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    US Agency Issues Paper on Lending; GAO Issues Recommendations for FED

    June 10, 2022

    The U.S. Government Accountability Office (GAO) published a report that outlines three priority open recommendations for the Board of Governors of the Federal Reserve System (FED), as of May 2022. These recommendations are related to financial technology and stress testing of banking institutions. Additionally, the Federal Reserve Bank of Cleveland published a working paper on credit availability for minority business owners in an evolving credit environment.

    GAO report on recommendations for FED. In its report, GAO highlighted that FED has not implemented the three priority recommendations identified in May 2021. GAO is now requesting FED its continued attention to the three recommendations:

    • FED should collaborate with other financial regulators to communicate with banks that have third-party relationships with financial technology lenders about using alternative data in underwriting.
    • FED should design and implement a process to communicate information about the range and sources of uncertainty surrounding the post-stress capital ratio estimates to the Board during Comprehensive Capital Analysis and Review deliberations.
    • FED should design and implement a process for the Board and senior staff to articulate tolerance levels for key risks identified through sensitivity testing and for the degree of uncertainty in the projected capital ratios

    Working paper on credit availability for minority business owners. The paper highlights that substantial credit disparities exist despite the growth of fintech lenders, which prior research shows have expanded the set of small businesses receiving credit. Also, there is evidence that the geographic focus areas of the Community Reinvestment Act do not appear to be disadvantaged but introducing information on the specific race and ethnicity of business owner continues to reveal differences in credit access. Fintech lenders are a valuable substitute in market segments that have limited access to credit, but their lending patterns do not shift lending to minority-owned businesses in a meaningful way. It has been also mentioned in the paper that the Paycheck Protection Program loans represented an unprecedented support for small businesses, support that was not dependent on the creditworthiness of businesses, but minority-owned businesses are estimated to have received a smaller fraction of the funds they applied for from the program. The combination of these results suggests that the credit needs of minority-owned small businesses might require more specialized interventions in national or local lending markets.

     

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    Keywords: Americas, US, Banking, Fintech, Stress Testing, Regtech, Lending, Credit Risk, SME Lending, FED, Cleveland FED, US GAO 

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