By Senior Consultant, Melissa Ettel

A recent study by the Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) has highlighted potential racial disparities in the treatment of Black and White small business owners during the beginning stages of the credit process. The findings shed light on how implicit bias and differential treatment can affect minority business owners’ access to financing, and  demonstrate that certain key fair lending risks, such as disparate treatment and steering, will soon come under enhanced scrutiny in the commercial lending space. Of note, the DOJ’s involvement, including its participation in a mystery shopping exercise with the CFPB, underscores the extent to which both agencies are intensifying their efforts to enforce anti-discrimination laws and to hold financial institutions accountable for non-compliant fair lending practices.

The study, which utilized matched-pair testing to simulate the loan application process, found statistically significant differences in how bank representatives treated Black and White business owners. The study was conducted at 50 different branches across 23 major financial institutions in Fairfax County, Virginia, and Nassau County, New York, using trained individuals posing as small business owners seeking credit. Despite Black applicants having slightly more favorable financial profiles than their White counterparts and, in many cases, meeting with the same bank representative, the study found a significant disparity in the treatment of Black applicants.

Specifically, lenders were 40 percent more likely to encourage White business owners to apply for a loan compared to just 23 percent of Black applicants. In addition, lenders steered 59 percent of Black business owners toward non-requested products, compared to only 39 percent of White applicants. The results of the mystery shopping by the CFPB and DOJ were consistent with prior studies conducted by non-profit and academic researchers in Atlanta, GA, Washington, DC, Los Angeles, CA, New York, NY, and other areas. These disparities point to a potentially broader issue of disparate treatment in the commercial lending space just as the CFPB’s small business lending rule (SBL) under Section 1071 of Dodd-Frank[1] moves closer to implementation.  Not only do the findings suggest potential violations of the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in any aspect of the credit lifecycle, but the involvement of the DOJ and the upcoming implementation of the SBL data collection rule suggests that additional regulatory interest and innovative approaches to enforcement in the context of commercial lending are on the way.

Given these findings and the DOJ’s interest in small business lending, financial institutions need to proactively plan and act accordingly to address potential disparities in lending practices and improve equity in small business lending, specifically as it relates to the enforcement of SBL requirements.  In both the short- and long-term, financial institutions should focus on four practical solutions:

• Implementing controls for the upcoming data collection rules;
• Performing matched-pair testing to audit lending practices;
• Enhancing their compliance management systems to monitor lending decisions for signs of bias, including statistical monitoring and conducting periodic reviews of lending policies; and
• Fostering a culture of inclusion within their organizations, including use of objective data to inform decision-making.

To prepare for the law’s effective date, banks must perform a tier determination analysis to understand if, and when, SBL will be applicable[2] and prioritize data collection, from understanding the data they currently collect to completing gap assessments. Specifically, banks should map out their processes for each business unit to fully understand the current process, the systems involved, and any gaps in data collection abilities. Once banks understand the SBL’s applicability and their current processes, they should focus on analyzing their current data and performing impact assessments. Banks that report data on small loans to businesses and farms under the Community Reinvestment Act may wish to use proxy-based analysis to test for disparities in small business lending on a prohibited basis until they begin collecting data under SBL. Performing a robust self-assessment will provide valuable insights into whether current policies contribute to disparate treatment and, if so, will help to identify the steps needed to address those issues.

The CFPB-DOJ study has brought to light potentially troubling disparities in how Black and White business owners are treated in the small business lending process and underscores the need for urgent action to ensure that small business lending is equitable and inclusive. By advocating for more transparency, adopting effective testing methods, and complying with anti-discrimination laws, financial institutions can effectively work toward fostering a more just and inclusive economic future for all small business owners, regardless of race or any other protected classification.

[1] In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, requiring the Bureau to establish regulations for collecting small business lending data. After almost 15 years, the CFPB passed Section 1071 of the Dodd-Frank Act to amend the Equal Credit Opportunity Act (ECOA). The new law requires financial institutions to gather, maintain, and submit data to the Bureau on credit applications from women-owned, minority-owned, and small businesses. Larger institutions must begin collecting data under the 1071 rule by July 18, 2025.

[2] SBL established different reporting requirements based on the number of small business loan applications submitted annually. Tier Determination refers to classifying financial institutions based on lending volume, wherein specific thresholds are defined and split into three tiers. Those who fall into tier 1, with at least 2,500 covered loans, are required to begin data collection on July 18, 2025, and submit the data on June 1, 2026, while tier 2, with at least 500 covered loans, are required to begin collection on January 16, 2026. Tier 3, with at least 100 covered loans, are required to begin collection on October 18, 2026, and have a submission date of June 1, 2027.