Mid-2020, 10and anniversary of the Dodd-Frank fiscal overhaul imposed by Congress and signed by then-President Obama, I listed the damage caused by the law. As I wrote at the time:
In the decade since President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, this so-called “financial reform” has caused damaging and sometimes disastrous for consumers, investors, entrepreneurs and Main Street financial services. institutions such as community banks and credit unions.
Now, to top it off, the law is set to hurt even more community banks and credit unions as well as new startup lenders in FinTech (financial technology), ultimately causing more harm to consumers and entrepreneurs in small enterprises. The Consumer Financial Protection Bureau (CFPB) recently released draft regulations implementing Dodd-Frank Section 1071, which requires lenders to collect data on the race and gender of small business loan applicants and to send this data to the CFPB for a huge database. to construct.
Earlier this month, I filed comments with the CFPB on the proposed rule, warning that “excessive bureaucracy – even if driven by the noble goal of expanding financial inclusion – could prove counterproductive and harming those it is meant to help”. .” Noting that FinTech “expands access to credit for entrepreneurs who had previously been overlooked by lenders as good credit risks,” I explained that the proposed regulations have “multiple pitfalls that could lead to reduced availability credit for women and minorities as well as other entrepreneurs.”
In the comments, I noted the lack of race and gender questions on online lending platforms, and why that’s a good thing:
Many online lenders currently do not ask for the race or gender of applicants, and their processes are automated, so they never know the race or gender of those they are lending to. This is a feature, not a bug, that protects against intentional discrimination.
But as I and other reviewers have noted, forcing lenders to ask questions about race and gender could discourage minorities and women from applying for small business loans. As I pointed out:
A small business owner seeking credit may be put off by questions on the application regarding their race and gender – see issues such as stigmatizing or invasive of privacy – and may be less likely to complete such an application. .
I noted in the comments that while there were some things Dodd-Frank required the CFPB to do in implementing the settlement, the law still gave the agency a lot of discretion. I argued that the CFPB should use this discretion to make regulation less burdensome and give lenders an implementation period of three years or more, rather than the 18 months that the CFPB is now proposing.
“Reprogramming a system to collect [race and gender] data for reporting to the CFPB is a step change that takes significant time to develop and then properly explain to lender employees and borrowers,” I wrote, adding that a longer implementation timeframe is especially necessary “to accommodate innovations from startups and small banks and credit unions for which implementation would be particularly difficult given their resources.
I have also warned the CFPB to request more information from lenders than Dodd-Frank requires. For example, the proposed regulations inexplicably require lenders to collect the six-digit North American Industry Classification System (NAICS) code of their borrowers, which federal agencies use to classify businesses for collecting, analyzing and publishing US economic statistics. I wrote that the CFPB itself that in a “request for information” in 2017, “many stakeholders expressed concern about difficulties in determining the appropriate NAICS code for businesses”.
I added that data collection warrants beyond what the law requires may not withstand judicial scrutiny. Quoting the decision and language of the Supreme Court case Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Auto Insurance Co.I wrote:
Courts may consider them “arbitrary and capricious”, if they find that the CFPB “relyed on factors that Congress did not intend to consider” or “offered an explanation of its decision that goes against the evidence presented to the agency.”
I concluded in the comments that “CFPB needs to make serious changes to the proposed rule to ensure it doesn’t harm financial inclusion and the very entrepreneurs the Dodd-Frank Act was meant to help.”
