C-Suite Wednesday — GAO Says Bad Data Clouds Community Bank Small Business Lending Numbers
September 12, 2018
By Dominic J Bartolone
Contributing Editor, C-Suite Wednesday
C-Suite Wednesday — GAO Says Bad Data Clouds Community Bank Small Business Lending Numbers
“We found that the economic environment and competition, rather than regulatory burden, explained most of the trends in (small business) lending from 2001-2017. We also found that community banks’ lending to small businesses has largely recovered since the crisis. However, the data that these banks report to federal regulators is incomplete, so we recommended that federal regulators evaluate how they collect this data,” writes GAO last week.
The concern is that the data collected by community banks and reported to regulators does not accurately reflect small business lending trends because it excludes some loans to certain businesses.
The reason is that the definition of small business loans used for bank and community lender reporting excludes loans greater than $1 million. This report-triggering amount has not been adjusted for more than 25 years.
The data is further corrupted by the fact that regulators record small business loan information by the size of the loan, rather than the size of the business. This inability to accurately identify who is most need of capital, limits the policy maker’s ability to determine the effect regulations has on small business lending.
Lending Procedures
The GAO estimates that since 2010, most banks made changes to their small business lending guidelines based on federal oversight and regulatory changes instituted under the Dodd-Frank Act. The changes most cited as influencing their decision included the requirement for more borrower information, and the lead time it takes to close SBA loans.
Another factor affecting small businesses was that between 2010 through 2017, the number of community banks decreased by roughly 24 percent. Due to mergers and the decline of new branch openings, small businesses faced less opportunity to find acceptable financing in their local market.
While the Internet expanded access to financing for underserved markets, a lack of niche banks and community lenders only makes it more difficult for small businesses to gain acquire credit needed to quickly address market shifts.
GAO to Continue Monitoring Lenders
The GAO intends to continue monitoring small business lending to determine how regulations, born out of the 2008 financial crisis, are hindering banks and stifling capital infusion into America’s small businesses.
Significant regulatory changes have been implemented with the intention of ensuring a stable lending industry. However, some of those regulations, although well intentioned, have negatively affected small business growth more than Congress or regulators expected.
We will have to wait and see how these changes translate into less restrictions and more opportunity for small businesses to gain more access to capital markets.