Small Business Lending – Enforcement Gaps And Possible Solutions

Just Economy Conference – May 13, 2021

The COVID-19 pandemic had a devastating impact on small businesses, and disproportionately hurt minority-owned small businesses. The government provided aid in a variety of ways, including the creation of the Paycheck Protection Program and extending credit modifications, but there still remains a need for additional assistance and regulatory changes in order for businesses to weather this ongoing storm. Evidence of discrimination by financial institutions has been repeatedly found by NCRC’s small business mystery shopping tests, but there has been limited enforcement action implemented to ensure equal access to aid and additional credit products for small businesses. Stakeholders at all levels have a role to play in working towards solutions for businesses damaged by the economic downturn. Join us for a panel discussion with speakers from federal, state, academic and advocate organizations on the gaps in lending enforcement today and possible solutions to increase oversight of fair lending practices.


  • Bradley Blower, General Counsel, NCRC
  • Patrice Ficklin, Assistant Director-Fair Lending, Consumer Financial Protection Bureau
  • Edgar Gill, Senior Deputy Commissioner, CA Department of Financial Protection and Innovation
  • Sterling Bone, Professor of Marketing and Strategy, Utah State University


NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.

Blower 00:04 

I’d like to welcome everybody to our session on small business lending enforcement gaps and possible solutions. our panel today is going to discuss the, you know, the pandemic and the devastating impacts on small businesses, and what their thoughts are on what we can do to aid small businesses, not just during the pandemic, but afterwards to make sure that they’re sustainable and can thrive. And we’re gonna focus a bit as well on a series of NCRC studies that we conducted, along with several academics, including one of our panelists, showing bone that looked at the payment protection program that the government federal government launched during the pandemic to aid small businesses, and particularly with a focus on how the program worked in serving minority and women owned businesses. And what To what extent we saw any discrimination or discouragement that occurred during the second phase of the PPP program. We have a great panel today, we have three distinguished panelists, our first speaker is going to be Sterling Bone, who’s Professor of Marketing at Utah State University, and has been a partner with NCRC for the last several years working on looking at small business lending what small business lending needs are and what gaps there are in terms of services and credit availability. Our second speaker will be Ed Gill, who’s the Senior Deputy Commissioner at the California Department of Financial Protection and innovation, and prior to serving in that role, and had a long career in banking. Most recently, before he joined the CD, FBI, he was marketing president for US Bank in Northern California. And our final speaker is Patrice Ficklin, who is who was the initial and continuing fair lending director at the CFPB. Prior to her tenure at CFPB, Patrice was counsel at the civil rights law firm of Rome and Colfax, where I worked with her at the time. And prior to that she worked at Fannie Mae on a variety of issues, including affordable housing. So with that, we’ll kick it off and Sterling bone press, Brown is going to kind of set the table for us on what the NCRC and our academic partners found, when we did mystery shopping, and testing of the small business lending space during the payment Protection Program. Professor Bone? 

Bone 02:30 

Thank you, Brad. And thank you all for attending the session. I’m honored to be with these amazing panelists that are deep into the trenches of all things related to what I’m going to be sharing. And I get to take the vantage point of being that Professor in this session of coming at it from a very open and neutral perspective to understand the paycheck protection program. And I’m going to be highlighting the minority small business experience during their journey for small business. And this is, as Brad mentioned, it’s been a very fruitful and long partnership with the NCRC with our Academic Team. And we want to make note that, that this is a very much a team collaborative effort to understand the paycheck protection program as well as all things related to small business financing. Just to kind of give you kind of a kind of a visual perspective of the Small Business journey, the journey to small business. Lending is a choice journey. And that comprises of a number of sub choices, and that denial and discouragement can occur at any stage or sub choice at any stage of the journey. And that the you know that this dis denial or discouragement at individual points is tantamount to a overall loan denial or rejection. The small business loan choice journey has a myriad of choice options. is dependent in that experience at one stage or sub choice impacts the sub choices at another point in the journey. So, as we look here at the lender and product search stage of Enrique first time business loan seeker, that our research focuses on this, this this this lender and product search stage. And that unique to our research is that we investigate the sub choice level of this journey, and are interested in denial and discouragement of small business lending throughout the process of information search. And at the time that the small business owner is seeking actively loan options, and not just the resulting outcomes of whether a loan is approved, and what the loan terms and rates are. So as a backdrop to our research approach, we have a core set of research questions that we are attempting to address. And we’re trying to understand that that whether and how are similarly situated minority and non minority small business owners presented the same information, are they required to provide the same information and at what level do are they given the same level of encouragement and service quality? Over the last 10 years, as academics, we have been refining the process of match pair testing with our partners at the NCRC been trying to under we’ve been trying to understand match pair methodology and small business. For those that are not familiar with this method. This research approach has its origins in mystery shopping procedures, however, is much tighter in research design and includes much more rigorous experimental control. We’ve conducted match pair cast in person in the bank as well as over the phone with bank representatives. However, since the covid 19 pandemic, we have concentrated our phone testing on concentrating on phone testing and refining methodologies there. And this was especially timely given the rollout of the paycheck Protection Program or PPP funding. I will now present two match pairs study tests that were conducted during the phase two of the PPP rollout, the first being conducted in the Washington DC, Virginia MSA in April of 2020. And the second that was collected in Los Angeles in the latter stages of phase two in July and August of 2020. We followed up these match pair tests with a national survey of small business owners looking at their loan appetite alone demand as well as their loan modification behaviors. And I will share some of the insights from this survey around the PPP outcomes among small business owners in nine major markets. Again, for those that are not as familiar with match pair fair lending approaches this this representation or this slide kind of details kind of the design and the process by which we conduct these tests. So for the studies that I’m going to present, we recruited and matched testers on voice and I’ll mention briefly here in a moment about linguistic profiling. And it across these tests, we looked at three rates, the national origin groups being white, black and Hispanic as well as crossed both gender groups with test banks in major metropolitan statistical areas, and the typical sample size varies from 120 to 180, individual test parts, this gives us adequate power to be able to look at statistical differences among the different test groups. As individuals are testing in these banks, they are testing about a similar small business loan product. However importantly, on paper, those that are in protected groups both in race and national origin as well as gender are presenting information that is superior to to our control testers and that they’re more qualified than the control Chester’s. That’s the testers are extensively trained and steps are taken to make sure that they are following protocols of this testing procedure. And then immediately after each of the tests they provide information using online survey and other methods of data collection after the test has been completed, we are they also provide detailed narratives of the experiences that are analyzed in an qualitative approach of fair lending analysis to ensure that we are able to approximate the racial and national origin route categories as well as the gender group categories. We conduct extensive voice retests, in that we that in that the testers are given a nursery rhyme that they recite or that they read. And then that recording is then presented to a panel of adults that are able to assess, or categorize individuals based on what they perceive to be the race and national origin of the voice, as well as the gender, we take a very high level of agreement in terms of the voice test to determine who will be the testers for a given study. And, and so we use classification and cross tabulation tables to make sure that we’ve identified at a high level of reliability voices that are correctly classified into our test groups. I’m going to first take us through the results and some of the high level results of the Washington dc report. And I will mention that all of the data that we are presenting today have been published in NCRC, white papers and in certainly can be available, and they’ll be information of where you can access these reports in their entirety. In the Washington dc test, you can see here, we’ve got represented the four groups with different colors of bars in these in these graphs, I’m going to highlight some of the key findings from these studies. It’s important to note that as I go through these, these these data, that while it might appear at times that there are differences based on the bar graphs, we are undertaking a much more rigorous statistical test of each of these group comparisons to ensure that, that we are accounting for the real and represented differences that are in the marketplace. But first, I’m here in terms of information that was provided by the loan officer, we found that women received less information received less information than men about general loan information. So in our testing procedure, the testers go in asking for assistance or loans for their business, there’s not a specific request of a certain a specific type of loan. So just generally, given the time period, PPP was the Hallmark product that was, you know, most valuable for these small businesses during this time, but generally women received less information about the about loans in general as well as PPP. In general, you can see that as represented that over 56% of the time, both the white men and black men received information regarding PPP, and that it was far less for significantly less for women receiving information about PPP. Important to our researchers that we are interested in understanding discouragement and encouragement during these this stage of information search and loan search, or the Small Business operators. And so it’s imperative and important for these small business, small businesses to receive encouragement along this very complex and arduous journey. We found that in the volunteering of a qualifying statements, so in the case of bump bank officer, discusses with the tester, various options and programs that might they might be qualified for when if there was a mention of a qualifying statement, and it were an encouraging statement to apply. We capture it here. We found that protected groups in the in the form of both race and gender minority groups, that we found that black males, white females and black females were less likely to be volunteered and given a qualifying loan statement during April 2020, phase two of PPP. I’m now going to shift our attention to the latter stages of phase two to to look in a different marketplace, Los Angeles, and to understand the the behaviors and what was occurring in the field around PPP in the latter stages. In this test, we found that there was interesting patterns that were revealed through large statistical analysis across race and national origin as well as gender groups. Looking at these statistical significant findings, we find that among men, Hispanic men were less likely to be provided PPP information, it might be it might appear by from your eyeball that the black males received that information more than white males, but that effect was not significantly different. Rather that Hispanic men were the group that was much less likely to receive PPP information in Los Angeles area in In July, and August of 2020. Among the women, black females were likely to be black females were less likely to be provided PPP information during this time period, and that there was no significant difference between white and Hispanic women. Again, continuing our conversation around encouragement and discouragement, we’ve advanced our testing to include overt and very objective measures of discouragement that occurred during our testing, for example, being told to go to a competitor bank to hold to call back at another time, even blatantly be being pulled to not apply. We take an aggregate measure of seven of items similar to these and and and analyze and test the overall discouragement that individuals received in Los Angeles during this time period. And we found overall that black females and Hispanic females experienced more open and objective discouragement. Compared to white females, there were no significant differences in overall discouragement among our male testers. The follow up this match pair testing, we undertook a national survey to understand the appetite in terms of the demand for small business products during the pandemic, as well as the supply or the behaviors in the banking and market place that were, were encouraging or discouraging individual who apply or to pursue or PPP programs. The PPP program, this sample, this survey was conducted with 935 small business owners across nine major US metropolitan statistical areas. The representative groups in this population included 29%, being white 33%, being black, and 38%. Being Hispanic. The sample is predominantly men in terms of being 65%. But we have representation of female women owned businesses, as well and that there is representation of, of industry across the ni CF and a ICS codes. I’m going to highlight just a few of these findings from this study, we find that overall and what you’re seeing here is three stages of the journey. And consistent with what we’ve continued to to investigate is these these sub choices or these stages of the journey. So first being in inquiring about a PPP loan is in orange, it represented by the orange bars, the gray bars represent applied or you know, the those that applied for PPP loan. And among those that applied, the yellow are those that were approved for a PPP loan. I’m going to talk and discuss the findings based comparing against the gender groups. So the key findings for men, black men were more likely to enquire about a PPP loan. We also took measures of the pre pandemic debt loads, and we found that black men were carrying higher level of debt liability against their business. And a lot of that debt was credit card loan in its end and other consumer loans that were being used for the business. Important importantly, here, we find that the ratio between inquiring about a PP loan to applying for a PPP loan was the lowest among black men, meaning that there was a greater gap. And this did not come into any surprise to us that have been looking at the encouragement or discouragement of minority business along small business lending for a number of years. Overall, we find that hits men IQ men, in general general were less informed and were less successful in the PPP program. Looking at women we find two interesting findings and and interestingly, these findings in this trend holds for both black and Hispanic Hispanic women, we find that black and Hispanic women applied for PPP more often than white women, and that the ratio of the applied to being approved for the PPP program was the lowest among black and Hispanic women. And so while there was more that applied, in general, that applied for the PPP program in these groups, there were fewer that actually received or approved for that program. So in terms of recommendations from this research, we strongly advocate as an academic and in our partnership Academic Team as well as our team with NCRC. To implement section 1071. as researchers, it’s absolutely imperative that we have more transparency in terms of the data surrounding small business lending. And we encourage those that have standing within government and, and and other areas to to begin the enforcement and continue enforcement actions in the small business arena. As academic researchers, we continue to do work in this area and are employing a lot of statistical and economic econometric modeling procedures of these data to account for bank and individual employee characteristics. We call upon our industry and bank partners to perform self test audit, and to introduce protocols and procedures to optimize customer experience across all customer groups. Thank you for the time. 

Blower 19:59 

Thank you, Sterling. Well, now that we have a bit of a backdrop of what the NCRC and our academic partners found, in the PPP program, in terms of discouragement, particularly of women and minority businesses, we thought it was important to have regulator leaders on these issues, speak out to what their respective agencies are doing from a state and federal level. And so we’re gonna turn it over to Ed Gill, to talk about what the state of California is doing and what they’re focusing on when it comes to small business lending. 

Gill 20:34 

Thank you. Good morning, everyone. It’s nice to be a part of today’s panel. Let me just take a few minutes to talk about our department, including some of the major changes taking place under the new California consumer protection law. The Department of Financial Protection and innovation is charged with protecting consumers while fostering reasonable financial innovation. And I think the commitment to that balance is long overdue. We believe consumer protection and financial tech innovation are not mutually exclusive. And that best in class companies understand that truly innovative products and services go hand in hand with consumer protection principles. California has the largest or the I’m sorry, the fifth largest economy in the world. How we regulate credit unions, banks, payday lenders, student loan servicers and financial tech companies matters. It creates a level playing field that allowed people and markets to thrive. And the California consumer protection law cc FPL gives us more tools to do that job. The law took effect at the start of this year and allows us to the following regulate previously unregulated financial products and services protect consumers from predatory businesses without imposing undue burdens on honest and fair operators, and spur reasonable innovation and financial so in financial services by connecting us with entrepreneurs and innovators early on so we can have an early look and provide feedback. one specific enhancement in our ability to investigate and enforced against unfair deceptive and abusive products and x, or you dap. The new you dap authority simply allows us to better do our jobs. We have always been here doing the work where our hands were previously tight, we can now take action to ensure a fair and resilient marketplace. This revamped financial services regulatory agency is a model for other states. Our success will spur similar reforms in other states we believe it gives us the latitude to tackle scams that have cropped up during the covid 19 pandemic while also ensuring that fintechs have a regulatory framework that makes sense for their unique business styles. We’re also standing up a new Consumer Financial Protection Division to supervise previously unregulated financial services and a market analysis and research arm will keep us informed about potentially harmful consumer trends. Suzanne Martindale is our new Senior Deputy Commissioner for consumer financial protection, y’all. You may also know her from her work at Consumer Reports. She helps she helped to shape and pass the California financial protection law and has more than a decade of experience as a consumer advocate. Going back further, in 2018, California enacted sb 1235, which requires non bank lenders and other finance companies to provide written consumer style disclosures for certain commercial transactions, including small business loans and merchant cash advances. Sb 1235 requires that provider of commercial financing, make disclosures similar to those required by consumer finance laws, such as the federal Truth in Lending Act. The term providers excludes depository institutions like banks, but includes commercial lenders operating under the California financing law, or bank sponsorship arrangements, including many FinTech companies. Sb 1235, was an inset was enacted to ensure that companies can easily compare the costs and features of various forms of commercial financing, and make California the first state in the nation to adopt such requirements for commercial lending. The DEA FBI is currently well along in the process of adopting rules to enact the law. We have received and considered many public comments, and we expect to have final regulations ready for adoption later this year. This law was first in the nation to provide such protections to small business borrowers. New York has since also require greater transparency from non bank lenders making small business loans other states may follow. I see our challenge as challenges that other states will experience in the near future. And I see our solutions, and specifically the Department of Financial Protection innovation, as a preview of what we will see in other progressive states. Thank you. 

Blower 25:29 

Thank you. And now we’ll turn to the federal perspective from Patrice Ficklin, who, as Ray mentioned, has been a longtime leader. 

Ficklin 25:40 

Yes, thanks so much, Brad. And we do go way back, don’t we, as you mentioned in your introduction, thanks so much to you and to Allie and to Sarah and all the other great folks at the NCRC for inviting me to speak with you today on this very important topic. I’m absolutely thrilled to be here. And it’s been wonderful to hear about Sterling’s work and Ed’s work as well, so honored to be a part of this distinguished panel. As Brad mentioned, my name is Patrice Alexander Ficklin. And I have the honor of serving as the fair lending director at the Consumer Financial Protection Bureau, or the CFPB. Sometimes the bureau as we refer to it, let me just note at the outset that I am a representative of the CFPB making this presentation on behalf of the Bureau. my remarks do not constitute legal interpretation, guidance or advice of the CFPB. As I noted in a blog post that I co authored at the beginning of the pandemic, small businesses including minority and women owned businesses are the cornerstone of the American economy. And I’ve been hit particularly hard during the covid 19 pandemic. There’s an old saying that when white communities get a cold, black and other communities of color get pneumonia. I’m not sure who said at first, but it’s an apt warning, especially in times of economic distress, where disproportionate impacts are often felt by minority communities. I’ll note that the Bureau has observed that minority entrepreneurs tend to operate in industries most affected by the pandemic and are dependent on in person contact, including restaurants, hospitality, barber shops and salons, which in many jurisdictions have been subject to lengthy closures. Because minority owned businesses are more likely to hire diverse employees, and are more likely to be located in minority communities. These adverse business impacts also tend to affect minority customers or consumers. Small businesses, especially minority owned ones typically have little savings to insulate themselves against lean times and business interruptions. Minority firms are often smaller and less likely to have multiple locations that can help reduce adverse outcomes should one location be incapacitated. Recent research from the Federal Reserve Bank of New York observed that the black community has been doubly harmed by the corona virus pandemic, first from the virus itself and secondly, from the harm inflicted on black owned businesses. The Fed bank found that activity among black small businesses fell more sharply than small businesses representing other populations between February at the onset of the pandemic February 2020, and the pandemics initial peak in April of 2020. The study found a positive correlation between the share of black owned businesses in a county and the number of infections occurring per 1000 residents. Specifically 40% of business receipts for black owned firms nationwide come from just 30 counties. And as of July of last year 19 of these counties had the highest number of Coronavirus cases in the country. Conversely, counties with higher proportions of white owned businesses had lower incidence of infection. The report concludes that areas with higher concentrations of black businesses are more likely to face more severe and lasting pandemic impacts. In more recent small business owners survey conducted by alignable Research Center found that 45% of small business firms are concerned about their firm’s survival. Their survey which was conducted last month of more than 5000 small business owners paints a worrisome picture 59% of minority owned 50% of female owned and 44% of veteran owned small businesses reported being highly concerned about their firm’s remaining solvent through the end of the second quarter of this year. The level of high concern is most pronounced in certain industries, beauty salons, barber shops, caterers, gyms, restaurants and bars and retailers. 41% of those surveyed say that they only have one month or less of cash reserves. And that’s an increase from the February survey were 32% reported having one month or less of cash reserves. 49% were unable to pay their market rent, and 74% reported significant problems in obtaining paycheck protection program funds, while only 26% reported that they were able to obtain their loans quickly and easily. Another recent survey reported the struggles of small businesses owned by women of color, caress and iPhone women of color reseach released research last month, reflecting that the pandemic worsened the gap for small businesses owned by women of color when compared with other firms. Nearly 70% saw revenue declines in 2020. And on average, those revenue declines were 46%. And most of them specifically 81% stated that they did not receive emergency government assistance to support their businesses with 49% relying on personal savings. And so having shared with you some of these worrisome statistics that the Bureau has gathered as part of our market monitoring function. Let me speak for a moment about the Bureau’s role. The CFPB is role in ensuring fair, equitable and non discriminatory access to credit for small businesses. One of the key anti discrimination laws that protects consumers and small businesses. In fact, businesses of any size is the equal credit Opportunity Act or the ecola as we refer to it, and its implementing regulation, known as regulation b ecoa, and regulation B prohibit lending discrimination on various prohibited bases, including race, color, religion, national origin, sex and sex includes sexual orientation and gender identity, marital status, and age, as well as whether or not the applicant receives public assistance. ECOWAS protection against lending discrimination covers any aspect of a credit transaction, and it prohibits the discouragement of prospective applicants. Most importantly, for purposes of this panel discussion, I’d like for you to know that he CO and regulation B prohibit discrimination in both consumer credit and as I said a moment ago, business credit, including loan programs, such as the Small Business administration’s paycheck protection program that we’ve talked about, particularly with regard to Sterling’s research together within CRC. discrimination under eco and regulation b can be proved using disparate treatment and disparate impact theories. It policy or practice even if it’s neutral on its face, that provides parental preferential treatment to certain applicants. over other similarly situated applicants can increase fair lending risk if it causes a disparate impact on a prohibited basis, consistent with our authority to ensure compliance with the equal credit Opportunity Act or COA, the Bureau has prioritized fair lending risks in small businesses, small business lending for a number of years now. Our small business fair lending work has focused on assessing whether there’s discrimination in the application, underwriting and pricing processes for small business loans. Whether creditors are engaging in redlining with regard to small business loans and file Whether there are weaknesses in fair lending related compliance management systems, again for small business lending programs, more recently is part of our supervisory response to the economic challenges created by the pandemic, we conducted prioritized assessments of the potential fair lending risks in lenders participation in the PPP program, as discussed in the CFPB recent addition of supervisory highlights in implementing the PPP, multiple lenders adopted a policy that restricted access to this loan program, beyond the eligibility requirements of the cares act, and the rules and orders issued by the Small Business Administration. And we would call that an overlay because that’s an additional eligibility requirement in addition to the legal requirements. Specifically, several small business lenders restricted access to PPP funds, by limiting eligibility to existing customers, what we call an existing customer overlay. The Bureau’s prioritized assessment work in this area revealed that these existing customer overlays fell into two general categories. First restrictive policies that allowed only small businesses with this pre existing relationship, or a certain type of pre existing relationship with the institution. The opportunity to apply for PPP alone, and less restrictive policies that required small businesses without a pre existing relationship, to first become a customer of the financial institution, usually by opening a business deposit account, and then they’d be allowed to apply for a PPP loan. What the CFPB determined is that an overlay, restricting access to PPP loans for small businesses that do not have an existing relationship with the lender, while neutral on its face, that policy may have a disproportionate negative impact on a prohibited basis, and run the risk of violating ecola and regulation B. Compared to white owned firms, black owned firms have disproportionately fewer relationships with a bank. As a result of these barriers, existing customer overlays, even if not overtly discriminatory, may have a disproportionate negative impact on a prohibited basis. Given the reported challenges that minority owned businesses have had in accessing PPP funds, the bureau encourages small business lenders to consider the fair lending risks associated with participation in the PPP, and in further implementation of the PPP, and really in any small business lending program to evaluate and address any fair lending risks. To mitigate fair lending risk, a first step is to assess the validity of the business need for loan eligibility policies. Even if a creditor determines that it has a legitimate business need for an existing customer overlay or any other eligibility policy, the lender should also consider whether there are alternatives that may be less discriminatory in their impact. In our prioritized assessments, we observed that some creditors permitted an applicant without a pre existing relationship, to first become a customer of the financial institution by opening up a business deposit account and then apply for PPP loan, or to do so simultaneously. a creditor may consider as part of its periodic monitoring whether its existing customer overlay is consistently applied to all applicants. overlay policies that vary by business unit or application channel, or that are administered on a discretionary or ad hoc basis may heighten concerns of illegal discrimination. As part of that evaluation, creditors should contempt consider examining their processes to identify instances where loan officers or other employees have significant discretion to prioritize otherwise make credit available to one applicant over another similarly qualified applicant, generally discretion in credit origination, including product selection, approvals, and pricing terms or servicing including modification or hardship requests may create heightened fair lending risks. The creditor may further mitigate for lending risk by examining whether its policies are consistently followed by staff and if exceptions are granted, ensuring those exceptions are justified by documenting and periodically monitoring the basis for any exceptions. Let me conclude by noting that I Again, I appreciate the opportunity to share comments about the work that we’re doing here at the CFPB. And I look forward to answering questions at the conclusion of the panel. Back to you, Brad. Thank you. 

Blower 39:12 

Thank you, Patrice. Before we turn it over to the conference participants who just had a couple of questions and wanted to ask the panelists, I mean, let’s start with you, Sterling. Given what you seen from the NCRC studies that we conducted with you and your peers in the academic community, particularly related to you know, African American business owners, having more debt coming in consumer debt coming into the process, and Hispanic, small business owners having less information, what do you see as the most pressing need for the small business owners, the minority and women owned businesses from your studies that you’ve conducted? 

Bone 39:53 

Yeah, Brad, I think it’s particularly concerning as we see just the, you know, simulate accumulation of, of disparate and treatment across the light the life cycle of these businesses, you know, access issues in terms of information are absolutely imperative. And I think it’s, we’ve kind of resolved at it, that the data and the implementation of 1071 is of utmost importance, because we don’t understand fully the landscape of what’s occurring in these situations for for small businesses, you knew what your highlight that, you know, there’s this pre this prior dead, as well as there is this, this difference of, you know, information gapping, provided, I think a lot of that is, you know, focused on, you know, getting more information to the marketplace so that the market can correct some of these activities, as well as preparing through I know, within the NCRC conference, there’s a number of individuals here that are in the trenches working with small businesses and in as in development centers and, and working with, you know, these these folks. And so providing the information, providing mentorship and education and outreach to these businesses is absolutely important. 

Blower 41:09 

Thanks. And and I wanted to ask you, it’s very important the rules, the role of the federal government plays, but the states have a key role here as well. And how do you see California and other states who are taking the lead on small business issues? What do you think that you can do in the short term to increase access to this information and credit that Sterling talked about? 

Gill 41:33 

Thanks, Brad. In reference to the information that Sterling shared with us, I think it’s it’s probably important to put it in perspective, from the standpoint of worse, where California sits at this point in time, for example, California continues to be the leader in operating, offering offering ppb loans through our institutions. As of December 31 2020. Our banking licensees have originally originated approximately 119,000 ppb loans for approximately $22.2 billion outstanding. I think when you look at the numbers of where Brad was going with the, I guess, the proportion of loans that are going to minorities and those of the non minority community, it’s it’s a lot to be determined in terms of where those funds are actually being spent. I think as we move forward, in so many ways that the Department of Financial Protection innovation will look to include in our exams, how those funds are being dispersed between those different communities, those different borrowers I should say, and I think and then at that point, we’ll probably have an opportunity to address more appropriately, how can we impact where those borrowers are coming from whose needs are being met things of that nature? I think as of right now, it’s pretty new for us from a regulatory standpoint, because we’re typically looking at the assets and balance the balance sheets for asset growth with our institutions, and not necessarily where they’re spending or whether they’re, you’re utilizing the the lending opportunities for minorities and non minority communities. 

Blower 43:24 

And Patrice a question for you as well. I mean, a lot of people are pointing to the FinTech or financial tech community as a possible fix for part of the problem of greater accessibility to digital services playing on your on your phone for credit. What I mean, what do you see in terms of the ability of the FinTech community to provide additional access for small businesses? Or do you have concerns about making sure that the FinTech community and the traditional banks have kind of an even playing field in terms of consumer protection and other overlays, we need to make sure that they’re doing the right thing for the Small Business borrowers. 

Ficklin 44:05 

Sure, sure. Thanks, Brad. So the, the CFPB actually takes in many ways, what one could call a charter neutral approach to the enforcement of the consumer protection laws under our jurisdiction. And so regardless of whether they are depositories or non depositories, we apply the standards set forth in those consumer protection laws in a consistent fashion when it comes to institutions that are under our supervisory and enforcement jurisdiction. And I think that, you know, with regard to thinking about the protections for small business owners, and specifically, specifically the color protections, I think it’s just important for all creditors, whether they’re online, or they’re fintechs, or they’re depositories of bricks and mortar, you know, whatever their constitution is, that they recognize that they have obligations under the equal credit Opportunity Act and regulation be to ensure fair and equitable and non discriminatory access to credit. And really availing themselves of the Bureau’s guidance, and some of the materials that we’ve issued around what the constituent elements are of strong compliance management systems, right. And so making sure that they’re monitoring, identifying and addressing fair lending compliance issues, regardless of you know, what their business structure might be, and so ensuring that they have, you know, an up to date for lending policy statement and regular training for their employees that are involved in their credit transactions, including their officers and, and board members, that they engage in ongoing monitoring for compliance with their policies and procedures that are intended to reduce fair lending risk that they regularly review those policies and, and ensure that they identify potential disparate impact. And some regular analyses, you know, depending on the size and complexity of the institution, they engage in the appropriate level of statistical analyses, empirical analyses, for potential disparities on a prohibited basis, in their pricing, underwriting and other activities, that they regularly assess how they market their own products, to whom are they marketing, those little products so that they’re not creating, you know, redlining risks, for example. And again, that their leadership their their officers and board of directors were appropriate, if they have a board of directors, but their leadership, their senior leadership is actively engaged in oversight of fair lending compliance. And so those same kind of nuts and bolts, best practices with regard to managing for lending risks apply, regardless of the the nature of the enterprise that’s engaging in lending.  

Blower 46:54 

Thank you. I’d like to thank our panelists. And at this point, we’ll turn it over to questions from the conference participants. Thank you. Okay, now the fun begins, we’ll bring in our speakers again, a few weeks after we taped that portion of the panel was fun to watch ourselves on tape. And remind that mind ourselves what we said, I’m going to pick up countries with you. You talked about things that the bureau can do. And I guess I’m going to touch upon the sir, is there additional guidance for bureaus thinking about taking to help a business of getting access to credit score?

Ficklin 47:43 

Absolutely. One of the measures that we are taking and this actually applies in terms of both consumer credit and small business credit, particularly focusing on underserved communities, is making sure that lenders are aware of the opportunities to create special purpose credit programs. Special Purpose credit programs are authorized by a provision of the ecoa equal credit Opportunity Act, as I mentioned in my earlier remarks, and it’s implementing regulation, regulation B. And the special purpose Credit Program authority actually allows for profit and not for profit lenders to actually create programs that benefit disadvantaged borrowers and can actually advance one of the Bureau’s priority goals, which is around advancing racial equity. And in order to assist creditors in better understanding special purpose credit programs, you know, in the aftermath of the murder of George Floyd and all of this social unrest and protests that follow Black Lives Matter and other protests last summer, lenders expressed much more interest in these programs and asked us for additional guidance and So we issued a blog post last summer talking about special purpose credit programs. And then also an interpretive rule that was styled as an advisory opinion and released last December. And and just by way of background, I just wanted to talk for a moment about kind of what the special purpose Credit Program authority would allow, and does allow for profit institutions to do to create special lending programs. And we we’ve frequently seen these types of programs in the small business lending space. And basically, what a lender has to do is establish pursuant to a written plan, a lending program that is designed to meet the needs of a class of persons that is basically disadvantaged, in other words, who would not normally receive credit, under the lenders customary standards of credit worthiness, or would receive it on less favorable terms. And so regulation B actually allows institutions to create these types of targeted lending programs that can address a needs in the communities that they serve, the standards for not for profits are actually less stringent. They do not have to actually create the written plan that for profit lenders have to create. But they too can also create a lending program that is targeted for the benefit of economically disadvantaged persons. And so we’re hopeful that the materials that we’ve issued will actually encouraged lenders to provide more of these types of programs to assist small businesses, and also hopefully facilitate an equitable recovery from the current recession. Thanks.

Blower 50:44 

Sure, and I, you know, I would add as an incentive, that not only has the bureau provided great guidance on this, and Patrice has added to that a bit. But also that you can get CRA credit for doing these kinds of things, not just in the small business space, but in the in the housing space in other areas. So easterly, I wanted to ask you, what’s next in the research? What, what what what do we need? We talked about discouragement, and the early phases of pre application, what else do we need to look at? Where are their data gaps in terms of distribution of loans that actually came out of the PPP program? Maybe you can tease a little bit about a study that we’re working with you on involving socio economic status. Can you touch on those points?  

Bone 51:27 

No, absolutely. And, I appreciate the comment by Jake raised up in the chat. You know, I think there is this question of how are funds being distributed. And a lot of that gets at the the question of the outcome of loan approval or denial. And again, one of the things that we try to do is really characterize the entirety of that experience of that journey in that pre application study. And so so I would encourage I put up some reasonable put up some resources in chat about some reports that are that are available. Regarding the general distribution of PPP, some of the things that Brad you can kind of get to is, is we recognize that there’s a complexity of factors that go into how funds are being distributed. And one of the things that we’re looking at is the socio economic status or the perceived education level of applicants, they come into loans. And what we’re finding is that in the early conversations that individuals are having with banks, and this was done over foam testing procedures, as I’ve highlighted in our research, that there is a there is a kind of a dismissal that’s happening for individuals that are perceived to be lower socioeconomic status. What’s interesting is when we do these tests, those that have lower socio economic factors, or status levels are actually some of the most credit worthy applicants based on their financials. And so they’re not even getting into those conversations. And so when we look at the entirety of the experience, it’s important that the data gaps, continue to understand that we hope that implementation of 1071 occurs in the future. But it’s important that we continue to look at the entire human journey and not just the outcomes.  

Blower 53:10 

So it’s your turn to chime in here. Now, the states often ask act as crucibles for interesting experiments, forcement, programs, opportunities, incentives. And after all, innovation is in the title of your agency. What kind of innovations and interesting ideas is the California Department thinking about in taking the lead here and being kind of a leader and experimenting with what can be done to help businesses particularly during the pandemic? 

Gill 53:39 

Great, right, I really appreciate that question. You’re right, innovation is in the name. So we really have to make it bring it to fruition at this point in time. And I think where we are is, in the beginning stages. We don’t we don’t currently have a regulatory scheme on the small business side to see how our banks are are reacting and participating in the lending process. However, we’ve just started a program where we reached out to our institutions and did a survey on how they’re impacting their customer base and their hiring base from a DNI survey perspective, are they active in the community. And by and large, I think most of the larger commercial banks in California have a have a plan where they are participating and communicating within the communities that they reside. So we’re hoping that some of the smaller institutions or state chartered institutions will take that lead and follow. However, you know, I think it’s a responsibility of theirs as well to step up and make sure they’re doing the right thing, as Sterling pointed out in a number of the other stats that he talked about the ability of some of those borrowers in those communities, their ability to repay debt, their willingness to repay debt and the need for them to rely on being sponsored debt. It’s, it’s what is what really drives the economy. And and people often talk about California is the fifth largest economy in the world. Well, a ton of that is made up by small businesses. And so how do we make sure that those small businesses are thriving across the board. And I think one of the ways that we try are trying to do that is to actively engage our institutions in terms of their responsibilities from a lending perspective. And the survey is just the beginning, we just recently got the results of that, we had about 35% participation from our institutions. And that’s unacceptable at this point in time, we expect to see more so as we revive that survey, and I’m hoping to work with Sterling on some of the practices that they use, from a survey perspective and partner with California to actually get that type of information out to our institutions, and then back to us from for an analysis standpoint. So again, early stages of review of how can we be more proactive in analyzing what our lenders are doing at this point in time? So that’s where we are. 

Blower 56:13 

Thanks, Ed. I guess a question for all of you. You know, when I talk to people offline at banks, on the small business side, they all acknowledge things could have gone a little bit more smoothly with the PPP program. But you know, everybody was well intentioned, and trying to do the right thing here. What can the banks do? What What can What do you see as some next steps that industry should take in terms of testing, training, providing grant programs subsidizing doing SP CPS? What do you think are the priorities for industry right now it’s really lean in because I think there’s a, there’s a goodwill there, especially during this pandemic, too. And what’s happened with the racial divide awareness in the last year that industries is a little more aware that they have a big role here to play. 

Bone 57:02 

If I could chime in there, Brad, I think that one of the things that we’ve seen is, as we’ve documented these experiences, is that a lot of banks, a lot of bank employees are acting and kind of their individual preferences. And the economists refer to this as taste based discrimination that they have maybe a preference for certain type of applicants. And we would like to see more uniform protocols and procedures taken by banks. I don’t think it’s too far fetched to think that these banks are capturing information in the customer relationship management database, maybe the loan officer, the employee is able to follow protocols that feed that information into the bank. So they can see that they’re being uniform. And I think this harkens to self testing, right. And one of the things that we’re hoping with our partnership with with NCRC is to partner with banks, as well, to do some testing to bring that information to light. I know that the you know, the regulatory enforcement is really appreciate them being sir, taking those self testing procedures, and really learning and improving their practices. And so those are a couple ideas that we’re trying to urge banks to engage with us on is to to engage in self testing, and then to consider maybe some more uniform protocols of what information is being asked and how it’s being asked uniformly across their prospective customers. 

 Blower 58:32 

Patrice, anything you’d like to add about the role of industry here. 

Ficklin 58:36 

Absolutely. Thanks, Brad. I choose two thoughts. The first is to take a very close look at your policies and procedures, and ensure that you don’t have other types of openings, credit overlays in your programs that really can’t be justified and that may in fact have an adverse impact on a prohibited basis. I think that in the small business lending segments of lender shops, there’s often been very little focus on consumer protections, types of concerns. And so I think that that many institutions haven’t yet brought their fair lending compliance lens to bear commercial lending side of the house. And so really taking the time to look at those policies and ask, are they in fact, justified? And in in even if they’re, there’s a legitimate business need for them, to go further and ask, Is there a less discriminatory alternative? I think the second thought, and this goes to a question in the chat where a member of the audience asked what can we do to avoid the types of practices that were unearthed in the NCRC, and research that Professor bone talked about during his presentation? And I do think that the diversity, equity and inclusion efforts that Ed spoke about a quite important, you know, I think those who have followed the Bureau’s redlining work know that one of the things we look at is the demographics, the diversity of loan officers, right? And so, you know, hiring a diverse team of people to engage training, the question in the chat asked about training, training on things like microaggressions. And unconscious bias, are also important tools that lenders can use, I never get in some of the early matched pair testing that NCRC and Professor bone did. That was in person testing, you will have a whole catalogue of micro aggressions to in terms of did the loan officer, look the prospective customer and was a tester in the eye? Did they invite them to sit down? Did they really, you know, make them feel welcome. And so those types of of, of micro aggressions are actually quite important in terms of complying with ECOWAS prohibition against discouraging prospective applicants. So I would no doubt commend to industry, those two areas, is areas of focus. Thanks.  

Blower 1:01:05 

So I’m gonna give you the last word to ensure anything you’d like to add to the debate or discussion.  

Gill 1:01:11 

Or Brad, I don’t think there’s much more I can add to what Sterling and Patrice had mentioned. However, I would want to just emphasize that that having had a career as a banker, and started my career as a small business banker, what what you were hearing today is real, those those biases do exist in the industry? I’ll be there have been a ton of changes in the industry in the banking industry over the last 2530 years, but not enough. And I think there needs to be a real in depth look, by the lenders, at their practices, their policies, and how can they engage the minority community a little better, I still don’t think they’re at a point where we’re on equal footing. And until we are and if that ever happens, there’s always going to be a need to improve in that area. So the effectiveness of conferences such as this, and the words that we heard from Sterling and portrays, are very apropos for what we need today. 

Blower 1:02:09 

Well, thank you all it’s been it’s been really enjoyable to do the panel with you. Let’s meet again next year, this time in person and see where things stand with small business lending again, in 2022. So thanks, everybody for your time. Appreciate it, the comments. Thank you. Excellent. Thank you. 

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