Business for Shared Prosperity

By Edward Wyatt and Sewell Chan
New York Times, May 1, 2010

WASHINGTON — An unlikely new tenant in the halls of the Federal Reserve would set out sweeping rules on a wide swath of consumer transactions, possibly making it one of the most powerful new federal agencies in a generation.

The proposed agency is causing concern and confusion, however, among owners of small businesses — drug stores, jewelers, pawnbrokers and car dealers — who fear that by allowing any customers to buy on credit, their businesses could be subject to significant new regulations.

While most of the headlines about the Senate’s consideration of a financial regulation bill have concerned financial giants like Goldman Sachs and complex investments like synthetic collateralized debt obligations, the proposed Bureau of Consumer Financial Protection, which is a major part of the legislation, is likely to be an intense battleground in coming weeks.

Much of the bewilderment — and therefore the argument — stems from the imprecise nature of some of the proposed rules. The new agency would regulate financing provided by most car dealers, for example, but not by rent-to-own furniture vendors, according to the bill’s advocates. Department stores with private-label credit cards would be covered; stores that let their customers pay in installments, without interest, would not, they say.

A review of the consumer protection provisions, which account for 335 pages of the 1,565-page bill, shows that the intent of the legislation is not to cover Main Street businesses. But the ambiguity of some terms — like the word “significantly” — leaves the regulations open to a broad interpretation.

Senate Democrats and Obama administration officials say nearly all nonfinancial businesses would be exempt from the new bureau’s regulations, which would focus narrowly on consumer finance businesses.

“There are a large number of different types of companies across the country involved in the finance business, consumer finance business, that took advantage of the current system and left people with financial obligations they did not understand, could not afford, were not appropriate for them, and the damage of that was catastrophic,” Timothy F. Geithner, the Treasury secretary, said at a Senate hearing on Thursday.

But Republicans and business groups have countered that the new agency’s approach is scattershot rather than focused, and would stifle the ability of small Main Street businesses to offer credit to strapped customers.

Rich Gallo, the owner of Office Outlet, an office products company in Indiana, Pa., said he regularly devised payment plans for his customers, and was concerned that the consumer agency would impose a new layer of regulation. Told that the bill’s advocates say his business would probably not be covered by the bureau, Mr. Gallo remained skeptical. “I just think that is the way our government seems to be going right now, to more regulation,” he said.

The bill also would cast a broad net, opponents say, over companies that had little to do with the housing crisis and subsequent recession — a group known as nonbank financial companies, which includes such longtime Democratic targets as payday lenders, which make short-term loans at high interest rates.

“There is growing concern that in an effort to hold Wall Street accountable, this bill could catch the little guys up in the same net as the big banks,” Senator Mitch McConnell of Kentucky, the minority leader, said earlier this week after the Senate agreed to begin debate on the bill, formally known as the Restoring American Financial Stability Act.

With its “ambiguous language,” Mr. McConnell added, “there is real concern that this bill could penalize anyone in this country who buys or sells something on an installment plan,” potentially subjecting any merchant that offers credit that is subject to a finance charge or extends over more than four installments to the authority of the consumer bureau.

The crux of the debate would appear to rest on the definition of “significantly.” Senator Christopher J. Dodd of Connecticut, the primary sponsor of the bill, points to a section that says the new bureau cannot regulate “a merchant, retailer or seller of nonfinancial goods or services that is not engaged significantly in offering or providing consumer financial products or services.”

That might seem to rule out auto dealers, which, after all, are principally engaged in selling cars and trucks. But roughly four out of every five car loans are generated by the dealers themselves, according to the Cambridge Winter Center for Financial Institutions Policy, a Washington research group that says it believes dealers should be covered by the agency. The dealers set the interest rate, and the loan fees that they earn are a big contributor to their profits.

That, Democrats say, makes most auto dealers enough of a financial company to fall under the new bureau.

Some small-business owners support the creation of the consumer agency, saying they are not threatened. “There is nothing onerous in these regulations,” said Lewis Prince, the owner of Vintage Vinyl, a St. Louis music retailer who participated in a news conference Wednesday sponsored by senators who support much of the Dodd bill. Consumer protection “can only help small business by providing the kind of stable financial environment in which small businesses can thrive,” Mr. Prince said.

Even as businesses say the bill might be too far-reaching, some consumer advocates fear that the bureau will be able only to write rules, not enforce them. The bill would give the bureau enforcement powers over “larger participants” in nonbank or nonmortgage lines of business, like payday lending. How to define “larger” is left up to regulators.

Both sides seem to agree that the consumer agency has an ample amount of independence — and maybe too much for some lawmakers. The bill states that the agency can demand that companies furnish information about “the organization, business conduct, markets and activities of persons operating in the consumer financial services markets.”

The bill would require the Federal Reserve to turn over 10 percent of its operating budget each year to finance the agency. That would leave the new bureau with a budget of nearly $500 million — 75 percent larger than the budget of the Federal Trade Commission, another agency that currently has consumer protection responsibilities.

Whatever the new agency’s powers, businesses and their advocates in the Senate are more concerned over who will be regulated. “No one can deny that the language of the bill is ambiguous, that it lends itself to broad interpretation, so let’s tighten it up,” Mr. McConnell said. “The authors of this bill may believe some of these concerns are misplaced. But they are going to have to prove it.”

Copyright 2010 New York Times Company

http://www.nytimes.com/2010/05/01/business/01consume.html