News

Dodd-Frank will reduce access to credit for small businesses

Lilly Thomas

Section 1071 of the Dodd-Frank Act is intended to prevent discrimination against minorities in lending, but this provision may actually eliminate small banks’ competitive edge in lending relative to larger banks.

“The purpose of this section 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,” the provision says.

The language of the law enables regulators to standardize business loans, a practice common in lending for larger banks. If a bank has not made a certain number of loans to minority groups, the bank may be subject to federal intervention.

While this may be a blow to all institutions, smaller institutions may suffer the most. Smaller banks are known for having flexible, customizable loans to compete with larger banks. Small businesses may be hurt even worse, as they often rely on small banks for loans.

While only 10 percent of the banking deposit market is composed of small banks, approximately 40 percent of loans to small businesses are made by small banks. Small business loans spur economic growth and development and small businesses themselves employ approximately 80 million Americans, The Daily Caller reports.

Lilly Thomas, the vice president and regulatory counsel for the Independent Community Bankers of America, said that until the Consumer Financial Protection Bureau writes and finalizes Section 1071, banks will not have to comply.

“As with any new regulation, we are going to be looking to try and talk to the CFPB about tiered regulations and maybe exemptions for small banks,” Thomas said.

Comments are closed.