Show and tell: a new act sheds some light on small-business lending to keep discrimination in check

Entrepreneur, June, 2002 by C.J. Prince

MORE THAN A QUARTER CENTURY after Congress passed the Home Mortgage Disclosure Act (HMDA)--and opened banks' books on consumer lending, inviting scrutiny and exposing discriminatory practices--a handful of politicians are now saying it's high time the same rules applied to small-business lending as well.

Introduced in November, the new Access and Openness in Small Business Act of 2001 would force banks to collect race and gender information from their small-business borrowers, just as they do from consumers. Or, at least, it would require them to ask for the data; the responses would be entirely voluntary. But the bill would reverse current Federal Reserve rules, which prohibit lenders from asking. "The [original] idea was, if banks collect this information, they'll discriminate," says Giles Giovinazzi, legislative counsel for U.S. Representative Jim McGovern (D-MA), who first introduced the bill. "HMDA [supporters] took the opposite tack, saying, 'We're going to force banks to disclose, because we can't monitor what's going on in that market.' "That kind of disclosure would be the guiding principle for the new bill. "Sunshine is the best disinfectant," Giovinazzi says.

While that doesn't necessarily mean banks are turning away entrepreneurs based on race or gender, it's impossible to know without accurate data--and little can be done to protect those who have been denied loans for shady reasons. At the moment, only loans guaranteed by the SBA report race and gender data, but most agree those numbers don't represent a microcosm of the larger universe. "It's skewed because everybody who applies for an SBA guarantee is referred by the lender," says Mike Stamler of the SBA, "so it's the lender who acts as a screen."

Despite the lack of accurate loan statistics, some say the growth of both minority- and women-owned small businesses--33 percent and 16 percent, respectively, between 1992 and 1997, according to the latest Census Bureau data--is evidence that these groups are clearly getting the capital they need. Some supporters of the bill say most banks would come out of the exercise clean. "Banks are doing some things right, or we wouldn't have 9 million women-owned businesses in this country," says Lynn King, director of legislative and regulatory affairs for the National Community Reinvestment Coalition, a strong supporter of the bill. "But let's just get the information out there so we can ensure women are getting the loans and aren't being discriminated against." King adds that if the information is being reported for home mortgages, there's no reason it should remain shrouded for small-business loans.

Not surprisingly, banks, which weren't thrilled with the onerous reporting requirements when HMDA was passed, see it differently. "The industry views additional reporting requirements as a burden," says James Ballentine, director of community development for the American Bankers Association. "It's additional paperwork and additional systems requirements that must be put into place to collect such data."

Ballentine further argues that data gathered through HMDA rules, essentially the model for the small-business bill, can be misleading, painting an inaccurate portrait of discriminatory consumer lending practices. "Depending on the way information is collected, the numbers can be manipulated to provide any story that somebody wishes to have come out," he says.

Trying to draw similar correlations in a small-business lending scenario would be "problematic," Ballentine adds, due to all the variables that can influence the bank's decision, including the company's business plan, market potential and location. "Many things are taken into consideration, and providing data this legislation asks for would only give you a small snapshot."

Critics of the bill say the market for small-business lending is so competitive, it isn't likely banks would turn away a potentially profitable long-term relationship based on the gender or race of the customer. "Community development is a growth area, and lenders are trying to get into it," says Mark Riedy, director of the Real Estate Institute at the University of San Diego, who isn't convinced the bill would be significant. "Will there be 10 abuses prevented over the course of a year? Probably. Is it worth regulating the entire industry and going through all the paperwork? No."

The bill is currently awaiting a hearing in the House Financial Services Committee, chaired by Michael Oxley, who's known for being conservative on such issues; even the bill's supporters say its chances aren't tremendous. But it has raised awareness and invited discussion about what, if anything, is needed to improve access to capital for women and minority entrepreneurs. Some advocates say looking for fault with a handful of banks might be a waste of energy "Overall, we dwell on discrimination at the lending level a little too much," says Harry C. Alford, president and CEO of the National Black Chamber of Commerce. "Access to capital is always elusive. But people overcome that."