Thirty-five years ago, when redlining was rampant, the Federal Reserve Board put in place a sweeping anti-discrimination regulation (Reg B) that prevented banks from identifying small-business borrowers by race, ethnicity, and gender.
As this piece was going to press Thursday, Congress was scheduled to re-examine this regulation in light of a scholarly Government Accountability Office study. This is an era in which most banks are making major efforts to eliminate redlining and instead greenline inner cities with multibillion-dollar Community Reinvestment Act commitments, such as the recent $1.5 trillion one by Bank of America Corp.
Fed Chairman Ben Bernanke has always been a strong proponent of increased transparency and gathering as much data as possible before making decisions. The GAO study, which, in effect, recommends mandatory reporting of small-business loans by race, ethnicity, and gender, is fully consistent with his philosophy and will add to the Fed's statistical arsenal critical data on lending to the 45% of small businesses that are minority- or women-owned.
Most minority business associations no longer believe that the major problem with large banks is deliberate discrimination or redlining. Instead, they believe that most banks, through lack of understanding of the unique opportunities presented by 13 million women- and minority-owned businesses, are not targeting or marketing effectively to these engines of economic growth. Minority- and women-owned businesses are growing three times faster than those owned by white males.
To solve this marketing problem, many minority business associations have urged Congress to enact mandatory data gathering of small-business loans by race, ethnicity, and gender. To minimize costs to financial institutions, we have recommended that the requirements not go into effect until 2011, but that banks be allowed to gather the data on a voluntary basis by next year.
This type of data is already required for loans guaranteed by the Small Business Administration and, of course, for all home mortgages through the Home Mortgage Disclosure Act.
To avoid the complexities and possible burdens of HMDA gathering, we have urged the Fed chairman to create a task force representing a diversity of interests to determine the scope of the data gathering with a focus on simplicity and minimizing costs.
This task force should include the banking regulators, small-business lenders, and minority and women business associations. It should be able, within 90 days or in time for the new administration, to produce a cooperative data matrix that could help stimulate the economy and expand the number and size of small businesses.
Though most large banks are unwilling at this point to speak in favor of mandatory data gathering, many recognize the value of what Wells Fargo & Co. achieved on a voluntary basis. For years it has set and achieved multibillion-dollar lending goals targeted specifically to women- and minority-owned businesses. This in part is why Wells made over $157 billion of business loans last year and became the leader in small-business lending in many places it serves, such as California.
Some critics of the GAO approach claim there is no data demonstrating that financial institutions are not fully serving our nation's 13 million small minority- and women-owned businesses. However, given the absence of any data to support their position and the fact that no financial institutions can provide any comprehensive data, the critics should welcome the opportunity to prove their point.
Most importantly, allowing financial institutions to gather data by race and gender will allow them to target and market effectively to the fastest-growing segment of the small-business community.
Many leaders have called for more economic stimuli. As recent U.S. history has demonstrated, small businesses are the largest engine of growth and employment, particularly for those without advanced college degrees. (Two-thirds of all jobs are created by small businesses.) It is quite possible that mandatory data gathering will be as great a stimulus for small-business lending as HMDA data has been for minority homeownership.
