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Cato Institute’s Calabria warns of consequences of Dodd-Frank’s Section 1071

Mark A. Calabria

Two years after the enactment of Dodd-Frank, some of the legislation’s potentially harmful provisions have started to emerge.

Section 1071 of the 2010 Dodd-Frank Act, Subtitle G, named “Regulatory improvements,” will establish a small business loan database system that will “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 business.” The provision essentially advocates for enhanced affirmative action in the business lending world.

“Recall that the same scheme of statutory social engineering contributed to the boom in subprime lending that eventually imploded the mortgage market,” Mark A. Calabria, the director of financial regulation studies at the Cato Institute, said, according to The Washington Times. “It appears Dodd-Frank is determined to drive small business lending down the same path.”

Calabria said that small-business lending is not particularly safe at the present time, adding that the annual failure rate for firms with fewer than five employees is approximately 20 percent. Additionally, Calabria said that since 2005, 19 percent of small businesses have failed, noting that the success rate for firms is heavily influenced by the race and gender of ownership.

“For example, 16 percent of female-owned firms operate in health care and social assistance, a sector with the comparatively low failure rate of 18 percent,” Calabria said, The Washington Times reports. “Meanwhile, only 10 percent of Hispanic-owned businesses operate in those industries, while Hispanics own a disproportionately high number of construction firms. In 2009, construction businesses in operation for less than 10 years failed at a rate of 30 percent.”

The U.S. Department of Justice recently took action against Wells Fargo for allegedly discriminatory mortgage-lending practices. Calabria pointed to this action as evidence that “politics, not reason,” will drive data collection under Dodd-Frank.

Calabria also said that race and gender of ownership is “a demonstrable factor” in those industries with varying failure rates, loan pricing and loan denial.

“’Equalizing’ denial and pricing in the way Dodd-Frank seeks to do necessarily means extending credit to riskier firms,” Calabria said, according to The Washington Times. “We are fortunate that losses on small-business loans played a relatively minor role in the recent financial crisis. If we want to avoid them playing a larger role in the next conflagration, then repeal of Dodd-Frank’s Section 1071 should be a high priority for the next Congress.”

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