The ChamberPost

FinReg and Non‐Financial Businesses: Just the Facts

by Ryan McKee

How and Why are Non‐Financial Businesses Still Regulated by the Consumer Financial Protection Bureau?

Proponents of the proposed CFPB say they do not intend to regulate nonfinancial merchants, retailers and service providers. But, unfortunately, the bill still does.

1) Merchants, retailers, doctors, dentists, plumbers, butchers and others are covered if they “extend credit” and the credit is (1) subject to a finance charge, or 2() payable in more than 4 installments (Section 1027 (a)(ii)).

2) As Chairman Dodd pointed out, only those not “engaged significantly” in offering or providing this type of payment flexibility are exempt from the full regulatory authority (including filing reports and being subject to inspections and enforcement) of the new agency.

3) But, there is no definition of “engaged significantly” in the bill. So, for example, if an orthodontist allows 70% of his/her or patients to pay in six or twelve installments – is that “significant” to the practice? If an electrician allows 50% of his customers to pay in installments, is that significant to his business? What about a lawn service that charges interest to any of its customers who don’t pay in 30 days – is that significant?

4) The point is, non‐financial businesses that had NOTHING to do with the financial crisis should not be in this bill AT ALL. We shouldn’t be debating which orthodontists’ extension of credit is “significant.” Orthodontists, dentists, florists, electricians, plumbers, auto dealers, and the thousands of other retailers, merchants, and other non‐financial businesses should never be covered in the first place. (Chairman Dodd says that the question is whether the orthodontist is a “significant financial player.” But that is not what the bill says; it asks about the significance of the credit in light of the orthodontist’s own business.)

(5) Chairman Dodd says: “Section 1027 of the Wall Street reform bill makes clear that folks for whom extending a line of credit is incidental to their business won’t be covered.” Again, that isn’t what the bill says. Let’s take a closer look at Section 1027. Here is a subsection of the bill that precedes the one quoted by Chairman Dodd:

(A) IN GENERAL.—Except as provided in subparagraph (B), and subject to subparagraph (C),the Bureau may not exercise any rule making, supervisory, enforcement, or other authority under this title with respect to a merchant, retailer, or seller of nonfinancial goods who—

(i) extends credit directly to a consumer, in a case in which the good or service being provided is not itself a consumer financial product or service (other than credit described in this subparagraph), exclusively for the purpose of enabling that consumer to purchase such nonfinancial good or service directly from the merchant, retailer, or seller.

So far, so good. If the bill meant what Chairman Dodd says – that all “incidental” credit is not covered – the provision would stop there. But it doesn’t; what (A) grants, (B) takes away:

(B) APPLICABILITY.—Subparagraph (A) [the exemption above] does not apply to any credit transaction or collection of debt, other than as described in subparagraph (C), arising from a transaction described in subparagraph (A)

(iii) in which the merchant, retailer, or seller of nonfinancial goods or services regularly extends credit and the credit is

(I) subject to a finance charge; or
(II) payable by written agreement in more than 4 installments.

So the bill does cover this group of merchants, retailers, and sellers. And, what is paragraph C? That is where “significant” comes in.

(C) LIMITATION.—Notwithstanding subparagraph (B), the Bureau may not exercise any rulemaking, supervisory, enforcement, or other authority under this title with respect to 23 a merchant, retailer, or seller of nonfinancial goods or services that is not engaged significantly in offering or providing consumer financial products or services.

The only retailers and other Main Street businesses that are exempt are those that meet the “significant” test, as it is defined sometime in the future by the CFPB Director. Not much assurance for the orthodontist, or any other retail business.

6) So, let’s review. You are regulated, unless you are not, unless you are, unless you are not.

7) And even if some retailer managed to make its way through these provisions and qualify for the exemption, that isn’t the end of the story. The bill (in Section 1036) creates brand new liability for “any person” for violating the statute or the bureau’s regulations or for doing something that in hindsight is claimed to be “unfair” or “deceptive” or abusive.” That’s “any person”, not just those who meet the definitions we’ve been discussing. These lawsuits can be brought by a state attorney general, based entirely on his or her interpretation of these vague terms, for civil penalties and class action‐type damages. Even if you think you’re out, you’re not.

8) This problem can be easily solved by clearly defining who is IN and making it equally clear who is OUT.

9) The only real question is, WHY hasn’t this been FIXED?

Moving the CFPA - A Victory in Form Not Substance

by Ryan McKee

There have been suggestions today that that the proposed Consumer Financial Protection Agency (CFPA) could be housed within the Treasury Department rather than exist as a stand-alone agency. We need strong consumer protections, the elimination of duplicative regulation, and strong enforcement against illegal financial activities; however we have continued concerns that the creation of a CFPA would impair financial markets and hinder small businesses ability to access credit at the very time when they need it most.

While we appreciate the administration's willingness to consider alternatives, suggestions that the proposed CFPA could be housed within the Treasury Department is merely a victory in form, not in substance. Make no mistake about it; this new proposal is nothing more than a wolf in sheep's clothing.

Lodging consumer protection authority within the Treasury Department would do nothing to remedy one of the fundamental flaws of the original proposal. Continuing to separate the regulation of financial products from regulatory expertise regarding the safety and soundness of financial institutions threatens consumers as well as the stability of the entire financial system. Putting the CFPA within a federal agency and giving it the same regulatory authority as a stand-alone agency would not fix our broken system and would still harm consumers and businesses accessibility to credit.

Learn more at StopTheCFPA.com.

The CFPA, Consumers and Small Businesses

by Ryan McKee

As demonstrated in this Wall Street Journal op-ed the way Elizabeth Warren and consumer groups "frame" the debate about strengthening consumer protection is: you either support the CFPA, or you’re altogether anti-consumer and anti-family. This argumentative and narrow view on an important public policy debate does a significant disservice to consumers across the country. Proclaiming it’s "our way or the highway" has prevented any real and substantive debate about alternatives to the CFPA that won’t result in a significant reduction in the availability and affordability of credit for consumers, small businesses and communities when they can least afford it. The Chamber has proposed an alternative approach that fills the gaps in regulation, provides consumers the information they need to make financial decisions and facilitates tough as nails enforcement to protect consumers, all without the need to create a new massive bureaucracy.

Although Ms. Warren’s op-ed references "Wall Street CEOs" nine times, her choice of a popular target hides the unfortunate reality that the CFPA’s impact will disproportionately fall on those it’s purported to protect – consumers and small businesses. 

First, the CFPA is not limited to, nor even targeted at, credit cards and mortgages. The CFPA would have power over businesses that are non-financial in nature, and that have at best a tangential relationship to consumer finance. For example, the bill the Senate is considering would require that the CFPA regulate any business that extends credit in which a finance charge is imposed, or in which more than four payments are allowed over time. This would encompass businesses across the country who provide flexible payment plans to their customers. The small business owner that allows his customers to pay over time is far from a Wall Street CEO.  In addition, businesses that simply contract for goods or services with firms that offer consumer financial products would be under the CFPA’s authority – advertisers, technology companies, data processers, software providers, etc. 

As such, rather than keep the agency’s focus on the areas where risk to consumers is highest, the CFPA represents an overly broad and massive new agency with an expansive, ill-defined mission.

Second, the CFPA doesn’t consolidate – in fact, most of the businesses referenced above are already regulated by the Federal Trade Commission (FTC), and the FTC will retain its authority over them.

Third, the CFPA sets the floor for consumer protection laws – allowing the 50+ states to pass their own laws that may conflict with the CFPA and with each other. In addition, State Attorneys General can enforce the CFPA laws based upon their own interpretation. This means a lot of overlapping, confusing and conflicting rules – which makes little sense in light of the need to simplify disclosures to consumers.

Lastly, the CFPA would have very broad and vague regulatory authority over any products that are "abusive." But, no one knows what that means. And businesses that want to comply won’t know what that means – leaving them in a guessing game about whether they’re in compliance.  This should provide little comfort to consumers, and creates significant disincentives for financial institutions to lend.

As the Senate begins to hammer down the details of its regulatory reform bill, we need a more open and honest debate about what the CFPA actually is, and what consumers actually need.  If there are regulatory gaps, let’s fill them. And if regulators failed to enforce the numerous consumer protection laws on the books, let’s hold them accountable. Let’s not add a new regulator to the mix without understanding why existing regulators aren’t working. And lastly – let’s make disclosure work for consumers through a strong, clear, uniform national standard – not 50+ new sets of disclosure rules.

Democrats and Republicans should work together to achieve comprehensive reform that both protects consumers and facilitates the flow of credit to America’s job creators.