Setting the Record Straight: Wall Street Reform Legislation Must Protect Consumers and Will Not Put New Burdens on Small Businesses

Ed. Note: Also see the President's statement out this afternoon.

As debate over Wall Street reform continues on the Senate floor, opponents of the legislation and their lobbyists continue to try to spread mistruths about the bill, particularly when it comes to the impact of financial reform on small businesses.

Let’s set the record straight once again: neither the Senate bill nor the Administration’s original proposal has ever applied to small businesses – not to florists, not to butchers, and not to orthodontists. When it comes to authorities for the new consumer financial protection agency, we have absolutely no interest in any company that is not significantly engaged in providing financial goods and services.

The Snowe-Landrieu amendment that will be considered soon makes clear once and for all that the Senate bill does not apply to small businesses – any small business.   That means if you are a small business owner that simply extends credit to facilitate sales of nonfinancial goods or services to your customers and keeps the credit on your own accounts, you will not be affected.

But it’s important to be equally clear on who IS covered:  with or without the Snowe-Landrieu amendment, this bill covers banks, it covers auto-dealer-lenders, it covers payday lenders, and all other companies engaged in providing financial services to consumers.  As it should.

As we mentioned here yesterday and articles in the New York Times and Washington Post note today, there's a fight looming as lobbyists argue for unjustifiable loopholes and carve-outs.  Auto dealer-lenders -who compete directly with banks and are responsible for originating 80 percent of car loans nationwide - are looking for a total exemption from the bill's consumer financial protection provisions.  Given the fact that, after a house, a car is the biggest purchase most American families make, the attempt to exempt auto lenders from consumer protection rules is particularly egregious.
 

We saw in the financial crisis that companies that originate loans for the purpose of selling them off to Wall Street— which is exactly what auto dealer-lenders do—often have skewed incentives.   For example, Wall Street pays dealer-lenders more to bring in loans with higher interest rates than the borrower qualifies for.  This encourages dealer-lenders to inflate rates and pack loans with expensive and unnecessary add-ons, while using deceptive tactics to make customers think they’re getting a good deal.  
 
For the sake of responsible consumers – as well as for responsible community banks and credit unions --we must ensure that all businesses that are significantly engaged in providing consumer financial products and services play by the same basic rules of the road.  That puts auto dealer lenders and payday lenders squarely within the parameters of this bill.  But it puts the butcher, the orthodontist and the floral arrangement maker squarely beyond its scope. 

Beware of any and all misleading attempts to blur those lines.  

Michael Barr is Assistant Secretary of the Treasury for Financial Institutions