By Karen G. Mills
June 25, 2017
This month, U.S. Treasury Secretary Steven Mnuchin issued a report on the effects of regulation on access to capital. Juxtaposed against the lack of nuance contained within the Financial Choice Act that recently passed the U.S. House of Representatives, the thoughtful, fact-based Treasury recommendations offered a welcome change of tone.
Small businesses, in particular, are looking forward to reforms that will entice community banks to lend more, but will also ensure that small business owners have the information and protection necessary to avoid being taken advantage of by bad actors. Some of the Treasury recommendations are on track to help.
Simplifying capital rules for community banks and raising the size of credit unions subject to stress tests are recommendations that make sense, and ones that should help traditional lenders stay in the small business lending market. Streamlining the federal regulatory structure also will help reduce compliance costs by creating coordinated regulatory standards, freeing up more capital for small business lending.
But tacked onto the end of this document was one incredibly foolish idea: the recommendation to repeal Section 1071 of the Dodd-Frank Act. This provision creates rules, which have not yet been implemented, for banks to report their small business lending data. Bowing to the pressure from community banking lobbying groups, repealing Section 1071 is a knee-jerk reaction to bankers who claim it is just too onerous to track and report this information. Not only is this not true, but it’s ultimately bad for responsible community bankers and the small businesses they serve.
Remarkably, unlike most other developed countries, the United States currently has no available national information on small business loan originations. This makes it almost impossible for banks to know where they stand within the small business lending market, and it leaves policymakers flying blind.
In 2008, we saw the disastrous effects of the financial crisis on small businesses. Just last week, I heard from Pilar Guzman, owner of Half Moon Empanadas in Miami. Despite having just paid down a large amount on a loan she held just before the crisis hit, her bank abruptly pulled her credit line in the recession. She was left with $30 and almost lost her business, along with all of the jobs it had created. Fortunately, she managed to survive and now, nearly 10 years later, has eight locations. But this was not the case for many small business owners.
When we fought our way out of the Great Recession, there were very few ways to measure, in real time, the state of access to credit for America’s small businesses. It was a scary place to be when small businesses were losing hundreds of thousands of jobs each month. Today, we still rely on imperfect surveys by the National Federation of Independent Business and the Federal Reserve to get a sense of how available credit is to these important job creators.
The concerns from banks about implementing the data requirements of Dodd-Frank 1071 are real, but they are not impossible to solve. How do we know what is a small business? How do we define a woman-owned or minority-owned business? These are valid questions. But the path to a better credit market for small business owners is to answer them, not to simply ignore them. One solution is to proceed in steps by beginning to collect loan origination data on small loans on the call reports to the Federal Deposit Insurance Corporation an easy first step that could be very valuable.
Whether or not the current administration wants to make federal policy using facts and data, there are plenty of members of Congress who should and do know the importance of making data-driven decisions. Back in 2009, in the wake of crisis, I talked to members on both sides of the aisle about the importance of this data. It’s time for them to step up and be sure we act not react.
Small businesses deserve good policy, and good policy requires good data. If Washington truly wants to help small businesses grow and create jobs, they’ll keep and implement Section 1071 of the Dodd-Frank Act.
Karen G. Mills is a senior fellow focusing on entrepreneurship and innovation at Harvard Business School. She served as head of the U.S. Small Business Administration under President Obama from 2009 to 2013.