How And Why CRA Reform Proposals Must Improve Access To Credit And Capital For Small Businesses
Josh Silver, Senior Fellow
In late spring of 2022, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) proposed the most far-reaching changes to the Community Reinvestment Act (CRA) regulations since 1995. The bank agencies sought to update the regulations in order to increase access to credit and capital for traditionally underserved communities including smaller businesses. The agencies issued a Notice of Proposed Rulemaking (NPR) in May of 2022 and invited public comment through the middle of August 2022.
The agencies’ proposal included several provisions that would be effective in increasing loans to and investments in small businesses. In a few key areas, the proposal fell short of its potential, such as omitting an examination of lending by the racial composition of the community. This brief will review the major provisions of the proposal and will also indicate how some of them can be improved. In addition, this brief can inform legislative proposals at a state and federal level. We expect the agencies to issue a final rule in the first or second quarter of 2023.
In brief, we recommend that:
- For CRA exams, the federal bank agencies should use the small business and small farm data that the Consumer Financial Protection Bureau (CFPB) will start collecting in the next couple of years since this data will have more detail about the revenue size and the racial and gender composition of small businesses
- The agencies should adopt performance measures on CRA exams that assess lending to minority-owned and women-owned small businesses
- CRA exams should focus on assessing bank performance in lending to and investing in the smallest businesses
Why supporting small businesses is a vital part of reinvestment
Small businesses are engines of economic growth. It is estimated that small businesses generate about two thirds of all jobs. For communities of color and low- and moderate-income (LMI) neighborhoods, small businesses are key parts of a functioning community and economy. They provide a variety of basic necessities ranging from food to childcare to health facilities that are otherwise not readily available for traditionally underserved communities.
Yet small business access to credit and capital has been uneven at best. Federal Reserve economists have documented that CRA increases lending to small businesses in LMI census tracts. Banks have made $856 billion in loans to small businesses with revenues under $1 million from 2009 through 2020. As impressive as these dollar amounts are, the data also reveals missed opportunities. Consider the following:
- The Minority Business Development Administration (MBDA) found that businesses owned by people of color received lower loan amounts than White-owned firms. This finding remained even after controlling for the sales level of firms. The average loan received by high-sales firms owned by people of color was $363,000 compared to $592,000 for White-owned firms.
- While Black people comprise 13% of the overall US population, Black-owned businesses represent 9.5% of all American firms. Only 2% of firms with employees are Black owned firms. The revenue generated by Black-owned firms represented only 0.5% of total US firm sales.
- In mystery shopping conducted by NCRC in Los Angeles, White testers were given significantly better information about business loan products, particularly information regarding loan fees. White testers were told about what to expect 44% more frequently than Hispanic testers and 35% more frequently than Black testers.
- Citigroup estimated that over a twenty-year time period, fair access to lending would have enabled African American small businesses to add $13 trillion in revenue and create 6 million jobs.
By increasing the accountability of banks to make loans to traditionally underserved businesses, CRA reform can help reduce these missed opportunities. CRA exams measure and rate banks’ lending to and investments in small businesses. If CRA reform makes these measurements more rigorous, banks would respond by increasing their support of small businesses. This paper will now review major areas of the agencies’ proposed CRA reform, indicating how the proposal’s provisions would be beneficial as well as other aspects of the proposal that need to be improved.
The proposed use of Section 1071 small business and farm loan data
The agencies proposed using Section 1071 data on small business lending by race and gender of the business and farm owner. Section 1071 data would replace CRA small business and farm loan data, which is limited in the amount of information it provides CRA examiners and the public. Replacing the current data with a more robust data source was the correct decision in the proposed CRA regulation.
Section 1071 is a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Congress included Section 1071 in Dodd-Frank precisely because it sought to increase transparency in the small business/farm lending marketplace and help stakeholders identify gaps in credit access for small businesses including women-owned and minority-owned small businesses.
Congress empowered the Consumer Financial Protection Bureau (CFPB) to write implementing regulations for Section 1071 and to collect the data on an annual basis from both banks and non-bank lenders that make small business and small farm loans. In a draft regulation published in the fall of 2021, the CFPB proposed to require any lender making at least 25 small business or farm loans annually to report data to the agency. The CFPB included a number of important data fields such as years in business, sector of the business and number of employees that will help determine whether similarly situated women- or minority-owned businesses experience discrimination or statistically significant disparities in access to credit compared to their male- or White-owned counterparts.
The Section 1071 data would be a vast improvement over the current CRA data for the fair lending review that accompanies CRA exams because it would be more effective in identifying if a bank is engaging in possible discrimination. If discrimination is found by the fair lending review, a CRA rating can be downgraded, depending on the extent and severity of the discrimination. In addition, as described in more detail below, the Section 1071 data would be more useful for other parts of the CRA exam, particularly in determining if banks are reaching the smallest of the small businesses.
We expect the CFPB to issue a final regulation implementing Section 1071 in the first quarter of 2023. The data would then be available in approximately two years, which would also be approximately when the new and updated CRA exams would be starting. If the Section 1071 data is not available when the new exams commence, the current CRA small business and farm data would be used until the availability of Section 1071 data.
Section 1071 data would also have an improved definition of small businesses
The Section 1071 definitions of small business and farms improve upon those used in the current CRA data. The CRA data bases its definition of small business loans on the loan size: A loan of $1 million or less is considered a small business loan. Focusing on the dollar amount of the loan is not an accurate method to consider a loan as one to a small business: Loans of under $1 million could also be made to larger businesses.
In contrast, the CFPB’s proposed definition for Section 1071 data is more precise, tracking loans to a small business or farm with revenues under $5 million. The CFPB estimated that this definition would capture most of the small businesses and farms and exclude consideration of larger businesses. Because the CRA retail lending test is focused on the credit needs of small business and farms, the Section 1071 data that records lending to these entities and excludes larger businesses is preferable to the CRA data that likely includes lending to larger businesses.
In response to a question in the NPR, NCRC believes that the agencies should not use the Small Business Administration (SBA) definition of a small business since the SBA definition includes revenue categories considerably higher than $5 million with employees up to 500. It also involves several revenue categories based on the North American Industrial Classification system (NAICs). It would be cumbersome for banks to use. In contrast, a definition of $5 million or less in revenues would be much simpler and would focus attention on the smaller businesses that traditionally had the most difficulty accessing credit.
Special Purpose Credit Programs (SPCP) will help determine if banks are serving women- and minority-owned small businesses
Banks can create SPCPs to assist borrowers or businesses belonging to groups that have been disadvantaged. The agencies are contemplating allowing SPCPs to qualify for CRA consideration. Stakeholders should applaud this move and continue encouraging the agencies to qualify SPCPs for CRA credit, while also urging the agencies to clarify that such SPCPs can explicitly incorporate race.
The Equal Credit Opportunity Act (ECOA) allows banks to establish SPCPs provided they develop written plans documenting economic disadvantage and indicating that the group of borrowers or businesses would likely experience rejection of loan applications or access credit on less favorable terms. ECOA requires a demonstration of disadvantage in the lending marketplace. The Section 1071 data is ideal for this purpose because it contains information on acceptances and denials as well as pricing information by race and gender of the applicants.
After a bank has established a SPCP, the proposed CRA exams would contain a new test called the Retail Service and Products Test that would evaluate the effectiveness of the SPCP program. This new test could use the Section 1071 data to determine whether SPCP programs targeting women- and minority-owned businesses were successful in terms of increasing a bank’s number and percentage of loans to these businesses as well as providing affordable and sustainable credit.
The proposed consideration of SPCP programs on CRA exams is an important proposal but it is insufficient by itself. Since a CRA exam would contain a number of tests, a bank does not necessarily have to create a SPCP program focusing on traditionally underserved businesses in order to do well on the exam; the bank can focus on excelling on other parts of the exam.
If SPCP programs are adopted on a widespread basis, they hold the potential to significantly increase credit to underserved businesses. However, as currently proposed, the consideration of SPCP programs on CRA exams does not guarantee widespread adoption of SPCP programs. A more regular and comprehensive element of CRA exams is needed. If CRA exams assessed lending by race of borrower and neighborhood on a regular basis, then lending would more likely be boosted to women- and minority owned businesses.
Consideration of race of borrower and neighborhoods must be a regular feature of CRA exams
Use performance measures assessing lending to businesses owned by people of color
NCRC recommends that, on an interagency basis, the federal bank agencies should conduct periodic statistical studies and identify metropolitan areas and rural counties that either experience ongoing discrimination or exhibit significant racial disparities in access to credit. In the geographical areas with significant disparities, fair lending performance measures like percent of loans to small business owned by people of color could contribute to CRA ratings. The racial or ethnic group considered on the CRA exam would be identified based on the interagency analysis of disparities. The racial or ethnic group could be African American, Hispanic, Asian or other categories depending on the findings of the study that found likely discrimination against one or more groups in particular geographical areas.
The performance measures could receive separate ratings or scores and thereby contribute to the ratings for the subtests and for the overall rating. Alternatively, the performance on the racial and ethnic measures could boost a rating if the performance is commendable. We would prefer the first alternative but offer the second in the interests of presenting various options for assuring success under a strict scrutiny standard.
Add a category of underserved tracts to the subtests
In addition to performance measures for people of color and businesses owned by people of color, we suggest that the federal bank agencies consider developing a category of underserved census tracts. The subtests of the CRA exam would then examine lending, service and community development activities in these tracts just as the exams now do for LMI tracts. In a previous report, NCRC described that underserved tracts would be identified via a metric of loans per capita (using households as the denominator in home lending and small businesses as the denominator for small business lending). Tracts in the lowest quintile of loans per capita would be designated as underserved. The study found that across the nation, 57% of underserved tract residents, on average, were people of color.
While most of the underserved tracts were LMI, 1,265 or almost 13% were middle- and upper-income and also predominantly minority. Therefore, using underserved tracts on CRA exams would be another way to increase the focus on communities of color that are not necessarily LMI but receive low levels of lending as a result of the legacy of redlining. Further, using underserved tracts on CRA exams would have concrete benefits such as increasing lending to small businesses, remediating health and environmental hazards and adding greenspace.
An evaluation of lending should focus on the smallest businesses that are more likely to be minority- and women-owned
The proposed lending test would have a performance measure calculating the percentage of loans to the smallest businesses. A bank would be compared against its peers and demographic data (the percentage of small businesses in the geographical area). The NPR proposed focusing on the smallest businesses for this measure, stating that the smallest businesses with revenues under $250,000 had the most acute needs for credit. NCRC therefore strongly supports the separate evaluations for businesses with revenues up to $250,000 in the proposed lending test. The $250,000 cut-off should not be raised to $500,000 as mentioned as an alternative. In addition, the agencies should consider adding small businesses of revenues of $100,000 or less as a separate evaluation category.
A revenue category of $100,000 or less could be particularly useful for capturing lending to young small businesses, especially minority- and women-owned businesses. According to JP Morgan Chase, “the median Black-owned firm earned $39,000 in revenues during its first year, 59% less than the $94,000 in first-year revenues of a typical White-owned firm. Small businesses founded by Hispanic owners earned $74,000 in revenues, or 21% less than the median for White-owned firms.” Moreover, the $100,000 category could be especially important for women-owned small businesses. According to an American Express report, 88% of all women-owned businesses had revenues less than $100,000.
Consider lending to the smallest businesses as well as “larger” small businesses in LMI tracts
NCRC applauds the agencies’ approach to separately evaluate lending to low-income and moderate-income categories in both the geographic and borrower analysis. As the agencies noted, when low- and moderate-income categories are combined, banks could focus more on moderate-income borrowers or tracts and neglect low-income borrowers and tracts.
The proposed retail lending test includes performance measures that would calculate the percentage of loans to small businesses in low-income and moderate-income tracts. The agencies should consider two performance measures in each of these tract categories: percent of loans to businesses with revenues under $1 million and percent of loans to small businesses with revenues between $1 million and $5 million.
Because Section 1071 data has not yet become available, neither the public nor researchers know whether larger small businesses with revenues closer to $5 million are significantly more successful in accessing loans than their smaller counterparts. Therefore, at least in the first few years of the new CRA regulation and Section 1071 data availability, it would be advisable to have more rather than fewer performance measures to more accurately measure credit availability to different-sized businesses in LMI tracts and to encourage banks to serve businesses with different revenue sizes. If the larger small businesses end up having more success in accessing credit than their smaller counterparts, the agencies may want to delete or alter the performance measure of lending to businesses with revenues between $1 to $5 million in LMI tracts. In contrast, if these larger smaller businesses include grocery stores and other critical businesses that continue to have difficulties applying for credit, this performance measure should remain on CRA exams.
Proposed CRA credit for investments appropriately targets small businesses with revenues less than $5 million with some careful exceptions
Unlike the current regulation, the proposed regulation would not routinely consider financing to small businesses with revenues over $5 million on CRA exams. The main exception to this is if a bank invests in entities identified in the proposed regulation such as a Small Business Investment Company (SBIC) that support some businesses over the $5 million limit. Some allowance for support for larger businesses financed under government programs would accommodate job creation and likely would weed out businesses that take advantage of workers through low wages and poor working conditions.
NCRC asks the agencies to provide CRA credit for non-SBICs owned by people of color and women as long as these companies adhere to SBIC net worth and after-tax income size limits. Women- and minority-owned investment companies often make equity and debt financing available to small businesses owned by people of color and women that would not otherwise have access to this financing. Moreover, the non-SBIC companies face challenges becoming SBICs. Eliminating CRA consideration for bank support of these companies could reduce the financing available for vibrant and growing small businesses originating from traditionally undeserved communities.
NCRC endorses the proposal to specify that CRA consideration would be offered to bank financing of intermediates like Community Development Financial Institutions (CDFIs) that support small businesses with revenues less than $5 million. In addition, NCRC supports listing technical assistance to small businesses and farms with revenues under $5 million as an eligible community development activity. Support for financial intermediaries and technical assistance would further job creation and retention. The impact review (the qualitative part of the proposed community development finance test) should carefully assess financing to CDFIs and intermediaries that focus on the smaller businesses and award more points to banks that are more focused on intermediaries serving the smallest businesses which have the most difficulties assessing credit.
CRA reform should encourage lending and investing to innovative small businesses such as minority-owned media
The agencies proposed to develop an illustrative list of CRA qualified activities in order to encourage banks to finance those activities as well as reducing uncertainty regarding which activities count. In the area of small business and infrastructure development, the list should state that financing and supporting Black, Indigenous and People Of Color (“BIPOC”) and other media outlets that prioritize traditionally underserved communities (collectively referred to as “Equitable Media”) is an important priority.
Stakeholders often do not contemplate media companies as examples of small businesses that should be supported in underserved communities. However, Equitable Media is an important communication lifeblood in these neighborhoods informing residents of community development opportunities as well as obstacles such as environmental hazards that need to be overcome. In some instances, BIPOC-owned broadcast companies will have annual revenues exceeding $5 million and as such should be regarded as essential infrastructure eligible for community development (CD) financing.
Retail services test must retain emphasis on branches, which are critical for small business lending
The proposed retail services test would retain performance measures assessing the percentage of branches in LMI tracts, comparing a bank to its peers and demographic data. The importance of branches cannot be over-emphasized. In addition to retail customer usage in LMI communities, small businesses rely to a great extent on branches for daily transactions and acquiring loans. Studies demonstrated that after bank mergers and branch closures, small business lending in LMI communities decreased significantly for several years. Thus, the final regulation must retain the emphasis on brick-and-mortar branches as vital for small businesses in LMI tracts and communities of color.
The proposed definition of wholesale and limited purpose banks hides an important credit source for smaller businesses
NCRC disagrees with the current and proposed designation of wholesale and limited purpose banks for large banks that offer credit cards. NCRC believes that responsible credit card lending serves important credit needs and should be encouraged by rigorous CRA exams. Moreover, a large amount of small business lending is credit card lending. For example, American Express issued 303,935 CRA small business credit card loans in 2020 yet did not have credit card lending examined on its most recent CRA exam because it was designated as a wholesale and limited purpose bank. The agencies are not assessing whether these lenders are meeting credit needs in a responsible fashion by leaving these large volumes of loans off of CRA exams.
The NPR contains provisions that should increase access to credit and capital for smaller businesses. Stakeholders should continue supporting these provisions as well as advocating for improvements to the NPR, particularly in the area of explicitly considering access to credit and capital for minority- and women-owned small businesses.
In summary, NCRC recommends the following:
- The agencies should adopt Section 1071 data to be provided by the CFPB as the source for CRA exams. This data would allow for increased precision in measuring access to credit for the smallest businesses as well as those owned by women and people of color.
- The agencies should adopt, as they proposed, providing CRA consideration for SPCP programs that can include a focus on women- and minority-owned businesses.
- The agencies must reconsider their decision to not explicitly consider the race of borrowers and neighborhoods on CRA exams. If the agencies adopt methods for considering lending to communities of color and minority-owned businesses, lending and investing would increase to these communities and businesses to a greater extent than if SPCP programs were relied upon as the main way to increase credit and capital to women- and minority-owned businesses.
- In the proposed lending test, the agencies should focus on the smallest businesses and also include separate performance measures assessing access to credit for the smallest businesses in LMI tracts.
- The agencies should retain the NPR’s appropriate focus on investments for small businesses with revenues less than $5 million in revenues with some careful exceptions.
- The final regulation should encourage SPCPs and investments in minority-owned media and other innovative businesses serving traditionally underserved communities.
- The retail services test must maintain its emphasis on branches as a way to ensure access to credit for small businesses.
- Credit card banks must no longer qualify for the wholesale and limited purpose test that would omit consideration of small business credit card lending on CRA exams.
 Daniel Wilmoth, PhD, Small Business Facts – Small Business Job Creation, Small Business Administration, Office of Advocacy, April 2022
 Raphael Bostic, and Hyojung Lee, Effects of the CRA on Small Business Lending, Federal Reserve Bank of Philadelphia, WP 18-27, December 2018, https://www.philadelphiafed.org/community-development/credit-and-capital/effects-of-the-community-reinvestment-act-cra-on-small-business-lending.
 Minority Business Development Agency (January 2010). Disparities in Capital Access between Minority and Non-Minority Owned Businesses: The Troubling Reality of Capital Limitations Faced by MBEs. p. 5, https://www.mbda.gov/sites/default/files/migrated/files-attachments/DisparitiesinCapitalAccessReport.pdf
Dedrick Asante-Muhammad, Dr. Jared Ball, Jamie Buell, Joshua Devine, Black Entrepreneurship’s Lethal Pre-Existing Condition: The Racial Wealth Divide During The COVID Crisis, NCRC, April 2021, https://ncrc.org/black-entrepreneurships-lethal-pre-existing-condition-the-racial-wealth-divide-during-the-covid-crisis/
 Citigroup, Citi GPS: Global Perspectives & Solutions, Closing the Racial Inequality Gaps: The Economic Cost of Black Inequality in the US, at 4 (Sept. 2020), https://ir.citi.com/NvIUklHPilz14Hwd3oxqZBLMn1_XPqo5FrxsZD0x6hhil84ZxaxEuJUWmak51UHvYk75VKeHCMI%3D.
 Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Notice of Proposed Rulemaking (NPR) to amend the CRA regulations, May 5, 2022, issued version, https://www.federalreserve.gov/consumerscommunities/files/cra-npr-fr-notice-20220505.pdf NPR, p. 385.
 86 Fed. Reg. 56356 (Oct. 2021), available at https://www.federalregister.gov/documents/2021/10/08/2021-19274/small-business-lending-data-collection-under-the-equal-credit-opportunity-act-regulation-b.
 NPR, p. 171.
 NCRC Comment On Proposed Section 1071 Small Business Lending Data Collection, January 2022, https://ncrc.org/ncrc-comment-on-proposed-section-1071-small-business-lending-data-collection/?utm_source=rss&utm_medium=rss&utm_campaign=ncrc-comment-on-proposed-section-1071-small-business-lending-data-collection
 U. S. Small Business Administration Table of Small Business Size Standards Matched to
North American Industry Classification System Codes, https://www.sba.gov/sites/default/files/2022-05/Table%20of%20Size%20Standards_Effective%20May%202%202022_Final.pdf and see https://www.sba.gov/sites/default/files/advocacy/SB-FAQ-2016_WEB.pdf
 Equal Credit Opportunity (Regulation B); Special Purpose Credit Programs: A Rule by the Consumer Financial Protection Bureau on 01/15/2021, see https://www.federalregister.gov/d/2020-28596/p-54 and https://www.federalregister.gov/d/2020-28596/p-62
 Bruce Mitchell, PhD. and Josh Silver, Adding Underserved Census Tracts As Criterion On CRA Exams, NCRC, January 2020, https://ncrc.org/adding-underserved-census-tracts-as-criterion-on-cra-exams/
 Josh Silver and Jason Richardson, NCRC Proposal For Underserved Tracts Would Increase Lending In Communities Of Color By Billions Of Dollars, July 2020, https://ncrc.org/ncrc-proposal-for-underserved-tracts-would-increase-lending-in-communities-of-color-by-billions-of-dollars/. The study cited above by Josh Silver and Bruce Mitchell found that 8,682 underserved tracts were LMI. An additional 1,265 tracts were middle- and upper-income as reported by the July 2020 study.
 NPR, p. 199.
 JP Morgan Chase & Co. Institute (July 2020) Small Business Owner Race, Liquidity, and Survival. p. 17. https://www.jpmorganchase.com/institute/research/small-business/report-small-business-owner-race-liquidity-survival
 American Express. The 2018 State of Women-Owned Businesses Report, p. 9, https://archive.mbda.gov/sites/mbda.gov/files/media/files/2018/2018-state-of-women-owned-businesses-report.pdf
 NPR, pp. 196-198.
 NCRC consulted with Federal Reserve surveys of credit availability for small businesses, raw Federal Reserve survey data and other studies. We could not determine the answer to the question of credit availability to the larger small businesses.
 NPR, pp. 61-62.
 Monika Mantilla, These Businesses Can Help Drive the Economic Recovery, March 2020, Aspen Institute, https://www.aspeninstitute.org/blog-posts/these-businesses-can-help-drive-the-economic-recovery/
 NPR, pp. 62-63.
 NPR, p. 105.
 Xu, Y. (2018). The importance of brick-and-mortar bank offices: Evidence from small business and home mortgage lending, 1998-2016 [Thesis, University of Delaware]. https://udspace.udel.edu/handle/19716/23925 This paper finds that declines in small business lending after mergers and branch closures can persist up to six years: Nguyen, Hoai-Luu Q. 2019. “Are Credit Markets Still Local? Evidence from Bank Branch Closings.” American Economic Journal: Applied Economics, 11 (1): 1-32. https://www.aeaweb.org/articles?id=10.1257/app.20170543.
 The FFIEC web page provides small business CRA loan data by institution including American Express. See https://www.ffiec.gov/craadweb/DiscInstList.aspx. Data retrieved from Table 1-1, Small Business Loans – originations, for American Express. OCC 2019 CRA exam for American Express via https://occ.gov/static/cra/craeval/dec19/25151.pdf