we ask you to share your thoughts and experiences to help us get there,
today and in the future, and we thank you again for joining us here today. Thank you. Thank you, Director Cordray. At this time
I would like to invite all the panelists to take the stage, and while they are doing so,
I will briefly introduce them. David Silverman serves as the Bureau’s Acting
Director and Associate Director for the Bureau’s Research, Markets, and Regulations Division.
Cheryl Parker Rose serves as the Assistant Director for the Bureau’s Office of Intergovernmental
Affairs. Grady Hedgespeth serves as the Assistant Director for the Bureau’s Office of Small
Business Lending Markets. Our guest panelists include Elba Schildcrout,
East Los Angeles Community Development Corporation; Makini Howell, Main Street Alliance Member;
Josh Silver, National Community Reinvestment Coalition; Kate Larson, U.S. Chamber of Commerce;
Todd Hollander, Union Bank; and Robert Villareal, CDC Small Business Finance.
David, you have the floor. Thank you. I think I can still say good morning,
but just barely. As Zixta indicated, I’m David Silberman. I’m the Acting Deputy Director
of the Bureau and the Associate Director for Research, Markets, and Regulations. It’s a
pleasure to be here and to chair this portion of our field hearing on small business lending.
As you have heard, we are about to hear from a number of respected panelists, consumer
advocates, and industry participants from around the nation. Each panel member will
give us some background and provide their perspective. We will then pose questions to
our panelists and engage in discussion, and then the panel discussion will be followed
by public testimony, where we will hear from members of the public who have signed up to
share their observations. Before we begin our panel discussion, let
me take just a moment to frame the issues we’re going to be talking about. As Director
Cordray noted in his remarks, and we discussed today in the white paper we have released,
small business play a key role in fostering community development and fueling economic
growth, both nationally and in their local communities. To do so, these businesses, and
particularly women-owned and minority-owned businesses, need fair and equal access to
credit to allow entrepreneurs to take advantage of the opportunities for growth.
As the director also explained, in section 1071 of the Dodd-Frank Act, Congress amended
the Equal Credit Opportunity Act to require financial institutions to compile, maintain,
and report certain information concerning credit applications made by small businesses.
Congress also directed the Bureau to issue a regulation to govern the data collection
and reporting. The purpose of this is twofold—first, to facilitate enforcement of fair lending
laws, and second, to enable communities, governmental entities, and creditors to identify business
and community development needs and opportunities of women-owned, minority-owned, and small
businesses. As Director Cordray explained, we are in the
early stages of implementing section 1071, and we are focused on outreach and research.
Today’s hearing and the RFI that we issued this morning are important steps in this process,
as we seek to enhance our understanding of the estimated $1.4 trillion small business
finance market, so that we can discharge our responsibilities under section 1071 thoughtfully
and pragmatically. So with that as a context, I am going to invite
our panelists to present their opening remarks. Each panelist will have 3 minutes to make
a brief statement, and then Grady, Cheryl, and I will moderate a discussion with the
panelists. So we will start on my far left, with Elba
Schildcrout from the East Los Angeles Community Corporation. Elba?
Thank you. I’m very privileged to be here. I am thinking of my mother on Mexican Mother’s
Day today. I’m just thinking about her and her being a micro-entrepreneur and I’m just
very privileged to be here. Also, we came here from Guadalajara, like Xavier Becerra’s
family. At East L.A. Community Corporation, or ELACC,
we advocate for economic and social justice in Boyle Heights and East L.A. and the greater
L.A. area, by building grassroots leadership, developing affordable housing and neighborhood
assets, and providing assets to access to economic development and opportunity for low-
and moderate-income families. In 2013, we began working with local businesses
to preserve the vitality of the small business community in Boyle Heights. Our Commercial
Corridor Project is part of a strategic effort towards responsible community economic development
by the developing leadership connecting brick-and-mortar businesses with technical assistance and hosting
monthly small business meetings. We are empowering our business community to take ownership and
be involved in their community. In 2015, we helped form the First Street Community
Business Association of Boyle Heights. This small business community is united toward
a shared vision of economic stability and inclusivity for all residents of Boyle Heights,
including, but not limited to, brick-and-mortar business, in-home enterprises, street vendors,
and mariachi groups. To help them thrive, small business owners need new resources such
as microlending and lines of credit. Many of these businesses rely on friends’ and families’
limited resources for loans. They also need case management to ensure that they can make
use of resources that already exist, such as technical assistance providers and other
business support services. It is through this relationship-building with
small business owners, who are primarily Latino, immigrant, monolingual Spanish speakers, and
women, that we have learned of their needs and challenges in growing their business and
obtaining loans from financial institutions. Some of these challenges have been just difficulty
in getting credit from banks, especially smaller-sized loans, under $250K. Some of these small business
owners need anywhere from $5K to $10K just to get them started, getting some work done
in their kitchen, for example, for the smaller-sized businesses.
There is also a need for data transparency to show which lenders are making loans, and
to which groups, and where those loans are being made. We think that banks should partner
and do joint outreach from trusted community groups, and address specific needs such as
language access. The data should be desegregated for Latino groups and other groups, such as
the HMDA data will start to do in the near future. And small business owners need greater
protections, like consumer protections, in order to prevent discrimination.
We are excited and supportive of CFPB’s efforts in gathering data from small business lenders,
and feel that this is important. Data gathering will be beneficial to the small business community
overall. Thank you. Thank you. Next, Makini Howell, Main Street
Alliance. Hi. My name is Makini Howell, and I am member
of the Main Street Alliance of Washington, and we are a coalition of 2,000 small business
owners. I have been running my family’s business for 13 years. We’ve been in business for a
total of 40 years. We are a food service. I own six vegan restaurant concepts in Seattle.
I employ over 48 people. I offer health coverage. I start my minimum wage at $15 an hour. And
I have grown our family business from grossing $200,000 when I took over 13 years ago to—we
closed last year at $3 million. And I didn’t do any of this with a bank loan.
Now, when I went in to apply for a bank loan, I don’t know if it was because I was a woman,
or if I was black, or because I was vegan. Any number of these things are a risk for
a banker. I understand that, when I talk to consultants, they had no concept of why I
wasn’t doing a steak, and people asked me, “Well, are you at least going to add fish
to your menu?” My menu is 100 percent plant-based. So any number of these things I can understand
would be a reach for someone to think would succeed. But not only did we succeed—I toured
as Stevie Wonder’s personal chef in 2015—but none of these things, absolutely none of this
was possible, not a penny came from traditional lending.
And I think that one thing that really has to happen is we have to change our understanding
around what can be successful, because as opposed to framing it as let’s collect and
let’s let a few well-deserving minorities and women in, people of color and women are
the majority of people that are actually providing jobs, and they are the majority of people
that are small business owners. And so bankers and banks have to change their framing around
who is deserving and who actually can provide jobs for the community, because small businesses
are the engine of the economy, and the engine of the economy right now is being run by people
of color and by women, and that thinking has to change, and then that lending will then
change, along with all of what is happening in Washington.
Someone told me that when you walk into a bank, they make a decision right away whether
or not they’re going to lend to you. Can I dress well enough? Can I be tall enough? Can
I be a male? You know, none of those things are going to happen. So the change has to
come from understanding who actually helps to run the economy.
And so I would still love to get a small business loan. I haven’t tried again because I don’t
necessarily need as much money now because I’m 13 years in. I am probably very attractive
now to a lender, but I don’t need money now. I needed money then. And so I’m not going
to go to a bank and ask for money now when it’s not as necessary, but in order to get
to where I am, I had to use predatory lending, I had to use cash advances. My dad gave me
$10,000. I got one CDFI loan from a community lender. It took me months and months of rewriting
my business plan to actually get that. But it’s a challenge and I feel like I would
have been a $6 million company if I had gotten the lending necessary at the beginning, and
I didn’t have to pay the exorbitant fees, and I had the education and I had the support
necessary from the banks to help me success. So that’s my story. Thank you.
Thank you. Josh Silver from National Community Reinvestment Coalition.
Good morning. I’m Josh Silver, Senior Advisor at the National Community Reinvestment Coalition.
I am honored and I thank the CFPB for this important hearing today. There are some lenders
on the panel so maybe they’ll be encouraged to give you a loan after this, or talk to
you, and I think they are very well-intentioned lenders.
Last week, USA Today reported on a survey showing improving small business confidence.
It looks like things are looking up for small businesses after the Great Recession. Not
so fast. The survey was sparse on which small business were surveyed. Previous research
showed that women, minority-owned, and very small business experienced difficulties growing
because of barriers in accessing credit. Consider the following: women-owned firms are a significant
force but they remain small. Ninety percent of women-owned small business have no employees
other than the owner. Part of the difficulty women face is lack
of credit. Also, just 5 percent of women-owned businesses use bank loans to start their businesses,
compared to 11 percent of male-owned businesses. Minorities also face difficulties in starting
and growing their small businesses. Non-minorities are twice as likely as minorities to own employer
businesses. If minorities owned businesses at the same rate as non-minorities, our country
would have 1 million additional employer businesses and more than 9.5 million additional jobs.
Surveys have found that African American small businesses are more likely than white-owned
businesses to not apply for credit, due to fear of rejection.
NCRC researchers found that the smallest businesses, those with revenues below $1 million, have
the most trouble accessing credit. In 2010, just 8 percent of these businesses received
loans, compared with about 20 percent of all small businesses. Access to credit is critical
for small businesses in regions of the country, yet inequalities in access to credit contribute
to overall inequality. NCRC found, in a report conducted for the Appalachian Regional Commission,
that in 2010, the business lending rate in economically distressed counties in Appalachia
was just 44 percent of national rates. The Woodstock Institute found that in Los Angeles,
here, and in San Diego, businesses in predominantly minority census tracts were 31 percent of
all businesses, but they received only 21 percent of the loans under $100,000.
A variety of reasons exist for these disparities. Some of it is due to the characteristics of
the small businesses, but also some of it is due to discrimination, unfortunately. Here
is where an obscure provision, section 1071 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act will be invaluable. NCRC was honored to have helped Members of Congress
draft a predecessor to section 1071, appearing in CRA modernization bills. Section 1071 requires
the CFPB to collect data from lending institutions regarding demographic characteristics of small
businesses, including race and gender, and to publicly report the data.
The mere act of data collection and dissemination is a powerful motivator for lenders to increase
responsible lending to under-served businesses. As Director Cordray says, former Supreme Court
Justice Louis Brandeis talks about sunlight and the electric light of data disclosure.
No lender wants to be highlighted for shirking any part of the community, and they want to
get up to speed with the lenders that the data show are doing a better job. Use data
for a spur for competition. We have a saying at NCRC that data drives
the movement for economic justice. In the small business arena, better data will result
in more small businesses, more employment, and more wealth-building in under-served communities.
Isn’t that what we’re all about here, making capitalism work in all communities? Thank
you. Thank you. We will move to the other side
of the table now with Kate Larson from the U.S. Chamber of Commerce.
Good afternoon, everyone. As a proud USC Trojan, I am very happy to be with you all today in
L.A. First I would like to thank the Bureau for holding this hearing on this very important
issue, and especially to Grady and his team for their wonderful outreach over the past
couple of months. They have been truly fantastic, and we’re very excited to engage with them
on the Request for Information. As previously mentioned, I am the Director
at the U.S. Chamber of Commerce, based in Washington, D.C., which is the largest business
federation representing the interests of more than 3 million companies of every sector,
size, and region. We represent both small business and lenders, so we have a unique
perspective of seeing the whole picture of small business markets and how it affects
the end users. In fact, more than 96 percent of Chamber member companies have fewer than
100 employees. It goes without saying, and we’ve heard this
multiple times this morning, that small businesses are the lifeblood of our economy, not only
to produce goods and services that we depend on but also to create jobs and provide financial
stability to millions of Americans. Remarkably, 28 million Main Street institutions account
for over half to the sales of the United States, provide 55 percent of all jobs in the country,
and are responsible for 65 percent of all new job creation. I’m sure you guys can all
recite all the stats we’ve given you this afternoon.
Indeed, it’s hard to overstate the importance of credit for small businesses that support
their inventory, open additional locations, hire more employees, manage seasonal downturns,
and otherwise push our economy and our nation forward. This is why we ask the Bureau to
conduct a comprehensive, sound report on potential barriers to small business lending in the
United States, including regulatory burdens, that it may fully understand the credit products
used by small businesses, inform forthcoming rulemaking to ensure it promotes, not inhibits,
small business lending, and propose a narrowly tailored rule to include not only necessarily
businesses and products, while also fulfilling the well-meaning purpose of statute. We hope
the SBA will also lend their expertise in this area.
Unfortunately, small business lending has not fully recovered from the Great Recession.
The most recent small business credit survey, that was mentioned earlier, jointly conducted
by the Federal Reserve Banks, found that cash flow remains a challenge for small firms;
only half of applicants received financing they applied for, and 18 percent received
none; 32 percent of firms said they had to delay expansion as a result of the financing
shortfall; and 21 percent had to reach into their personal finances. Clearly, this is
not okay. Much of this—and I know that we will all
have differing of opinions on the panel—but we think is due to post-crisis regulatory
overhaul and increasingly risk-adverse financial institutions that have to meet safety and
soundness and know your customer requirements when issuing a loan. So as the Bureau begins
its fact-finding process, we hope it will consider the true spirit of the statute, and
the definition should be tailored to include only the most vulnerable populations, specifically
the SBA definition of 500 employees doesn’t exactly seem like a small business at this
juncture. Second, every small business have different
needs and approach credit in very different ways. This market is completely different
than the mortgage lending and data collection is not close to the Home Mortgage Disclosure
Act, so it’s a bit of a misnomer to call it HMDA-like, since there are many different
types of credit. Not only are the needs different, but small
business lending is a complex market with many sources, as I mentioned. Depending on
the needs of the small business, owners may turn to friends and family, home equity lines
of credit, credit cards, SBA loans, private small business loans, or a combination of
multiple sources. Larger and middle-market firms get even more complicated. This is why
the definition needs to be narrowly tailored. Employee training will be incredibly complicated,
given the countless sources of business credit, that could swoop in home equity credit officers
issuing a HELOC, flight attendants offering a credit card on a plane, trucking companies
offering leasing for certain trucks for business purposes, retail clerks offering branded credit
cards. They may not understand that they will also have to capture small business lending
data. Also, it will be difficult to create a firewall between the employee accepting
the credit application and the one making the underwriting decision. Without a firewall,
institutions will be in violation of the Equal Credit Opportunity Act, and that will be even
more difficult at smaller institutions. Business representatives applying for a loan,
especially if this applies to more than just the owner of the business, may not have the
information, which will create confusion and prolong the credit application. They may not
know how much they have for annual revenue or the other data points. It is unfeasible
for lenders will know if the business changed as the status of a woman- or minority-owned
business, so just to be mindful of that potential hurdle. And it would be impossible for institutions
to continuously report individual credit transactions. I didn’t tell her I was going to do this,
but my wonderful mother, who drove 2-1/2 hours to be here, is a small business owner, so
if she’s buying something on a credit card for her business, is that also going to be
the same thing as home goods? So that is a difficult way, if you’re going credit-by-credit
transaction. In conclusion, we thank the Bureau for soliciting
information but stress the importance of the Bureau conducting a sound, robust study on
the roadblocks inhibiting small business lending, including potential regulatory considerations.
To understand where small businesses are attaining credit, and where they are not, ensure the
rulemaking will not curtail these valuable sources, and an environment where access to
small business credit is constrained, it is imperative we energize the small business
market and encourage growth. Our economy and hard-working citizens depend on it.
Again, I appreciate the opportunity to testify and thank the Bureau for its deliberative
approach. I look forward to working together and I’m happy to answer any questions.
DAVID SILBERMAN: Thank you. Todd Hollander from Union Bank.
TODD HOLLANDER: Hi. I’m Todd Hollander. I’m the head of business banking for Union Bank,
and I’m also currently serving as the Chairman of the Small Business Committee for the Consumer
Bankers Association, and I also serve on the California Bankers Association, so I’m proud
to be representing all the groups in this testimony. We wish to express our appreciation
for the collaborative and transparent manner in which the CFPB is undertaking the implementation
of these proposed rules. In our view, the regulatory environment, private
lending, advocacy groups, and lenders share common goals. We want to provide loans to
small businesses to help generate jobs, tax revenues, and economic growth and prosperity;
lend to all market segments without bias or discrimination; enable identification of business
and community development needs; ensure regulatories have the ability to hold lenders accountable;
and avoid saddling lenders with rules that are unnecessarily costly to implement and
execute, and that could generate misleading data or curtail access to needed capital.
In terms of the current small business lending environment, the CBA sees signs of improvements
in the small business lending environment. CBA members say charge-offs and delinquencies
for small business loans have greatly decreased from the Great Recession and are currently
at all-time lows. SBA lending programs are still vital for many small businesses and
marginal borrowers, and the SBA, in 2016, had a record year, exhausting the SBA’s appropriation
of $30 million. From the peak in 2008, small business lending
saw a steady decline until early 2011. Indexed against 2011, small business lending has seen
sharp declines. While the trends have improved over the past few years, it is still significantly
less than prior to the downturn, as evidenced by utilization rates, historically 40 percent.
I’ve been doing this for almost 30 years, lending to small businesses. I’ve worked for
large banks and I’ve worked for community banks, and between the two, usually, when
you loan to a large population of small businesses, you could set your watch by 40 percent utilization
in that population. Well, after 2008, we saw the utilization rates come down and come down,
and what means is businesses weren’t borrowing what they had available to them, and post-recession
we have a much more conservative population of business owners than we had going in, because
they felt the pain of firing people, they felt the pain of downsizing, and those kinds
of things. So not only is the lending environment important, but the optimism that businesses
feel when they feel confident, they borrow money, and when they borrow money they can
fuel economic growth, hire people, and do all the things that they need to do.
According to the Small Business Financial Exchange, and Dun & Bradstreet, small business
credit card utilization has also declined every year since 2008 but one, and new account
openings have been well below the 2007 and 2008 levels. FDIC numbers also reported decline
from 2008. In our view, there is a misconception that
the whole decline in small business lending volumes is related to significantly tightened
credit standards. If banks don’t lend money, we don’t make money, so our job is to deploy
capital in the community and we want to continue to do that. Instead, we noted a decline in
demand on such loans. The next hurdle will be the 1071 action. While
the CBA and its member organizations support the goals of 1071, we strongly believe that
the CFPB should keep top of mind that although section 1071 mandates the rule, it is not
akin to data collection efforts undertaken on other lending products, such as mortgages.
As such, the CFPB needs to take great care in the creation of these regulations.
We are pleased to see the CFPB pursuing formal information-gathering processes to ensure
that it is well informed, which will enable it to put forth regulations that optimally
accomplish the mandated Dodd-Frank requirements while avoiding costly and burdensome regulations
that could lead to higher cost for business and less credit available to those businesses.
Specific to the challenge is the notion that some hold, that business lending parallels
nicely to residential mortgages misplaced. First of all, residential lending has the
same collateral type, and business collateral types can vary as widely as the businesses
that engage in them. Residential lending has, with rare exceptions, consumers as applicants,
and businesses can have all sorts of applicants—limited liability companies, sole proprietorships,
1065 partnerships, 1128S corporations, full corporations. All of these things run the
gamut of borrowing and lending. Business owners have a much shorter and various
durations than mortgages—3 to 5 years, typically, as opposed to 15 to 30 years. The appropriate
property address to use for reporting an analysis can be debated and has no easy answer. Address
of the business versus address of the borrowers—which address of which borrower should you focus
on? And then there’s the beneficial ownership question. The applicants, to capture for reporting,
can similarly be debated and have no easy answer. Residential mortgages typically have
one to two consumer borrowers. Small businesses generally have multiple borrowers, large partnerships,
officers, directors, guarantors, or a single owner, that also runs the gamut.
The CFPB must keenly be aware of these challenges inherent to the nature of small business lending
when trying to construct these loans, and it is daunting and it’s two-fold. Determining
which data fields to collect in constructing fair lending analysis approaches that will
yield meaningful and appropriate conclusions from the small business lending community
is likely to be even more challenging. In light of these issues, and currently lending
trends, to streamline credit processes in order to extend credit with greater speed
to qualified applicants, the CBA and member institutions cannot stress enough the importance
of well-balanced rules under section 1071 in order to avoid overly burdensome data collection
requirements that could stifle small business lending. While the CFPB has broad discretion
in authority under 1071, we note that in order to issue fair and achievable rules, that result
in meaningful, useful data, the CFPB may need to request from Congress changes to certain
aspects of the rule. Examples of well-meaning definitions or requirements are outlined in
the rule but must be made optimal. First, primary address of the business versus
whether the business serves a minority or the address of the borrowers, regardless of
where they locate. Two, the definition of minority and women necessitates the determination
of both ownership and earnings allocation. Third, access to this data, including incidental
access, unlike the mortgage space, is strictly prohibited for underwriters, and in the event
that they do have access to it, mandates disclosure to applicants. This is unnecessary and impractical.
Thank you for the opportunity to testify and thank you for the comment period. We look
forward to continuing to work collaboratively with you for a successful outcome. Thank you.
Thank. And finally, and help me with the pronunciation, Robert Villareal.
Villareal. Yeah, that’s what I said.
Thank you, Deputy Director Silberman, Director Cordray, and Assistant Directors Parker Rose
and Hedgespeth. We appreciate you coming out to Southern California, and Los Angeles. It’s
important that you’re here. In the city of Los Angeles, 50 percent of the businesses,
according to the 2012 census, are minority owned. In the county, 55 percent. And that’s
5 years old, so we know those numbers already have changed and shifted, and so it’s a greater
amount. I’m with CDC Small Business Finance. We’re
headquartered in San Diego. That’s that city that gave you a football team that you didn’t
want. And I’m the Executive Vice President there,
but I’m also the President and CEO of Bankers Small Business CDC of California. That’s an
affiliated CDFI, part of the CDC Small Business family. CDC Small Business Finance is a 39-year-old
company. We are a certified development company. That means we provide the SBA 504 product.
That’s a commercial real estate lending product. We partner with banks such as Union Bank,
where they do 50 percent. We, as an agent of the SBA, do 40 percent, and the small business
only has to put 10 percent down. We also are an SBA community advantage lender.
That is a program that allowed mission-based lenders, such as ourselves, to do S7A loans
up to $250,000. The gentleman a few seats down to my left created that program when
he was with the SBA, and it’s had a wonderful impact on particularly the small business
and minority communities. I believe SBA lenders do less than 4 percent of their loans to African
Americans across the country. Community advantage lenders do about 13 percent of their loans
to Latinos and African Americans, so it’s been a great program.
So we are the largest organization that does both of those, the SBA 504 and the SBA 7A
community advantage, and we work in the states of California, Arizona, and Nevada. But we
really are an economic development organization. So while we’ve done about $13 billion in lending,
most of that has been through the commercial real estate. About $2 billion has gone to
women, minority, and veterans, and throughout our non-504 programs—so that’s our 7A lending
community advantage, we’re a microlender, and through our CDFIs—at one point, believe
it or not, we had three different CDFIs in Southern California. Now we just have the
one—we’ve done about $70 million in lending, particularly in Southern California.
I’m sitting here to the right of the banker, but my take will be a little bit different
than that industry, in that I think it’s very important that we’re here, and I think it’s
important that the folks in the audience are here, and I’m looking forward to hearing from
everybody later, in regards to why we’re here and why 1071 is important.
Let me give you at least three reasons why I think it’s important and why, as a state
attorney, Becerra said that we need our quarterback and we need to be supportive of him. Racial
discrimination—discrimination still exists. There was a study done by Utah State, BYU,
and Rutgers University, published in the Washington Post in June of 2014. They took nine individuals—three
African Americans, three Latinos, and three Anglos—gave them the exact same resume and
history, dressed them exactly the same, and they walked into banks. There was clear differentiation
in the way the people of color were treated, so it still exists in the lending world.
More recently, I think Josh also quoted the Woodstock Institute Patterns of Disparity
that was released in January of this year. What Josh talked about was they looked at
Chicago, L.A., and San Diego, and they lumped in Los Angeles and San Diego, and he talked
about the lack of lending in those census tracts. And, in fact, if there had been lending
to the amount of small businesses in those census tracts, that were census tracts predominantly
of color, that was a $1.6 billion opportunity that was lost, for those census tracts for
communities of color. So it’s very important. But why 1071 is real critical is all we have
right now is we can look at CRA, but we have to look at census tracts. We don’t know what
individuals are getting the loans. So let’s look at the City of Los Angeles—or the County
of Los Angeles. In 2015, there was $4.7 billion, about $280,000 loans, under $250,000. This
is CRA reportable and the FFIEC website. The same year, SBA, there was about 1,750 loans
for about $136 million. So in terms of units, the SBA was less than one-half percent of
the total. I’m looking at Michael Banner because I think I always told him it was 4 percent,
and it was half a percent, in units, and in dollars it was a little less than 3 percent.
So that means there was 99 percent of the loans that went out in the county of Los Angeles,
under $250,000. We don’t know who they went to. We can look at the census tracts, where
they went to, and we can say, well, they’re predominantly minority and there’s probably
minority small businesses there, but we can’t find out who they went to, and, more importantly,
with 1071, we’ll find out who applied, and what happened to those individuals, when they
didn’t get the loan. So I implore the folks here, my colleagues
here and the CFPB, that this is important, and, yeah, it’s going to take a lot of work
and we’ll have to hammer out and come to some agreements, but at the end of the day it’s
very important that we take this mandated rule and that we implement it. So we look
forward to working with everybody here and to get that done.
Thank you. Thanks to all the panelists for your thoughtful remarks.
My colleague Grady Hedgespeth, the Assistant Director for Small Business Lending, and Cheryl
Parker Rose, the Assistant Director for Intergovernmental Affairs, and I are now going to ask the panelists
some questions to try and generate some further discussion.
I get the first question, Robert, to you. Talk a little bit about the challenges that
financial institutions face when extending commercial credit to small businesses, particularly
minority- and women-owned businesses. I’ll try to be brief, because there’s lenders
out here, and there’s lots of reasons. But I will base it on my 12 years of experience
working at CDC Small Business Finance. I had conversations with my colleagues about this,
and also, CDC Small Business Finance just had a report done on Latino small businesses
in the state of California, and it was done for us by the National Association for Latino
Community Asset Builders, NALCAB, based out of San Antonio, Texas, and hopefully we’ll
make that public at the end of this month or early June.
While all small businesses face very similar challenges, entrepreneurs that are women,
or that are people of color have particular challenges. A couple of them. One is record-keeping
or financial documentation, or, really, it’s the lack thereof, and there could be a variety
or reasons for that. Maybe some of them are cash-based businesses. But really it comes
down to financial literacy. Now when I say that, I’m not saying that small
businesses, particularly businesses of color, are financially illiterate. No. Far from that.
What the challenge is, is that lenders, whether you’re a Union Bank or whether you’re CDC
Small Business Finance, have certain criteria and documentation that we require, and we
put people through some horrendous hoops to get an SBA loan, and a lot of folks just don’t
have that background. And since mothers were used, and fathers were used, I’ll use my father
from Tepic, Nayarit, which isn’t far from Guadalajara, a little further south, who came
over with a sixth-grade education and ran two very successful businesses, a restaurant
and a parking lot. He never received a loan from a bank, and he never could have put together
the documentation that I know my company asked for somebody. So he wasn’t financially illiterate.
He just didn’t understand the way the system worked here.
So as lenders, it’s working with small businesses and how do you work around that. How do you
educate them and have the patience to get them through the process? As a mission-based
lender, as a nonprofit, we put money into paying business advisors to help individuals
with that. So that’s one. A second one is also what’s known as a thin
credit file, or poor credit. Experian did a study that was released in September of
last year, that showed that minority-owned businesses, their business score was five
points lower than a non-minority, and that their personal credit score was about 15 points
lower. A lot of lenders, really, one of the first questions they’ll ask is, “What’s your
credit score?” because there’s a threshold, and if you’re not at 680, and if that institution,
that’s their threshold, and you’re at 679, a lot of them are going to ask you to walk
out the door or they’re not going to finance you, as you put you into their credit scoring
model. So that is a challenge, as lenders, is how do we work with those that have poor
credit, that probably doesn’t completely dictate their ability to pay, and how do we look at
other factors? And then I think the third and fourth for
me are really combined, and that is—because I’ve learned from individuals like this guy,
and we’ve seen it, is it takes just about as much money to underwrite and process a
$50,000 loan as a $500,000 loan. So if you’re a profit-driven organization, who are you
going to lend to? So, again, as a mission-based lender, we’re going to work with those that
want $5,000 or $10,000, but how do we build efficiencies with that, and how do we deal
with fintech, the financial technology, and those competitors of ours that are charging
94 percent? We have refinanced loans at 94 percent. How do we deal with that when they
can give somebody an answer in a couple of minutes, and finance them within a couple
of days? That’s very difficult, so that’s a challenge,
I think for reputable lenders who are trying to do right, and trying to do good, and treat
people with a lot of respect. Thank you. Cheryl?
Thank you. Josh, what are some of the current barriers to understanding the small business
lending landscape? Well, thank you, Cheryl. Short answer—current
barriers, lack of data. Longer answer is that 1071 will mandate—I’m sorry. Bad to swallow
when you’re trying to talk. Give me one second. Don’t take my time off. So, type of lender.
Large bank, small bank, credit union, non-bank, fintech. I think we need data on all these
lenders, because we need to know which ones are making responsible loans, that are sustainable
and borrowers can repay, and which ones need a little more oversight.
The literature talks about smaller banks being relationship lenders and really getting to
know the small business owner, and having more flexibility in their underwriting, that
the bigger banks tend to use automated underwriting, and some of the studies suggest that the smaller
banks have an easier time reaching underserved populations. The problem is we haven’t had
the data for the smaller banks for a number of years. Actually, the mid 2000s, the bank
regulators actually exempted the smaller banks from some Community Reinvestment Act data
reporting requirements. So we need that data back to better understand the market, and
to really know who is making responsible loans to traditionally underserved businesses.
I should also say that NCRC did a study for the Appalachian Regional Commission that showed
that the smaller banks were about 20 percent of the market in several states. So it’s very
important to understand what they’re doing, for example.
Loan type—this is huge. Whether the loan is an origination, whether it’s a refinance,
whether it’s a renewal, whether it’s a line of credit, because different credit needs
are served by these different types of loans. And, actually, I talked about the Community
Reinvestment Act data, which large banks, over $1 billion in assets, report. This is
probably the most systematic data that we have now, but there are significant limitations,
and one limitation is the reporting rules are a bit strange, that there is actually
renewals being reported with originations. I think it’s mostly originations, but there
are some renewals in there as well, and you can’t separate them out. That clouds our understanding.
Credit card lending, for example, is higher cost lending. It is needed, but term loans,
that are lower-cost lending, is also needed. And basically, at this point, there a crude
way to differentiate credit card lending from term lending in the CRA data, but we need
better data because there has been some SBA studies that have shown that minorities disproportionately
rely upon credit card lending. And if we had better data, again, we could use the spur
of competition to encourage more term lending by traditional banks.
And also factoring, which is a form of high-cost lending. Actually, the white paper from CFPB,
when you look at the number of transactions—not the dollar amounts, but when you look at the
number of transactions—it actually looked like factoring was higher than term lending.
So we need more data on high-cost types of lending, to make sure that it’s not the new
subprime lending that is actually stripping wealth instead of responsively serving credit
needs. Loan action. Robert talked about it. We need
data on applications, as well as denials. The CRA data only has data on originations.
To really know whether it is unmet demand or, in some communities, is there low demand,
and what could be ways to increase the demand in some communities.
Revenue size of small business—this is huge. Actually, most of small businesses have sales
of less than $100,000, as shown in the CFPB white paper. But the CRA data, the existing
data, only tells you whether the loan is made to a small business above or below $1 million
in revenue. And I could go on. We need data on reasons
for denial. Is it insufficient collateral? Is it credit history? Is it inadequate documentation?
Is the business too new? Some of these factors have been mentioned before. We have some of
this data in HMDA data. Look, I’m not asking for the sky. I’m asking
for some very well-defined—there are some statutory requirements like race and gender
of the small business owner. The CFPB has some discretion to add, some data elements.
We do this carefully, but if we do it well, we can understand whether controlling for
a lot of these characteristics, whether there are still disparities that need further investigation.
And through robust data collection, hopefully, again, we can make American capitalism work
better in all communities. Isn’t that what we’re all about? Shouldn’t there be a bipartisan
consensus for this, that better data, more transparency makes markets work better, increases
small business lending, and then, ultimately, people who are working hard and playing by
the rules can provide for themselves in their communities? This should be beyond question.
Grady. Todd, CBA, Consumer Bankers, are always very
thoughtful. Your remarks are very thoughtful. And you’ve already mentioned some of these,
but what are the unique aspects to consider when you extend credit for commercial purposes,
commercial credit to a small business? What’s unique about that?
There are a few things that are unique when you extend credit to any small business. First
is the complicated ownership structures and how you assess each ownership structure and
determine ability to repay. Next is the difficulty in separating the ability and the willingness
to repay. So as we mentioned, especially for smaller businesses, the interrelated nature
of their personal credit and their business credit make it hard to separate, so you need
to consider how they have repaid their debt up to the start of their business, or after
their business, as part of the picture. Next is varied collateral. Lots of lending
that we do is unsecured. We don’t even put a UCC filing on the company. Some is partially
secured, which is a UCC filing, which is the minimal, and then we take direct collateral
for things as equipment and real estate and things like that, so varied collateral.
The next thing is the multiple purposes for the loans. We lend for anything from working
capital to fixed assets, permanent working capital, acquisitions, versus consumer lending
that’s relatively straightforward. As I mentioned before, the closely interrelated
nature between the personal and business finances of closely held companies are hard to separate,
and the last couple of things are relative age and depth of balance sheets of small businesses
tend to be less deep and with less reliable data than large businesses, so it becomes
an art. And then the quality of the information is less and as Robert mentioned earlier, the
cost to which we need to process these things economically and still make money for the
bank and protect our depositors make it difficult, but not impossible, to do.
Mahini, can you talk about, do small businesses’ owners have access to credit through other
businesses? Me?
Yeah. My name is Makini.
Makini. I’m sorry. Like zucchini.
It’s vegan. I’m sorry. Could you repeat the question?
Sure. Do small business owners have access to credit through other businesses?
In my experience I did not have access to a traditional bank loan to grow my business.
I had access to credit. I had access to a fintech loan. I had access to merchant cash
advances, which is basically predatory lending, where you purchase funds. So if you need a
$30,000 loan, you could purchase it for $15,000 and end up paying back $45,000.
I think that one of the questions was how do reputable lenders combat that. I think
reputable lenders have to re-look at their bottom line and what they need to make off
a $50,000 loan and a $500,000 loan. I think that when we raised the minimum wage to $15
in Seattle, all business owners had to have a different understanding of their profit
martin, and I think if you really want to help, because the predatory lenders have gotten
a hold of the market, you have to rethink your profit margin as a legitimate lender.
Because there’s always available capital, but it could bankrupt you if you take that,
and you have to pay it back in 2 or 3 months, sometimes, and that’s generous.
So some of the problems around it are you get junk fees, which can be up to $800 tacked
on to a $1,000 weekly payment, or they will take out the payments daily. On some of my
notes, borrowers paid an average of 94 percent of an APR, according to the Opportunity Fund,
and as it is, 44 percent of small businesses rely on expensive credit cards or financing.
Stalled growth. If you’ve taken a cash advance and you hit a slow season and you’re not making
money, and your fixed costs have not changed—your rent, your payroll hasn’t changed—that could
take your business, because you still have to pay back this exorbitant loan that you’ve
taken out, and it’s not really even considered a loan. It’s considered purchasing funds.
You have to pay that back in addition to all of your fixed expenses.
So, yes, to answer your question, there is money available, but it’s not necessarily
the money that will help you to grow your business. More than likely it’s money that
will help to bankrupt your business. Thank you. Cheryl?
Thank you. My question is for Kate. Kate, what should small businesses be aware of in
terms of accessing credit from financial institutions? Thank you, Cheryl. I’m going to mimic a lot
of what Robert said earlier. Documentation, documentation, documentation. So first, know
your business plan inside and out. Understand that institutions, it’s not that they just
don’t want to give you credit. It’s that they do have very stringent safety and soundness,
and know your customer requirements that are from the regulators. Obviously, we don’t want
to relive the Great Recession. A lot of that was ability to repay, so post crisis, regulators
are even more strict about the ability-to-pay requirement. So that is why we are concerned
about maintaining access to credit while, of course, giving it out in a safe and sound
manner. But to small businesses, I would say to come
as prepared as possible with any type of financials that you have, any type of protections, in
order to give institutions the cover, in a way, to explain to their regulators, “We know
this person is going to be able to pay this loan back because of X, Y, and Z.” They can
just say, you know, “They seemed like a really nice person. They’ve got a great idea.” It’s
not going to work like that. So I would say any type of documentation that
you have available, and just really understanding your business plan, and what credit would
be right for you. So whether it’s marketplace lending, traditional bank credit, SBA loans—and
I think that would be possibly a good avenue for the Bureau, and I’d be happy to work collaboratively
to identify those types of different credit, because I think that a lot of people don’t
know what is available. So that also is a financial literacy piece.
Grady? Elba, this question is to you. What type of
credit is available to small business owners who cannot access loans from traditional lenders?
Yeah. So very similar to what Makini mentioned is the predatory loans that are out there,
including merchant cash advances. They’re very similar to payday lending. Some of the
small business owners use personal credit and credit cards, so they get into really
high-interest credit cards in order to be able to use that. There’s also just loans
from their family members or friends. Some of the things that we’ve worked at, along
with members of the California Reinvestment Coalition, and CLR, and now even members of
NALCAB as well—we are all members of all those organizations—is looking at how can
we expand and help the business owner with technical assistance, with helping them with
their credit scores. So a lot of times there’s no distinction between personal finance, personal
credit score, and the business score. So it’s really important. And a lot of people are
talking about financial literacy. It’s more their financial education and just knowing
their options and understanding their credit score and what credit score is about, and
how they can utilize that. A lot of the CDFIs that are out there, they
can make loans, but they can’t make them as much as we would like to. A lot of them need
more funding, and there needs to be more education about what’s out there and their options.
With us, at East L.A. Community Corporation, ELAC, we have a social lending loan that we
call lending circles. They’re for those of you that have heard of tandas or condinas
in Spanish. It’s a social loan where people lend to each other. And what we have done,
in partnership with another Bay Area nonprofit organization, Mission Asset Fund, we’ve been
able to do very small loans so that they can improve their credit. So there’s no interest,
there’s no fees, and they’re basically lending to each other, and this is being reported
to all three of the credit bureaus. So we’re starting with even some of the micro-micro-entrepreneurs,
like street vendors, and even to small business owners that have brick-and-mortar, so that
they can start working towards their credit. All of this comes with financial education,
financial coaching, and technical assistance, to help them get to the documentation that
we’re talking about. A lot of our people that we work with, our small business owners, are
immigrants, and they are bilingual Spanish speakers, and they trust our organizations,
organizations like us. We have already earned their trust in the community, so they are
able to come to us so we can speak to them in regards to the different options and different
loans that are out there. Thank you. I have one last question, which
we will ask all panelists. We will give all panelists a chance to offer any closing remarks.
We are running a little behind so I will ask you to try to keep your answers brief. The
question is, what could be the benefits and challenges to collecting small business lending
data and make it available to the public? Let’s go in the opposite order from which
we started, so, Robert, we’ll start with you and go around.
Just a couple. I think it’s a good way to distinguish who the good and the bad players
are, and we can see who is doing the loans and who is not, and who is potentially discriminating
against people of color. But I really see it, more than anything, as an opportunity.
It’s going to be an opportunity not only for the traditional financial institutions. When
they see the data they’re going to see opportunities in new markets. As I mentioned, Los Angeles
County, 55 percent of the small businesses are minority owned. So, really, this is a
challenge but don’t take it completely as a challenge, but really as an opportunity
to see where you could grow your market in the next phase of your financial institution.
Well, there are definitely benefits to this, and challenges, as I’m sure you’ve gathered
from all our statements. We already do a lot of data collection, so whatever we do with
the 1071 action, I caution as to make sure that we don’t double up on the work adding
to the costs. We need to establish a minimum set of data standards. We did a survey amongst
the 60 banks that belong to the Consumer Bankers Association. I would be surprised if two matched
on how the banks define a small business or a small business loan. They can take on all
kinds of product, loan amount, loan type, entity type, and things. So I would caution
you to take all those things into consideration. Also, the risk of inaccurate or drawing wrong
conclusions from the data that’s extracted remains high. I think that if we’re not careful
in the way that we disseminate the information, the way that we interpret the information,
and it’s not completely objective, we could run the risk of increasing legal costs, leading
to incorrect conclusions with the output of the data and how it can be manipulated.
So, in conclusion, I think that it’s necessary. I think banks want to put capital in the hands
of the people who will use it. The better our business community does, the better the
banks do, and we are just a reflection of the community that we represent. So we look
forward, as Kate said, to working with you to establish the right rules, and again, thank
you for the collaborative nature you’re engaging in this.
Kate. All right. I’ll be brief. I already stated
the challenges that we’ve been looking at, so I won’t bore with you them again. I just
want to say, as Josh said earlier, this is a common goal. I totally agree with Director
Cordray’s statement, in his opening, that when credit is unavailable, creativity suffers.
That is very true. So we are all working together to ensure that there is credit for the small
businesses that need it. With that said, I would like to underscore
that we hope to minimize the regulatory hurdles and decrease the cost of underwriting. After
Dodd-Frank, the cost of underwriting for any commercial loan has escalated to about $7,000
per loan. As Robert indicated, that’s for a $100,000 loan, that’s for a $1 million loan.
So we just want to make sure that the hurdles that institutions have to go through are minimized
in order to get credit to the people who will repay, so we can grow small businesses.
In terms of the privacy aspect, there are definitely concerns about the publication.
In the day of data breaches, clearly governmental agencies are not immune to them, so that is
always a concern. And then reidentification, in terms of the different loans, and there
could also be an anticompetitive nature if the loans are reidentified. But again, mimic
what Tom said, very excited to work with you going forward.
Thank you. Josh. Hi. My grandparents were grocery store owners,
and started shortly after the Great Depression, and I wonder how they did it. I wonder if
they got loans. And if we had more information, way back when, I think it would have helped
the Great Depression. And now we are now in the years after the Great Recession. And I
want to caution a couple of statements that were made, that overregulation has stifled
or retarded lending. In the years before the financial crisis, it was the reverse. It was
a lack of regulation. The Federal Reserve Board, had, on the books, in 1994, they had
the ability to curb abusive lending, and they didn’t do anything. And we all know about
lending beyond people’s ability to repay, and we know that not only caused a recession
in this country but a global recess. And, in fact, small business lending, I think,
has been under-regulated. We don’t have the same consumer protections.
So, yes, it is a balancing act, but, if anything, there’s not enough regulation and oversight
in the small business lending arena. More data will not stifle lending. It will not
delay loan processing. We’ve had 40 years of experience with the Home Mortgage Disclosure
Act data. It is a regular part of business. And, yes, there are costs, but I think even
for financial institutions, the benefits outweigh the costs, because they want to know how competitive
they’re doing. You know when the new HMDA data becomes available
in March, and you request it from individual lenders? It’s not consumer groups that are
the biggest askers for the data. It’s actually banks asking other banks for their data, for
other banks’ data, so they can see how well they’re competing in all marks.
So data, if it’s done well, and if you have good information on loan terms and conditions,
it actually makes the lending marketplace more competitive, and I think also, if you
do it carefully, you won’t get wrong conclusions. You won’t get unnecessary litigation. We’ve
had 40 years of HMDA experience. There have been instances, Department of Justice and
CFPB, where there has been egregious behavior, and the data helped us stop the behavior before
it did continued damage. We won’t know the extent of the egregious behavior if there
isn’t data, and if there is more data, there will be a lot less harmful behavior.
And lastly and not least, we’ve had a lot of CRA small business data reporting. We can
build on that experience to make this—I think we’ve lost $14 trillion in a Great Recession
because of abusive lending. If we have better transparency in the marketplace we can gain
trillions of dollars in wealth in our communities, and small businesses get more loans. Thank
you. I’ll get it right this time. Makini, like
zucchini. Yes. I think that it is a great opportunity
to not only collect data, on whether it’s a black woman, an Asian man applying for a
loan, but it’s also an opportunity to create an understanding that education comes before
literacy, and to change the culture of lending in banks. So if we work on the culture of
lending and understanding the engine that the people of color and the women create for
small businesses, and understand how much money is sitting there, sometimes lost on
the table, and we understand that it’s not an unwillingness to pay back but the education
has to come before the literacy piece, and then that way you can lend, safely, to a community,
understanding that they understand how to pay that money back.
Finally, Elba. Thank you. So, yeah, we think that the benefits
are going to outweigh the challenges. Honestly, there’s got to be a better understanding of
the market, similar to the HMDA data, to help local government decide how to allocate resources,
to help identify discrimination. This data is very important. There’s going to be better
lending and even more lending, I believe, once we know where this lending is happening.
The evaluation of products, are they reaching the communities and need and with the right
loan products. So that is very important that we don’t know right now. And even informed
policy and make assessments and address issues. Thank you.
Thank you. So this concludes the panel portion of our program, and please join me in thanking
all of our panelists for thoughtful discussion. So let me invite the panelists to take their
seats, and turn the program back over to Zixta Martinez, our Associate Director for External
Affairs, who is going to moderate the next portion of the field hearing.
Thank you, David, and once again, thank you to our distinguished panel of experts. That
was a terrific conversation. I now turn to one of my favorite parts of
our field hearing, which is hearing from you all. An important part of how the Bureau helps
consumer finance markets work is to hear directly from consumers, from industry, from our state
and local partners, from community advocates across the U.S. One of the ways that the Bureau
gathers public feedback is through events such as these. We have held field hearings,
town halls, and other events across the U.S., from Miami, Florida to Itta Bena, Mississippi,
to Seattle, Washington. At these events, we not only hear from experts, we also invite
the public to participate. But before I open the floor up to public comments,
I want to remind folks that there are several other ways to communicate your observations,
your concerns, or your complaints to the CFPB. You can submit a consumer complaint with the
CFPB through our website, at consumerfinance.gov. Our website will walk you through that process.
The CFPB takes complaints about mortgages, car loans, or leases, payday loans, student
loans, or other consumer loans. We also take complaints about credit cards, prepaid cards,
credit reporting, debt collections, money transfers, bank accounts and services, and
other financial services. If you don’t have a specific complaint but
want to share your story with us, we have a feature on our website called Tell Your
Story, where you can tell us your story, good or bad, about your experience with consumer
financial products or services. Your story will help inform the work that we do to protect
consumers and create a fairer marketplace. We also have another feature called Ask CFPB,
where you can find answers to over 1,000 frequently asked questions about consumer financial issues,
as well as additional resources. We have a Spanish language website called CFPB en Espanol,
which provides access to essential consumer resources, as well as answers to consumers’
frequently asked questions. I encourage you to visit consumerfinance.gov
so you can learn more about the resources and tools that the Bureau has developed to
help consumers make the best decisions for themselves and for their family.
Now it’s time to hear from members of the public that are here today. A number of you
have signed up to provide comments and observations about today’s discussion. The public comment
portion of the field hearing is an important opportunity for the Consumer Bureau to learn
and hear about what’s happening in consumer finance markets in your community. Each person
that signed up to provide testimony will have 2 minutes to do so, what we hear is invaluable.
We want to hear from as many of you as signed up as possible, so I encourage you to please
stick to the 2-minute limit so that everyone who signed up to provide comment has the opportunity
to do so. Our first commenters are members of the federal
and state community that we work with, so I would invite Arthur Zaino with the Federal
Reserve Bank of San Francisco to provide remarks. Our staff will bring a microphone to you.
Okay. Melody Winter Head. Hi, everyone. I’m with the Community Development
Group here in Southern California with the Federal Reserve Bank of San Francisco, and
the subject of data collection with small business lending is something that between
the local reserve banks and the Board of Governors in Washington is a very important concern.
And we have extensive data on this subject, and in particular, we have data around small
business ownership and the connection to auto loan financing. Of great concern to us is
what is happening with discrimination in that market, with lenders of all sizes, large and
small, and independent auto lease agents or lenders.
So we’re here today, really, to listen to what is happening here with what the CFPB
is leading, and then to provide support and advice, as we do in our responsibility with
1071. Thank you. Thank you, Ms. Winter Head. We appreciate
the outreach and we look forward to engaging in substantive conversation and collaborative
efforts with you. Ron Fong [ph]?
Thank you. Good afternoon. My comments are focused on the need to continue to improve
the collection of more detailed data for Asian Americans, Native Hawaiians, and Pacific Islander
communities. As the nation continues to diversify and the population approaches majority-minority
status in 2044, accurate and standardized data collection and reporting of race and
ethnicity is critical to ensuring that federal departments and agencies understand the needs
of diverse communities and are able to effectively meet their obligations to serve the American
people. Data collection and reporting is particularly
salient for Asian Americans, Native Hawaiian, and Pacific Islanders who comprise over 20
million people, trace their heritage to more than 50 countries, and speak over 100 different
languages. We recommend that federal agencies adopt the
recommendations of the Census Bureau of 2015 National Content Test for proposed additional
minimum race and ethnicity categories—I got all of that out there. We recommend that
these categories be applied in three areas where small business data is being collected.
That includes the Home Mortgage Disclosure Act, small business lending reporting under
the Community Reinvestment Act, and U.S. Small Business Administration loans. We believe
that the data that results from this action will result in a better assessment of our
community’s needs, better targeting of solutions from both the public and private sector, greater
access to financial services and capital for our community small businesses, and ultimately
healthier Asian American and Native Hawaiian and Pacific Islander communities. Thank you.
Thank you, Mr. Fong. Joey Quinto? Hi. I’m Joey Quinto, publisher of California
Journal for Filipino Americans, and I’m representing The Greenlining Institute.
Greenlining Institute is a multiethnic policy and advocacy organization working to bring
the American dream within the reach of communities of color. We would like to raise three issues
pertaining to minority business enterprises in California today. Number one, underwriters
must take into account nontraditional payment sources and cash flow. Underwriters need to
take into account untraditional payment sources and restructure decisions. Many small businesses
are financially responsible and have the ability to pay back loans, but their cash flows don’t
allow them to pay at the right time. For example, a coalition member has worked with a law firm
that focuses on minority clients in civil disputes. The firm receives payment from settlements
but they are not necessarily paid out on a monthly basis. Underwriters need to take the
business cash flow into reality into account. Number two, marketplace lenders in fintech
companies are preying on the minority business enterprises. Community lenders and CDFIs are
seeing a surge of MBEs with loans they cannot afford, from companies such as Kabbage and
LoanMe. They are charging interest rates between 30 to 105 percent annual percentage rate.
The fintech companies provide a way of getting money fast, but have direct access to business
accounts and exorbitant fees, and— Thank you, Mr. Quinto. Please submit your
statement for the record and we will make sure it’s part of the field hearing record.
Thank you. Sure. Okay.
Kevin Stein. Hi. My name is Kevin Stein. I’m with the California
Reinvestment Coalition. We’re a coalition of 300 nonprofits throughout California, many
of whom work with small business in various ways. We primarily want to thank the CFPB
for all the work that you do, for coming to Los Angeles, to hearing about the needs of
small businesses, and for protecting our communities. You can play such an important role in this
particular arena. The data that we have on small business lending
is inadequate. The few observations we can make about what’s happening, based on the
data and the experience of our members, number one, there’s less access to credit in low-income
neighborhoods and neighborhoods of color. Number two, banks are not doing a good job
with regard to small business lending, in particular, loans of smaller loan sizes into
smaller businesses. So that much of what we consider small business lending is actually
going to businesses with over $1 million in revenue. Number three, that non-bank, higher-cost
lenders are filling this void, and as we heard before, small businesses enjoy fewer protections
than consumers. Highly problematic. Perhaps one of the more problematic products is the
merchant cash advance product that has been mentioned. It seems virtually unregulated.
Perhaps Commissioner Owen and others can help us address that issue. And fourth, CDFIs and
community lenders do not have the capacity and the capital to meet the community need.
In conclusion, we recommend and urge CFPB to do three things. Continue on with this
first step. We’re very pleased to see you come forward in this public way, in moving
forward the 1071 data. We are very hopeful that the data can be to small business lending
what HMDA has been for home lending. How can all the people who say they support small
businesses have problems with helping in this way, or even presenting challenges? So we
are concerned when we hear about challenges. To continue the work with regard to ECOA.
We were glad to hear the Director point out that the Bureau is working with lenders to
ensure that there are not fair lending violations. That’s terrific. And to the extent that there
are violations, we hope that there’s aggressive enforcement, and then lastly—
Thank you, Mr. Stein. —if I may, to expand the consumer complaint
database which we think is a wonderful tool, but to make it clear and more user-friendly
for small businesses so they can identify concerns about fair lending, ECOA violations,
and also inform the data you might collect under 1071. Thank you so much.
Thank you. Lori June? Scott Pearson? Sharon Lindeman?
Good afternoon. My name is Sharon Lindeman. I’m here today representing the interest of
credit unions in California and Nevada. First I want to thank the Bureau for this field
hearing and reaching out to the various stakeholders, including the Department of Business Oversight
Commissioner, Jan Owen. My comments today are focused on two points.
One is the Bureau should be careful in drafting the definition of not only small businesses
but also small business loan, so as to not discourage lending, and any new data collection
requirements for women-owned, minority-owned, and small businesses should be limited to
the data elements required by section 1071 of the Dodd-Frank Act.
Since the Great Recession, credit unions have actually seen a growth in small business lending.
Many consumers turn to the local credit union for their small business loan needs after
they’ve experienced difficulty obtaining loans from other larger institutions. Credit unions
provide needed capital to existing small businesses as well as to start-ups.
There are statutory limits on the aggregate amount of member business loans that may be
held by federally insured credit unions. National Credit Union Administration’s definition of
a member business loan excludes business loans to a member when the net business loan balances
are equal to less than $50,000. The Bureau, as consumer advocates, should
encourage these small dollar business purpose loans also by exempting them from any member
business lending regulations or reporting. The leagues urge the Bureau to narrowly define
a small business loan and not create a conflicting definition that will result in an administrative
nightmare for credit unions. Section 1071 of the Dodd-Frank Act amends
the Equal Credit Opportunity Act to require financial institutions to report certain information
concerning the credit applications. The leagues are concerned that the Bureau will use its
discretion to require additional data beyond what is required in the Act, as they did with
HMDA, the rule. The Dodd-Frank act required 17 new data points for HMDA reporting. However,
the CFPB expanded that and added an additional 16 data points.
Thank you, Ms. Lindeman. If I may, just one more. The expanded data
collection created an additional burden on credit unions as well as the industry. Thank
you for the opportunity to comment. Thank you. Namoch Sokhom?
Thank you for this opportunity. My name is Namoch Sokhom. I’m the Director of PACE Finance
Corporation. I would like to support the statements of Ron Fong where the segregation of data
collected. An example would be in the API community. It looks like we are doing well
in terms of getting the loans overall, but the subset of Southeast Asian community is
still at the bottom of getting these loans that are intended for minorities. So desegregation,
and recommended that the 2015 census data points would be adopted into the new data
collections. Thank you. Thank you. Chris Walters? Arlene Williams?
Victor Ramirez? Flossie Hall? Hi. I’m Flossie Hall. I’m actually a small
business owner in San Diego, and I just wanted to address the issues of small lending and
basically the difference between personal lines of credit and business lines of credit.
When you start a business, mostly everything goes onto your personal credit, as for what
Kate said, credit cards, loans, mortgaging your house, things of that nature. And at
what point do banks step in and say you’ve had enough time in business, you have enough
revenues, you have enough profitability, you’ve met these margins, but your credit score personally
has suffered because of the damage you’ve done to build your business, and they still
won’t even let you in the door to say, yes, you can have money. It’s an immediate no because
it’s a quick click of a button on a computer that checks your credit score.
Thank you, Ms. Hall. Andy Koblenz? Hi. I’m Andy Koblenz from the National Automobile
Dealers Association. We appreciate the opportunity to be here.
Director Cordray’s remarks highlighted the potential benefits to small, women-owned,
and minority-owned businesses, of a rule implementing section 1071, and we thank him for that. But
these remarks, only mentioned in passing the considerable and unprecedented compliance
burdens that could be imposed by such a rule, especially on creditors who are small businesses
themselves. While the RFI indicates that you are looking for information in this area,
it is essential that you fully and accurately account for this burden and ensure that it
could be managed by small business creditors. And in this regard, we would be interested
in knowing what coordination has been had thus far with the Federal Reserve Board, which,
rather than the CFPB, will be implementing section 1071 for a very large cohort of those
small business creditors, auto and truck dealers engaged in indirect auto lending. Thank you.
Thank you. Iosefa Alofaituli? Thank you. Yes. My name is Iosefa Alofaituli
and on behalf of Opportunity Fund and all of our clients, we want to thank CFPB for
this platform. Opportunity Fund, for those of you who are
not familiar, is a CDFI. We’re the largest nonprofit microlender in California, and we
have deployed over $164 million over our 24-year history. Last year we did $65 million of microloans,
2,200 originated. But to Opportunity Fund, the development and implementation of section
1071 serves to eliminate two purposes. One, obviously, access to capital and the other
protection from predatory practices. I wanted to highlight a business right down
the street from here, along Cesar Chavez, called Kleverdog. The owner, David Oshima,
opened up this shared space here in Chinatown with the intention of creating a space for
folks to grow their own businesses. As we know, over the last few years, these coworking
spaces have expanded, and as part of David’s success in wanting to finance remodeling and
expansion of his building, he wasn’t able to access a loan through his local bank, even
after 4 years of success and stellar credit, because the line of credit that he needed
was $15,000, and not very large. He essentially got a no and was referred to us by the bank,
and we provided that loan for his construction and expansion, and now he is going on his
sixth year of success. But David’s story is just one illustration of how low dollar amounts
have few bank opportunities for a lot of our small bank communities.
I want to highlight three points before I get cut off, and that is around the data collection.
First, it’s critical that CFPB collect data around clients’ race, gender, and geographic
location to understand both where and to whom discrimination may be occurring. Second, the
CFPB should collect data on both mainstream products like term loans, but also merchant
cash advances and other types of credit extensions. Finally, Opportunity Fund recommends that
data be collected on financing interest rates, fees, and terms, as well as performance. Default
rates or payment rates is important to understand the effectiveness of these products.
So thanks to the panel and thanks to Director Cordray for this platform.
Thank you for your comments. Yvette Nuñez? Hi. I’m Yvette Nuñez. I’m the Director for
Economic Development at CDTech. We’re a nonprofit in South L.A. and we have engaged small businesses
for manufacturers, to neighborhood mom-and-pop shops for 20 years. We have heard their concerns
on access to capital. Their loan size needs and revenue profile don’t fit traditional
bank guidelines so they are often declined, and we are even talking about businesses that
have been 40 years in business. We also hear about them being approached by
predator lenders offering quick money at high interest rates. For these small businesses,
it’s tempting to say yes, but fortunately we have been able to educate and refer them
to alternative lenders whose interest has been helping their business and not taking
advantage of them. But still there are so many businesses who are being trapped in the
predator lending debt. Small businesses need greater protections.
We need to require all lenders to provide transparent lending data, we need caps on
interest rates and loan terms, and we need fair lending to women and borrowers of color.
Small businesses are the economic engine for our communities, like South L.A., our region,
and our nation, so we hope you do all you can to help them stay in business. Thank you.
Thank you. Kevin Savada? Marcia Charles? Hello. How are you? My name is Marcia Charles.
I’m the owner and the operator of a boutique called Pinky Rose, and I’m a designer as well,
manufacturer. I’ve been in business for 13 years and I definitely can relate to Makini
here, and the other lady that just stood here. Opportunity Fund was able to help me, after
being one of those who did get a loan from Kabbage, one of those. You can get it in no
time. It was a 45 percent interest loan. Almost after being in interest for so many years,
it took me down, because I needed that money after 2008 collapse.
I truly thank you for everything that you’re doing. I’m going to keep it short, and I thank
Opportunity Fund for helping. We need the help. We definitely need the help. And for
13 years—if I’ve been in business for 13 years, I can pay back. I can pay back. I have
no problem paying back. If I paid $900 a month to Kabbage, I can pay back a loan. Okay? Thank
you. Thank you. Miguel Acuña? Sharon Evabs? Jaime
Lagasse? James Kurtz? Michael Banner? Randy Groyen? Richard Palay Jr.? Natalie Pompas?
Stephen Michael? Thanks very much. My name is Stephen Michael.
I’m with Main Street Alliance. We are a network of tens of thousands of small business owners
all across the country. We’ve got chapters currently in 15 states, one here in California.
We definitely appreciate the opportunity to speak, and thank you so much for highlighting
one of our members, Makini Howell, on the panel, and for the opportunity earlier this
morning in the community roundtable with Flossie Hall as well.
These were just two stories from thousands and thousands of our members all across the
country that struggle with these same issues of access to capital, and fair capital. One
of the challenges that we keep hearing, time and time again, is the necessity to relate
this financial education and business education and that support with the capital access,
with fair lending rates that small business owners really need.
Main Street Alliance definitely supports the CFPB’s efforts to address some of the challenges
that small business owners, especially business owners of color and women business owners.
Often these are the most enterprising, hard-working individuals in our communities, but they are
given the least fair shot. Not only are these business owners not able to obtain the capital
they need from traditional sources, but with the decrease in lending to these business
owners, we’ve seen, as we’ve heard, a spike in the predatory lenders that target our constituents.
Because of these issues, Main Street Alliance strongly recommends increased transparent
data collection to show which lenders are making and not making which loans to different
communities, as well as greater protections for small business owners against the unfair
lending practices now prevalent in the lending space.
We will submit longer comments for the public testimony as well. Thanks.
Thank you for the comments, and I want to invite all the public commenters today to
submit further comments in the event they didn’t get to share everything they wanted
to during their time here. I also want to thank the audience, our expert
panelists, and to everyone watching via livestream at consumerfinance.gov. This concludes the
CFPB’s field hearing in Los Angeles, California. Have a great afternoon.

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