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Why is There a Diversity Section in the Dodd Frank Act?

Why is there a Diversity Section in the Dodd-Frank Act?  

The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was one of the most sweeping banking laws that have been enacted in many years.  Of course, the legislation was passed against the backdrop of one the largest financial crises in world history.  The legislation has many sections and several of the provisions have been heavily discussed.   However, one section of the act, Section 342, has not received much discussion or fanfare at all.  What is Section 342?  It is the section that establishes the Office of Minority and Women Inclusion.

Are you Aware that the FFIEC has released Guidance Standards for Diversity in Hiring and Procurement? 

On Oct. 25, 2013, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corp., National Credit Union Administration, Consumer Financial Protection Bureau, and Securities and Exchange Commission (SEC) which is collectively known as the FFIEC, issued a proposed interagency policy statement on diversity.   Section 342 of the Dodd-Frank Act requires these agencies to develop standards for regulated entities to assess diversity. The final rule was issued and took effect on June 10, 2015.

First Things First-What is this all about? 

One of the things that the Dodd-Frank Act addresses is the effort being made by financial institutions in the area of inclusion of women and minorities in the overall hiring and procurement processes.  The legislative discussion of Section 342 of the Dodd-Frank Act helps to describe what it is that this section of the law is designed to do.

The Agencies believe that a goal of Section 342 is to promote transparency and awareness of diversity policies and practices within the entities regulated by the Agencies. The establishment of standards will provide guidance to the regulated entities and the public for assessing the diversity policies and practices of regulated entities. In addition, by facilitating greater awareness and transparency of the diversity policies and practices of regulated entities, the standards will provide the public a greater ability to assess diversity policies and practices of regulated entities. The Agencies recognize that greater diversity and inclusion promotes stronger, more effective, and more innovative businesses, as well as opportunities to serve a wider range of customers.[1]

Put another way, the Dodd-Frank Act is trying to get financial institutions to get to know their entire assessment area not only as customers, but as potential employees and contractors.   We believe that this fits in with a larger direction to financial institutions that they should get to know the credit and financial needs of the communities they serve.   Much like the Community Reinvestment Act, there is nothing in the law or the guidance that directs institutions to lower standards or to set quotas.  Instead, the idea here is to make sure that the employment and procurement processes are inclusive.   The fact is that there are many “diamonds in the rough” that go overlooked and as a result, are unbanked or underemployed.

Will This Require a Whole new Reporting Process?

The guidance requires an annual statement on the diversity practices of the Banks and credit unions.  Based upon the standards in the rule, it is not likely that a whole new data collection regime will be required.  Instead, it will be the duty of the Board and senior management to include diversity considerations in the strategic plan and ongoing monitoring of performance.

According to the proposed guidance, the expectation will be that institutions will

  • Include diversity and inclusion considerations in the strategic plan
  • Will have a diversity and inclusion plan that is reviewed and approved by the Board
  • Will have regular reports to the Board on progress
  • Will provide training to all affected staff
  • Will designate a senior officer as the person responsible for overseeing and implementing the plan

What does Diversity Mean? 

For purposes of this definition, “minority” is defined as Black Americans, Native Americans, Hispanic Americans, and Asian Americans, which is consistent with the definition of “minority” in sSection 342(g)(3) of the Act.

The final Policy Statement also states that this definition of diversity “does not preclude an entity from using a broader definition with regard to these standards.” This language is intended to be sufficiently flexible to encompass other groups if an entity wants to define the term more broadly. For example, a broader definition may include the categories referenced by the Equal Employment Opportunity Commission (EEOC) in its Employer Information Report EEO-1 (EEO-1 Report), [2] as well as individuals with disabilities, veterans, and LGBT individuals.

While this may seem like a long list of new requirements, in our opinion that is not the case at all.  When developing a strategic plan and assessing the credit needs of the community, the idea of diversity should be part and parcel of the basic considerations and projections.  It is clear that regulators will increasingly focus on financial institutions ability to identify the financial needs of the communities they serve and to match how the banks activities meet those needs.  In addition, we believe that examiners will ask financial institutions to document the reasons why they are not able to offer certain products.  The same will be true in the area of hiring and procurement.  Financial institutions will need to be able to document diversity efforts and to have a good explanation for the lack of diversity.

It should be emphasized that we do not believe that this guidance is leading towards hiring or procurement quotas.  Instead, the requirement will be for complete and clear documentation of the efforts made to ensure that diverse candidates are being considered.

Why is this a Good Thing? 

Diversity has been, and will always be a strength.  Of course a diverse loan portfolio is one that can absorb fluctuations in various industries without much turmoil.   Diverse ideas and experiences have always lead to innovation.  In point of fact, there has been a history of exclusion of several communities of potential customers by financial intuitions for some time.  The whole point of the Community Reinvestment Act was to get financial institutions to look at all communities for potential clients.

Earvin “Magic” Johnson has developed a multi-Billion-dollar business based upon the idea that diversity is strength.  His companies have invested in neighborhoods that were traditionally under banked and lacked access to funding.  The success of this company is a good example of how strategic diversity creates opportunities in communities that often get overlooked.

Self-Assessment

One of the more controversial points of the regulation is that it appears to rely on self-assessments.  There are no examinations standards that are mentioned in the guidance.  While some commenters decried the idea that self-policing is too vague; it appears that the expectation is that financial institutions will develop a policy, monitor compliance with that policy and make the results available to the public.

Self–assessment is both an opportunity and a curse.  The opportunity exists for an institution to self-define itself.  By setting standards that are based on a comprehensive understanding of the community vis-à-vis the capabilities of the bank, an institution has the opportunity to create a strong impression with regulators.  At the end of the day this is what regulators will willingly accept and applaud.

Implications

While it is too early to tell whether the final guidance will have significant costs associated with it, it is obvious that there will be an emphasis on diversity planning and programs for financial institutions. We suggest that the approach should be part of the overall strategic planning process

[1]  Joint Standards for Assessing Diversity Policies and Practices of Regulated Entities

[2] Ibid

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