Many small businesses and entrepreneurs – “Main Street” – have struggled since the late 2000s to secure financing needed to grow their businesses. The Treasury Department recently made several recommendations that are intended to increase access to capital for this vital segment of the economy, which employs over half of the private-sector workforce. Main Street should evaluate these recommendations to ensure that they will be helpful to business growth.
Treasury’s June report proposes reducing regulations that banks face when lending to small businesses, an area in which bipartisan agreement is possible.
Treasury’s June report proposes reducing regulations that banks face when lending to small businesses, an area in which bipartisan agreement is possible. Under Treasury’s plan, smaller banks that present less systemic risk would encounter fewer regulatory requirements, with the goal of freeing up additional access to credit for Main Street. This could reduce unintended consequences that have inhibited small business lending.
Three primary areas in the Treasury report are important for Main Street to consider:
1. Data collection – Main Street should make their voices heard on new data requirements for minority and female-owned businesses. Treasury recommends repealing the Consumer Financial Protection Bureau’s authority to collect data from small business lenders about credit applications made by women-owned, minority-owned, and small businesses. Opponents find that these data requirements are costly to implement and could increase small business borrowing costs. Supporters find that data requirements will increase transparency and facilitate enforcement of fair lending laws that can help uncover potentially unfair lending practices. Small businesses and entrepreneurs can inform Treasury on their views about the pros and cons of this requirement.
2. Stress testing – Stress tests are a tool that the Federal Reserve uses to assess whether financial companies have sufficient capital to weather a downturn and support operations during weak economic conditions. Current stress test requirements apply to institutions with over $10 billion in assets which small firms find burdensome. Treasury’s recommendation is to apply stress test requirements to institutions with over $50 billion in assets. Bank supervisors and regulation will focus on the riskiest of firms, which would reduce the compliance costs and capital constraints for firms that are less risky. Traditionally banks have been the major source of small business funding and by reducing existing stress test compliance costs, smaller banks can focus on lending to their local communities.
3. Real estate collateral – Some small business owners turn to the equity in their homes or workspaces for needed financing. Home equity and commercial real estate have long served as important collateral for small business financing and are easier to obtain than a traditional bank loan if the borrower has good credit and income to support the repayment. While loan availability has improved considerably since the financial crisis, a 2016 BPC paper cited that consumer lending has dropped off more precipitously at FICO scores of 660 and 700 and that small business lending has declined as a proportion of total commercial lending even before the crisis. Treasury recommends regulators should consider alternatives to assessing concentration risk for commercial real estate loans, so small businesses can more easily use commercial real estate assets as collateral.
These proposals in the Treasury report on banks and credit unions are relevant to Main Street and offer small businesses and entrepreneurs the opportunity to have their voices heard in the regulatory process. BPC is continuing to analyze these and other proposals as part of its new Main Street Finance work.