By Karen Mills
March 14, 2017
Last week, President Trump held a listening session with community banking CEOs and the leaders of community banking trade groups to discuss financial regulation and opportunities for regulatory reform. Now, he and congressional leaders have an opportunity: reform the Dodd-Frank Act in a way that helps small business.
These issues are critically important to our economy. Small businesses are responsible for half of all jobs in the United States and 60 percent of all net new jobs since 1995. Access to capital is fundamental to starting and growing these businesses, and gaps persist in the small business loan market, particularly in small-dollar loans.
So if President Trump and leaders in Congress truly want to reform Dodd-Frank to help small businesses, what can they do? They can start with four ideas.
Simplify capital requirements for community banks
Community banks, a primary source of loans for small businesses, are burdened by capital requirements designed for large institutions that pose a systemic risk. These requirements limit the ability of community banks to lend, and make it harder for small businesses to access capital. Simplifying these requirements is something Hillary Clinton proposed during the 2016 campaign, and Republicans, including the president, have expressed support on this front, as well.
Streamline federal regulatory guidance
There are at least seven federal entities with some jurisdiction over banking regulation, resulting in duplicative and sometimes conflicting guidance. This makes it difficult for community banks to navigate the system, and inhibits the entrance of innovative financial technology — also known as “fintech” — players who have begun to fill the small business loan gap. As one example, there should a coordinated set of rules and regulations around third-party guidance to allow for more partnerships between fintech lenders and banks looking to improve their small business lending processes.
Collect the data to create sound policy
Compared to many developed countries in the world, the United States is “flying blind” when it comes to understanding what is happening in small business lending. Section 1071 of Dodd-Frank mandates the collection of this data by the Consumer Financial Protection Bureau. Given how critical this data is to creating sound policy, the implementation of this provision must be a priority.
Protect small business borrowers
Small businesses do not enjoy the same borrower protections as consumers. Without these protections, it is difficult for small businesses to understand the terms of their loans or compare across lenders, inhibiting the efficiency of the small business lending market and potentially encouraging bad actors (particularly in the new fintech arena).
These reforms ought to be bipartisan. There should be interest from both sides in supporting community banks, aligning regulators to provide clearer guidance, collecting the information required to make data-driven policy, and protecting small businesses from predatory lenders.
With Dodd-Frank reform having been put on the table by the White House and leaders in Congress, there is an opportunity to make Washington work better for America’s small businesses. That is what the president and the majority on Capitol Hill have promised, and small businesses across the country are counting on them to step up.
Karen Mills is a senior fellow focusing on entrepreneurship and innovation at Harvard Business School. She served as Administrator of the U.S. Small Business Administration under President Obama from 2009 to 2013.