When Congress passed the Dodd-Frank Act in 2010, there was an unprecedented allocation of power to the Bureau of Consumer Financial Protection (BCFP—previously known as the Consumer Financial Protection Bureau, or CFPB), a new federal regulator created under the Act. Not only were a vast number of statutes transferred from other federal regulators, but the Bureau was also vested with new powers. Since then, little effort has been made to assess how these new rulemaking authorities are shaping out, until now.
Yesterday, CEI filed comments in response the BCFP’s Request for Information regarding new rulemaking authorities and adopted regulations. In particular, we focus on two new powers that the Bureau was granted, but is yet to define via rulemaking.
The first is Section 1071 of the Dodd-Frank Act, which amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to collect, report, and make public certain information concerning credit applications made by women- and minority-owned small businesses. The Bureau is required to promulgate a rule implementing the amendment, which will then be used to facilitate fair lending enforcement actions.
As I have written before, the BCFP has long had problems with the way it enforces ECOA. But Section 1071 has the potential to overshadow all of them. The ECOA was intended to ensure that all consumers have equal opportunity in credit applications. However, extending the ECOA to cover small business lending is problematic, because commercial lending is a completely different animal from consumer lending.
Unlike consumer credit products that typically involve a limited number of variables to be considered in the underwriting process, lending to small businesses is highly tailored and dependent on any number of relevant variables, such as local economic conditions, the competitiveness of a specific industry, assessments of the businesses profitability and longevity, and a host of other factors.
Small business lending decisions are not easily placed into government-mandated boxes for purposes of identifying discrimination. As each small business has unique credit needs, small business lending does not require a standardized application process. Current lending practices would not conform to the data collection efforts mandated by Section 1071, let alone provide reliable information for fair lending enforcement actions.
An overly broad implementation of Section 1071 would be self-defeating. A law designed to protect women- and minority-owned businesses would likely serve to inadvertently discourage lending to the those businesses. Rather than a broad implementation, the Bureau can use its exemption authority to exempt any financial institution under a certain asset threshold, such as $100 billion, or whatever is deemed appropriate to avoid negatively impacting access to credit for women- and minority-owned business. The Bureau could also exempt certain types of lenders, such as alternative or non-bank lenders, which would be materially harmed by the increase compliance costs.
Secondly, one of the most widely discussed new powers that the Bureau was granted under Dodd-Frank is the creation of a new standard in consumer protection prohibiting “abusive” conduct, in addition to the well-established “unfair” and “deceptive” standards. This “abusive” standard has suffered from a lack of clarity—statutory, judicial, and administrative—since its inception. Even the Bureau’s previous director seemed to lack a clear understanding of what abusive conduct entails. In 2012 congressional testimony, former BCFP Director Richard Cordray stated that the abusive standard “is going to have to be a fact and circumstances issue” and is “not something we are likely to be able to define in the abstract.” Further, Cordray asserted that good businesses ought to know what constitutes abusive behavior and avoid engaging in it, while suggesting that a practice that is perfectly fine with respect to one consumer may be abusive with respect to another. Since then, the Bureau has provided no clarity as to what exactly constitutes abusive conduct, such as defining “material interference” with consumer understanding or taking “unreasonable advantage” of consumer bias.
The abusive standard—if it is to exist—must be defined via rulemaking, rather than determined through enforcement. As defined in the statute, the term is extremely broad and could theoretically encompass any number of violations. It would not take much prompting for an aggressive director to take advantage of such a far-reaching statute. At a minimum, if the Bureau cannot reasonably and clearly define what constitutes an abusive action, it should define which financial industry practices are not abusive, thus providing safe harbor for activities that are clearly out of the bounds of the statute.