On Wednesday, the Senate voted 53-44 to overturn the Consumer Financial Protection Bureau’s (CFPB) small business lending rule. The 2010 rule requires lenders to collect and report to the government demographic information (including race, ethnicity, sexual orientation, and gender) regarding loans approved for small businesses.
Supporters of the rule claim that it will ensure “equity” and “fairness” among borrowers and bring to light discrimination. CFPB director Rohit Chopra said preserving the rule would “give the public key data on this market to ensure that banks and nonbanks are serving small businesses fairly.”
The opposition claims that the rule is overreaching not only into the personal businesses of the borrowers but also into the lenders’ decisions. Senator John Kennedy criticized the rule: “The bank has to ask the small-business person if that small-business person is gay.”
Kennedy added, “What a private American does with another private, adult American in the privacy of their bedroom — we are free, so long as it doesn’t break any laws, to express our sexuality however we want to, and it’s none of the CFPB’s business.”
In addition, Kennedy pointed out a potential security issue in the CFPB collecting all of this data, especially after a data breach earlier this year. He stated, “This private information has got to be collected by the CFPB … and it’s not like the CFPB is exactly a wizard when it comes to data security.”
While it is noble to want borrowers to be treated “fairly,” demographic data tells you nothing about why any individual person is approved or denied a loan. If two people of different demographics apply for loans and one has a better credit score or a more promising business model than the other person, that person is more likely to be approved for the loan. It would have nothing to do with demographics and everything to do with the individual circumstances of the person.
Putting pressure on banks to focus on demographics when it comes to lending means they will likely give loans to those who are not qualified and disqualify those who are out of fear of repercussions. If the goal is to be “fair,” which would mean making these decisions rationally, regulations would do the opposite of their intended goal and enforce demographic-based discrimination.
The government needs to stay out of banks’ business decisions, and we should encourage them to decide who they approve of and don’t approve of based on their own judgment of what’s best for themselves as a business.
If their judgment is rational, they won’t give out loans based on demographics but instead on the merit of the individual’s borrowing history and the predicted success of the business, which would be in the bank’s best interest.
If their judgment is bigoted and they decide to blindly prioritize certain demographics over others, they’ll miss out on financial opportunities that their competitors can grab. They might even go out of business if they continue making decisions based on factors irrelevant to financial outcomes.
It’s unfortunate that the Democratic-controlled House and President Biden won’t sign on to the Senate’s decision, so the rule most likely won’t ultimately get repealed, but hopefully, it will be undone in the future.