Section 1071 of Dodd Frank added a new Section 704B to the Equal Credit Opportunity Act. It requires, in general, that the recipient of a commercial loan application make a record of the race, sex and ethnicity of the principal owners of the business making the application. It also requires a lot of other data gathering about the loan application including the date, the amount requested and whether or not the application was approved. The information will then be reported to the Consumer Financial Protection Bureau annually. All of this awaits the implementation of regulations by the CFPB which are in the pre-rule stage.
This is one of the few regulation writing requirements of Dodd Frank that the CFPB has not addressed, and I am somewhat surprised that it hasn’t. First, writing the regulation should not be a complicated process, and the announced purpose of the new law is to “facilitate enforcement of fair lending laws” which is near and dear to the heart of every regulator. My guess is that it has been put on the back burner until now because it is not directly consumer related. In any event, my guess is that it will not be overlooked much longer.
There has not been a focus on illegal discrimination in commercial lending activities. My guess is that examiner focus has been on consumer lending, not necessarily because consumer lending was a more target rich environment, but because examiners did not have information readily available to make a determination with respect to commercial lending.
On the consumer side of lending, the regulators had all of a lender’s HMDA or ECOA data that they could slice and dice and manipulate to see if they could find anything untoward. On the commercial side, they have no data to work with. If a lender makes a loan or denies a loan to ABC Corporation, there is generally nothing in the lender’s files to indicate anything about the demographics of ABC Corporation’s ownership. Regulators are going to take the path of least resistance, which is to concentrate on the consumer side of the institution rather than the commercial side. When the new data collection and reporting rules become effective and implemented, that will change.
My guess is that if examiners had the information about commercial lending today that they will soon have, the statistics for many lenders may indicate on the surface that illegal discrimination was occurring. There is no intention on the part of anyone to discriminate. As to individual loan applications, my guess is that the credit decision is made impartially. The problem is that in most cases there has not been sufficient outreach to minority owned borrowers.
If I were the president of a community bank, the first thing I would look at is the demographics of my commercial lenders. Does my staff reflect diversity? If not, I would take steps to diversify my commercial lending staff.
Second, I would look at the records of my calling officers. How often have they called on minority owned businesses? Women owned business? And compare to calls made to business owned by males and drill that down to white males. I would have them place an emphasis on calling on minority owned businesses significantly in excess of their proportionate presence in the community.
When the regulation does eventually become effective, it will probably be too late for a financial institution to reinvent itself. If you think your institution has an issue in this area, the better policy is to take the corrective action today.