Dodd-Frank’s Small-Business Lending Time Bomb
The Dodd-Frank Wall Street Reform and Consumer Protection Act is the “great achievements” that Congress likes to wave around as proof that they actually did something following the turmoil of the financial crisis. Not surprisingly, the act is riddled with small business earmarks hidden throughout its hundreds of pages of complexity.
For example, as The Washington Times noted, “under Section 1071, Subtitle G, labeled “Regulatory Improvements” (who says Congress doesn’t have a sense of humor?), the act establishes a system of small business loan data collection. The claimed purpose 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 business.” Translation: Push affirmative action in small-business lending.”
Such legislative tomfoolery is what led to the subprime bubble that destroyed the housing market which is the very thing Dodd-Frank is supposed to prevent. The Washington Times expands, “the financial crisis demonstrated the government’s ability to take what should be a relatively safe activity — mortgage lending — and turn it into a disaster. Small-business lending, however, is already far from safe. The annual failure rate for firms with fewer than five employees averages around 20 percent — 1 in 5. That’s true even in the best of times: In 2005, 19 percent of small businesses failed. Small-business failures, however, are not random. Younger firms fail at a higher rate, of course. Another big factor is the type of firm — a factor that tends to be heavily influenced by the race and gender of its 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. 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…”
Source - Washington Times