In mid-2020, on the 10th anniversary of the Dodd-Frank financial overhaul being rammed through Congress and signed by then-President Obama, I catalogued the damage the law had done. 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 supposed “financial reform” has caused harmful and sometimes disastrous effects for consumers, investors, entrepreneurs, and Main Street financial institutions such as community banks and credit unions.
Now, to top it off, the law is set to do even more damage to community banks and credit unions as well as new startup lenders in FinTech (financial technology), ultimately causing more harm to consumers and small business entrepreneurs. The Consumer Financial Protection Bureau (CFPB) recently issued a proposed regulation implementing Dodd-Frank’s Section 1071, which requires lenders to collect data on the race and gender of small business loan applicants and send that data to the CFPB for a huge database it will be constructing.
Earlier this month, I filed comments with the CFPB on the proposed rule, warning that “excessive red tape—even if it is motivated by the noble purpose of widening financial inclusion—could turn out to be counterproductive and hurt those it is intended to help.” Noting that FinTech is “widening access to credit for entrepreneurs who had previously been overlooked by lenders as good credit risks,” I explained that the proposed reg has “multiple pitfalls that could result in reduced availability of credit for women and minorities as well as other entrepreneurs.”
In the comments, I noted the absence of race and gender questions from online lending platforms, and why this is a good thing:
Many online lenders do not currently ask applicants’ race or gender, and their processes are automated, so they never know the race or gender of those to whom they lend. This is a feature, not a bug, that protects against intentional discrimination.
But as I and other commenters have noted, forcing lenders to ask about race and gender could discourage minority and women applicant for small business loans. As I pointed out:
A small business owner seeking credit may be put off by questions on the application about his or her race and gender—seeing such questions as stigmatizing or invasive of privacy—and may be less likely to fill out such an application.
I noted in the comments that while there are some things Dodd-Frank required the CFPB to do in implementing the regulation, the statute still gave the agency much discretion. I argued that the CFPB should use this discretion to make the regulation less burdensome, and give lenders an implementation time of three years or more, rather than the 18 months the CFPB now proposes.
“Reprogramming a system to collect [race and gender] data for the purpose of reporting it to the CFPB is a radical change that needs significant time to be developed and then explained properly to the lenders’ employees and borrowers,” I wrote, adding that a longer implementation time is especially needed “to accommodate innovative startups and small banks and credit unions for which implementation would be a particular struggle given their resources.”
I also warned the CFPB about asking lenders for more information than required by Dodd-Frank. As an example, the proposed regulation inexplicably requires lenders to collect their borrowers’ six-digit North American Industry Classification System (NAICS) code, which federal agencies use to classify businesses for the purpose of collecting, analyzing, and publishing U.S. economic statistics. I wrote that the CFPB itself that in a “request for information” in 2017, “many stakeholders expressed concern about the difficulties in determining the appropriate NAICS code for businesses.”
I added that data collection mandates in excess of what the statute require may not withstand judicial scrutiny. Citing the ruling 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 find them to be “arbitrary and capricious,” if they find that the CFPB has “relied on factors which Congress has not intended it to consider” or “offered an explanation for its decision that runs counter to the evidence before the agency.”
I concluded in the comments that “the CFPB needs to make serious changes to the proposed rule to ensure it does not harm financial inclusion and the very entrepreneurs the Dodd-Frank law was intended to help.”