Access to Capital for Minority-Owned Businesses

 

All Americans should have equal opportunity to earn their success, rise on their merit, and live their own American Dream. Through its Equality of Opportunity Initiative, the U.S. Chamber is developing and advancing data-driven business and policy solutions to bridge opportunity gaps and ensure that Black Americans and other people of color have greater opportunities to succeed.
 

The Chamber believes that policymakers should prioritize policies that promote access to capital and credit for minority-owned businesses. These businesses are often underserved because they do not have convenient access to the regulated banking system or because they reside in traditionally underserved communities.

The Chamber believes that policymakers should prioritize policies that promote access to capital and credit for minority-owned businesses.

Entrepreneurship plays an important role in building wealth in families, communities, and economies, but the opportunity to start and grow a business is not equal for White and Black Americans. Research shows that these disparities can be explained by persistent gaps in access to financial capital. According to findings from the U.S. Chamber of Commerce, Black entrepreneurs are nearly three times more likely than White entrepreneurs to have business growth and profitability negatively impacted by a lack of financial capital. Given that 70.6% of Black entrepreneurs rely on personal and family savings for financing, lower family wealth for Black families overall drives more of a divide in access to capital.

The Federal Reserve, for example, has consistently found there is a racial wealth gap in the U.S. According to a report released by the Federal Reserve in September 2020, “In 2016, white families had the highest level of both median and mean family wealth: $171,000 and $933,700, respectively. Black and Hispanic families have considerably less wealth than white families. Black families’ median and mean net worth is less than 15 percent that of white families, at $17,600 and $138,200, respectively. Hispanic families’ median and mean net worth was $20,700 and $191,200, respectively.”

There is a moral imperative for promoting an equality of opportunity, and there are also benefits to the American economy.

There is a moral imperative for promoting an equality of opportunity, and there are also benefits to the American economy. Closing racial divides in entrepreneurship would provide a significant infusion of jobs and economic growth. A recent study found that, if the number of people-of-color-owned firms was proportional to their labor force participation, the U.S. would add more than 1.1 million businesses, supporting an estimated 9 million additional jobs and adding nearly $300 billion in workers’ income.

 

Congress: Enact a JOBS Act for Minority-Owned Businesses

Congress should initiate a formal process through the SEC to develop recommendations for changes in existing law and regulations that would improve access to capital for minority-owned businesses. This process could be conducted through the SEC’s Office of the Advocate for Small Business Capital Formation by prioritizing outreach to minority-owned businesses to understand their financial needs and by working with financial companies to understand what public policy barriers stand in the way of providing capital.

Action: Congress should direct the SEC’s Office of the Advocate for Small Business Capital Formation to analyze the needs of minority-owned businesses and make recommendations for improving their access to capital.

 

Congress: Enact the Improving Corporate Governance Through Diversity Act of 2019

The Chamber supports efforts to increase gender, racial, and ethnic diversity on corporate boards of directors, as diversity has become increasingly important to institutional investors, pension funds, and other stakeholders. The Improving Corporate Governance Through Diversity Act of 2019 would establish a model to organically boost diversity on boards through disclosure, rather than the counterproductive quota-driven strategies that some jurisdictions have attempted. The bipartisan legislation would also establish an SEC advisory group that would carry out a study and provide recommendations on private sector strategies to increase gender, racial, and ethnic diversity among boards of directors.

Action: Congress should enact the Improving Corporate Governance Through Diversity Act of 2019 (H.R. 5084–116th).

 

Encourage Use of Alternative Data for Underwriting

Broadly speaking, the Chamber believes the use of appropriate data—both in quality and quantity—is paramount for underwriting financial products. This is true for consumer financial products, such as insurance policies and loans, but the principle is equally applicable to assessing the creditworthiness of a business. Data can be used to predict, with a high degree of confidence, whether a borrower will meet his or her financial obligations to creditors. However, in some cases, these predictions have been criticized for excluding, or not appropriately accounting for the risk of, some demographics. Expanding underwriting to include new sources of data will promote broader inclusion in the financial system without jeopardizing a proper assessment of a borrower’s ability to repay.

Action: Policymakers should encourage use of alternative data to create a more inclusive financial system that does not exclusively depend on traditional data for underwriting and other business purposes. Reforms should not include new burdens, such as mandatory reporting of certain information, and should strongly weigh the benefits of federal preemption to simplify compliance.

 

Congress: Expand and Strengthen Community Development Financial Institutions

Status as a Community Development Financial Institution (CDFI) is provided by the U.S. Treasury Department to certain institutions that provide financial services in low-income communities and to people who lack access to financing.

Organizations are designated by the U.S. Treasury Department as a CDFI if they meet certain requirements demonstrating their commitment to serving low-income and distressed communities that have historically had inadequate access to capital and credit. These organizations, which may be a regulated entity like a development bank or credit union, or a nonregulated entity such as a venture capital fund or loan fund, are eligible for certain benefits that support their commitment to developing underserved communities.

The CDFI fund was established in 1994 with the intention of assisting CDFIs in providing support to markets that are underserved by traditional financial institutions. The CDFI fund may provide financial assistance to support lending, investing, and other financing. The CDFI fund may also provide technical assistance to help an organization build capacity to serve the community, such as by purchasing equipment or training staff.

The Chamber has supported increased funding by Congress toward the CDFI fund. The CDFI fund received a $250 million appropriation from Congress for fiscal year 2019. The Chamber supported the $1 billion emergency appropriation to the CDFI fund proposed by the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, and supports increasing its regular annual appropriation.  

Action: Congress should significantly increase the annual appropriations to the CDFI fund.

 

Congress: Expand and Support Minority Depository Institutions

The criteria for a Minority Depository Institution (MDI) was established in 1989 by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The law defines “minority” as any “Black American, Asian American, Hispanic American, or Native American” and defines “MDI” as any federally insured depository institution where 51% or more of the voting stock is owned by one or more “socially economically disadvantaged individuals.” The Federal Deposit Insurance Corporation (FDIC) later clarified that an “MDI” is defined as any federally insured depository institution where 51% or more of the voting stock is owned by minority individuals.

Designation as an MDI includes some benefits and is important for a number of reasons. The FDIC provides technical assistance to MDIs to assist them with meeting their regulatory compliance requirements. The FDIC also provides training opportunities to MDIs. The FDIC takes steps to preserve the minority status of an MDI by working with other MDIs to acquire it in the event of an insolvency.

Multiple bills were considered by the House in the 116th Congress, receiving bipartisan support, that would make meaningful reforms to strengthen MDIs.

The Expanding Opportunity for Minority Depository Institutions Act (H.R. 5315–116th) would codify the Treasury Department’s Financial Agent Mentor Protégé program. This program requires certain financial agents of the Treasury Department to mentor MDIs in how to fulfill responsibilities of a financial agent in order to expand opportunities for MDIs to do business with the federal government. The bill also requires Treasury’s Office of Minority and Women Inclusion to conduct several outreach events and submit a report to Congress.

The Ensuring Diversity in Community Banking Act (H.R. 5322–116th) would support MDIs and CDFIs through the placement of deposits by the federal government at these institutions to lend to underserved communities. The legislation includes other important reforms, such as establishing a designation of “impact banks” (which primarily lend to low-income borrowers), codifies the Treasury’s minority bank deposit program, and streamlines the FDIC’s application process for CDFI status.

Action: Congress should enact legislation to expand the number of Minority Depository Institutions and support their work with underserved communities.

 

CFPB: Complete Small Business Data Collection (Section 1071) Rulemaking

Section 1071 of the Dodd-Frank Act directs the Consumer Financial Protection Bureau (CFPB) to collect data on lending to small businesses, with the goal of better understanding the credit availability landscape for those that are owned and operated by women and minorities. The purpose is to facilitate compliance with fair lending laws and enable communities, governmental entities, and creditors to identify the needs and opportunities of minority-owned and women-owned small businesses. However, if compliance costs for lending to businesses are overly burdensome, the costs may pressure lenders to limit the amount of credit they extend.  

There are commonsense steps that can be taken to limit the burdens imposed on creditors and borrowers while also fulfilling the intent of the law. The CFPB should use a cost-benefit analysis, develop a clear definition of “small business” that is narrowly tailored, collect only data points mandated by the statute, and protect the privacy of borrowers by keeping the data private.

Action: The CFPB should complete the rulemaking required under Section 1071 to improve the information available about credit availability for businesses owned by minorities and women.