United States

Dodd-Frank, shifting demographics drive a new emphasis on diversity

Why financial institutions should focus on inclusion and compliance


One aspect of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that has attracted relatively little attention until now is Dodd-Frank Section 342, which addresses the diversity policies and practices of several federal agencies and of the companies that those agencies regulate or with which they contract. While there so far has been little enforcement or compliance action related to Section 342, there has already been some reporting on diversity among financial institutions by the Government Accountability Office (GAO), and many expect increased attention from regulators soon.

HMDA requires financial institutions to report data collection on mortgages applications received from individuals acquiring a home.  The regulation change increases the amount of data to be reported and will allow a regulator to determine if disparate treatment was existing in their lending practices. In 2016, financial institutions considered this their biggest risk and concern exceeding even TRID.   Such reporting of data, if required by Section 342, could lead to the same scrutiny of a regulator.  Regulated entities are only required to voluntarily submit Section 342 data.  If such data is required to be reported, financial institutions will be opening the doors to regulator’s scrutiny.

Potential regulatory attention is not the only reason for financial institutions to pay attention to Sections 342 and HMDA.  Shifting demographics mean that banks need to focus increasingly on women and minorities in both hiring and lending practices if they wish to compete in evolving talent and lending marketplaces.

Though compliance to-date has been voluntary, lawmakers are taking note of lackluster progress since Dodd-Frank was enacted. In response, regulators are considering new frameworks to review and assess practices and outcomes.

How Section 342 works

Section 342 calls for the establishment of Offices of Minority and Women Inclusion (OMWIs) at 20 different government agencies:

  1. Department of the Treasury (DOT)

  2. Consumer Financial Protection Bureau (CFPB)

  3. Federal Deposit Insurance Corporation (FDIC)

  4. Federal Housing Finance Organization (FHFO)

  5. National Credit Union Administration (NCUA)

  6. Office of the Controller of the Currency (OCC)

  7. Securities and Exchange Commission  (SEC)

  8. Board of Governors of the Federal Reserve (the Fed)

  9. All 12 Federal Reserve Banks

The OMWIs are tasked with oversight of all agency matters relating to diversity in management, employment and business activities involving:

  • The employment practices of the agency

  • The diversity policies and practices of the entities with which the agencies contract

  • The diversity policies and practices of the entities the agency regulates.

Section 342 further mandates that the OMWIs develop and implement standards and procedures to ensure the fair inclusion of minorities, women and minority- and women-owned businesses in all business and activity of each agency. It also grants the OMWIs the power to refer contractors to the agency administrator if the OMWI determines a contractor has not made good-faith diversity efforts. Financial entities subject to the oversight of OMWIs include:

  • Financial institutions

  • Investment banking firms

  • Mortgage banking firms

  • Asset management firms

  • Broker/Dealers

  • Financial services entities

  • Underwriters

  • Accountants

  • Investment consultants

  • Law firms

As a result of Section 342, six agencies (SEC, OCC, CFPB, NCUA, FDIC and the Fed) developed joint standards for voluntary diversity policies and practices at regulated agencies. The standards fall into four categories:

  • Workplace standards that focus on  overall policies, progress, planning and promotion of diversity issues

  • Workforce standards that focus on employment issues, including diverse applicant pools, outreach and accountability

  • Marketplace standards, which focus on supplier and contractor diversity

  • Community standards, which focus on transparency and mentorship

The six agencies also developed self-assessments that regulated entities should use to report their progress against these policies and practices.

What financial institutions should do now

So far, compliance with and self-assessment against these joint standards is voluntary. That does not, however, mean that financial institutions should take them lightly. GAO measurement of data collected under Section 342 has shown little change in key diversity measurements since Dodd-Frank was enacted. Regulators have had authority to enforce Section 342 since enactment. Increasing attention by trade organizations and others indicates that financial institutions and other affected businesses anticipate a shift from voluntary. Following are three steps you should consider taking now:

  • Conduct the voluntary self-assessments. If and when more active regulatory efforts are undertaken, financial institutions that have not conducted the voluntary self-assessments are likely to be targeted first.

  • Don’t just write policies, implement them. Having a policy in place is worthless if it is not actively implemented throughout the organization and if compliance with that policy is not measured to ensure compliance

  • Treat diversity compliance as a risk focus. Failure to comply with either Section 342 exposes your institution to fiduciary, reputational, market and regulatory risk.

The strategic perspective

The best reason to focus on diversity, both in hiring and in your lending and business practices is the future success of your financial institution. Consider the following facts:

  • Minorities will account for more than 50 percent of the population of the U.S. by 2044 and will be more than 60 percent of the population by 2060.

  • The number of minority owned businesses is growing five times faster than non-minority owned businesses

  • There are 9 million women-owned businesses in the U.S. with cumulative revenues of $1.4 trillion

  • Minority students now outnumber non-minorities at private, for-profit two- and four-year colleges

  • Women outnumber men in undergraduate program enrollment

The demographic trends are clear, in the battle for both talent and market share, financial institutions that effectively target women and minorities will have a significant strategic advantage in the coming years.

Potential regulatory attention stemming from Dodd-Frank provides an immediate reason for financial institutions to focus on effective diversity practices. Learning the specifics of Sections 342 and HMDA should be an immediate risk focus. From a strategic perspective, however, diversity is even more important. Institutions that understand and capitalize on the shifting demographic trends shaping their future markets will be better positioned for future growth.   

RSM US LLP has specialized financial institution diversity and inclusion knowledge and experience, which allows:

  • Readiness and current state understanding through rapid assessment

  • D&I implementation advisory focused on measurably impacting outcomes

  • Risk-based D&I advisory and internal control analysis

  • Data analytics, including forecasting to allow longer-term D&I planning

  • Regulatory compliance in concert with our understanding of oversight and enforcement plans

Please contact Tracey Walker, RSM senior director of government affairs, culture diversity and inclusion to learn more.


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