Section 1071 of the massive Dodd-Frank Act could burden bankers with suffocating regulatory requirements that threaten to stifle lending to small businesses.
Essentially, Section 1071 sets out reporting requirements that would force all banks and credit unions to inquire of every applicant for a commercial loan whether they are woman-owned, minority-owned or a small business. Lenders do not consider race or gender when making loans — doing so would be discriminatory. But, Section 1071 will require banks to track those statistics and report them annually — and for good measure, banks must establish safeguards to shield loan decision makers from the potentially discriminatory information.
According to the legislation, Section 1071’s stated purpose is “to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
While this is a noble purpose, the means of effecting it may frustrate lenders right out of the small-business-lending market — which is certainly not good news for those the law is intended to protect.
The reason is simple: the law opens the door for federal regulators to standardize business loans in much the same way mortgages and automotive financing have been standardized. With “fair lending” as their rallying cry, regulators can determine whether or not a bank has made ‘enough’ loans to women and minority owned small businesses, and whether the loans it did make were fair as to interest rates and fees — another noble purpose — but one that is well upon nigh impossible to implement without shutting some would-be borrowers out of the market altogether.
Banks who charge different interest rates to small, women-owned and minority-owned businesses will have to justify their actions — a time-consuming task for arguably little return — and could be penalized if regulators disagree with the bank’s logical basis for varying rates.
Who pays for it? A fact of life is that additional compliance and reporting requirements cost money to implement and maintain. Banks will have to raise prices in other areas to maintain profitability if they wish to continue making commercial loans. Smaller (less profitable) loan options for small businesses may disappear altogether if the sector is no longer economically viable.
Another likely outcome is banks that remain in the market will develop standardized criteria for small business loans. If a business doesn’t meet the standardized criteria, it will not get a loan, even if the business could have received a loan prior to the implementation of Section 1071.
Commercial loans are not good candidates for standardization. The primary reason is that commercial loans are based in part on the credit history of the principal borrower, and in part on the strength of the business itself. Anyone who has been in business management knows that no two businesses are alike, and each commercial loan is negotiated based on the specific characteristics of the business seeking financing. This is why interest rates vary, and ideally, has nothing to do with the principal’s gender or race.
Though Dodd-Frank was enacted nearly two years ago, implementation of Section 1071 is on hold while the Consumer Financial Protection Bureau addresses other matters the director deems more pressing. Nonetheless, if the law does not change before the CFPB decides to implement it, we can expect to see these predictions above come to fruition.
If you have questions about whether your business is or will be affected by the Dodd-Frank Act, or any other area of law, contact us today. The attorneys at Glass & Goldberg provide high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law. Call us at (818) 888-2220, email us at firstname.lastname@example.org, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.