FOOT-DRAGGING

Can’t get excited about the CFPB’s fourth birthday? Well let’s celebrate the continued foot-dragging on the part of the CFPB and other Federal agencies.

Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act to require financial institutions to collect and report information concerning credit applications made by women- or minority-owned businesses and by small businesses. The law established an effective date of July 21, 2011.

Since Section 1071 was scheduled to be effective on the same day as the CFPB opened its doors for business, it was pretty obvious that it would be impossible to write a proposed regulation, allow for a comment period, and then issue a final regulation all in one day. Something had to give. On April 11, 2011 Leonard Kennedy, then General Counsel of the CFPB, issued a letter that:

  • Explained the dilemma;
  • Clarified that financial institutions’ obligations under section 1071 would not go into effect until the CFPB issued necessary implementing regulations; and
  • Promised that the CFPB would act expeditiously to develop such rules in recognition that section 1071 is an important tool that will significantly bolster both fair lending oversight and a broader understanding of the credit needs of small businesses.

Four years have gone by and we have not seen even the proposed regulation. So much for acting expeditiously.

This requirement, once implemented, will mandate the collection and reporting of HMDA-like data for business loans. The collection form, which doesn’t exist yet, has been nicknamed the B-LAR, short for business loan application register.

The concept of collecting data on business loans has a long history and it has been a bad idea since day one. Discussions on the topic began at least as far back as the 1990s. In the late 1990s Congress instructed the Federal Reserve Board to expand HMDA to include business loans. After some research, the Fed responded they could not and would not take the requested action for two reasons.  First, they did not have the authority to expand HMDA without an act of Congress. Further they claimed that collection and reporting of business loan data would not be an effective way to identify discrimination on business loans.

The act of Congress happened in 2010 in the form of the Dodd-Frank Act. The reasons why the collection and reporting of business loan data are not an effective tool for detecting discrimination are complex. The simple explanation is that in a comparative analysis, borrowers have to be substantially similar. Identifying comparable borrowers in consumer transactions is difficult; the task is next to impossible in commercial transactions.

The Fed avoided action for 10 years; so far the CFPB has delayed action for additional five years. The collection and reporting of business loan data is now and always has been a bad idea.

Let’s celebrate the CFPB’s continued foot-dragging. They are saving us from a burdensome task that will not produce results.

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