'The second way' to close the wealth gap

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“With PPP, you got this objective lesson — it’s the same pricing, same credit risk. And yet some are doing much smaller loans and others are not,” Van Tol said. “It really shows you that banks could do it if they wanted to.”

Those incentives could be better developed in a future iteration of the Paycheck Protection Program or through other emergency measures pursued under the Biden administration that focus specifically on relief and recovery, but many banks are already thinking about how to help small businesses — particularly minority-owned businesses — get access to capital in the wake of the pandemic.

Mary Mack, head of consumer and small-business lending at Wells Fargo, said in an interview with American Banker in September that the bank was taking all the fees it has earned through implementing the Paycheck program and creating a capital pool for community development financial institutions to leverage into new small-business loans over the next several years.

“We know, for instance, that businesses owned by Black and Brown entrepreneurs are failing at twice the rate of white-owned businesses,” Mack said. “And how do we lean, particularly, into diverse businesses to help them with recovery?

“We don’t know who’s providing capital to who, at what cost — how small businesses, women-owned businesses, minority-owned small businesses, are receiving capital. That’s really important.”

— Gilberto Soria Mendoza, senior policy advocate, Opportunity Fund

“To learn how to operate in this environment — a lot of our customers have had to retool their own shops to be able to operate in a safe environment for employees and customers,” Mack said. “So how do we help with that, how do we help with funds going into CDFIs for business recovery and creation, how do we help with nonprofits leaning into the educational realm around these businesses? All of that is a structured program that goes back into the small-business community.”

Bank of America, which manages a small-business portfolio with more than 12 million clients totaling more than $20 billion of assets, also pledged $1 billion over four years to address racial inequality through a number of initiatives, including $200 million directed toward supporting minority-owned businesses, including clients and vendors.

“This is what we stand for,” Sharon Miller, head of small business at Bank of America, told American Banker in September. “We want to promote racial equality, and women’s equality. We want to be there for all clients we serve.”

Another untapped vein of regulatory potential lies inside the Consumer Financial Protection Bureau and nascent rules implementing section 1071 of Dodd-Frank, which mandated the creation of a database for tracking discrimination in small-business lending.

The federal watchdog agency has dragged its feet for the better part of a decade on the endeavor, eventually resulting in a lawsuit and a court-supervised process requiring the bureau to make progress. The CFPB has said it is trying to reduce data collection burden for banks while grappling with the ambiguous definition of small-business lending in the statute.

In September, the agency signaled what the small-business database may eventually look like with a 77-page policy outline. But many analysts say the CFPB missed a crucial window from the early days of the coronavirus pandemic, when Black business owners had a much harder time securing Paycheck Protection Program funding than white-owned businesses. A database equipped to track loans by race and gender could have spotted such problems.

“If this was in place, community groups, small businesses and their advocates could have more thoughtful conversations with the largest lenders,” Briones said. “You can point out who’s doing well in the first place, evaluate where and how they’re making money versus where there’s a market for banks to consider growing.”

Gilberto Soria Mendoza, senior policy advocate for the Opportunity Fund. Mendoza said the small-business lending market lacks many of the guardrails and protections that other forms of lending enjoy, including basic data about lending activity and borrower protections.

Gilberto Soria Mendoza, senior policy advocate for the Opportunity Fund. Mendoza said the small-business lending market lacks many of the guardrails and protections that other forms of lending enjoy, including basic data about lending activity and borrower protections.

Gilberto Soria Mendoza, senior policy advocate for the Opportunity Fund, said lawmakers should set up stronger guardrails for small-business loans like there are for mortgage loans. The pandemic has made it clear how little is known about how these small businesses access capital.

“We know it has negatively impacted businesses; they’re shutting down all over the country,” Mendoza said. “But we don’t know who’s providing capital to who, at what cost — how small businesses, women-owned businesses, minority-owned small businesses, are receiving capital. That’s really important.”

Moreno, the sandwich shop owner, has been able to keep his business going through the pandemic in part because of a PPP loan he obtained through the Opportunity Fund. But he says business owners like himself will have to continue to find ways to get along without the benefit of banks.

“Banks don’t want to take a risk on losing money, at all,” Moreno said. “And they want to secure their investment, and besides securing their investment, they want to make profit off of it. I don’t know how we can overcome those two obstacles. I guess it’s been a challenge for many years. How can banks take a risk?”

Urrutia is more optimistic that the right incentives can be found to spur the kind of small-business investment that can bring wealth to communities of color. But only if everyone works together.

“I’m a firm believer that not one single sector of this economy can solve this problem alone,” Urrutia said. “So if you said to me, ‘Luz, the federal government can do it’ — no they can’t, not by themselves. ‘But Luz, what about the banks? You know, if they wanted to do it, they could do it.’ Nope, they can’t do it by themselves. Neither can philanthropists, neither can CDFIs, nonprofits.

“This has got to be a collaborative effort, because we all bring separate skills — and assets and tools and resources and value — that all are needed right now to help solve this problem.”

Photos by: Patrick Strattner