Limiting the Consumer Financial Protection Bureau

The financial crisis brought two primary goals to the front of legislation: preventing the crisis from occurring again and stabilizing the economy. Legislation was passed aimed at both goals by installing new restrictions on the financial industry and taking extraordinary actions to provide cash to businesses. There has been significant discussion about whether these actions will be successful in their objectives. One area, however, that has not received enough consideration in creating this legislation is its effects on small businesses. Small businesses are a critical part of the America economy and a key to its growth. The creation of the Consumer Financial Protection Bureau (Bureau) in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has the potential to effectuate significant progress in enforcing consumer protection laws. It also has the potential to create a significant burden on small businesses that will in turn set back the entire American economy. The Bureau has been granted a broad authority to be effective in their objective. This includes a new authority to prevent unfair, deceptive and abusive acts in addition to rule making authority for eighteen current consumer protection laws. The new regulations that will be promulgated under these grants of authority will bear more significantly on small businesses and have a negative impact on the economy. However, if the Bureau's authority over small businesses did not include the new broad and undefined grant of authority, it would significantly decrease the negative economic impacts while still allowing for an increase in effective enforcement of consumer protection laws.

I. Importance of Small Business

Small businesses are an important driving part of the U.S. economy. They also bear significantly more costs to comply with regulations than their larger counterparts. With the unemployment rate at 9%, job creation becomes an important goal. Small businesses need to be a significant part of that plan. Since at least the 1970's, small businesses have created 2 out of every 3 net new jobs. In addition, nearly all job creation since 1980 has occurred in firms less than five years old.

With small business being such a critical part of bringing the US economy out of a recession, it is important to look at the cost of the regulations that are being imposed on them. Small businesses incur a 45 percent higher cost to comply with federal regulations than their larger competitors. Beyond the direct effects of complying with regulations, small businesses face challenges with getting enough credit to run their businesses. Almost 90 percent of American small businesses use some form of credit. However, in 2009, only half of these small businesses that tried to borrow received all or most of the capital they needed. This credit allows these businesses to grow and have the beneficial affect that the economy needs. Economists have raised concerns that the actions in the Dodd-Frank Act and the Consumer Financial Protection Bureau will tighten the credit even more than it has been; causing higher interest rates and in turn prevent job growth. The additional costs of compliance and lack of effective credit options for small business will cause many to exit many of these regulated industries. This will only exacerbate the constriction of the markets thereby providing less diversity, which causes an increase in prices and rates putting the economy in worse position.

II. Broad Authority of the Bureau

With the importance of small business to the economy and the impact of regulations on them, it is essential to recognize how the Bureau has been given broad authority to create new regulations and the broad scope of their authority that will now apply to a number of new small businesses. The Bureau assumes authority of eighteen enumerated consumer laws in addition to new grants of authority created in the Dodd-Frank Act on a broad range on consumer issues. These regulations reach every part of the financial industry from the Home Mortgage Disclosure Act (HMDA) to the Electronic Fund Transfer Act (EFTA). Congress has shown that they want to give broad rule making authority to the Bureau to be able effectuate fundamental changes in how consumer protection laws are enforced. While the Bureau is the primary examiner for these consumer laws of entities with assets in excess of $10 billion, they have the exclusive power to promulgate rules for all entities under the consumer laws. This broad authority to make rules can be demonstrating a shift from the current "disclosure" regime to a rule-based regime. This change can have significant compliance and enforcement costs. There will be significant upfront costs in establishing systems to monitor compliance and higher ongoing costs than the current disclosure system. As discussed above, small business will bear a higher cost for compliance than larger regulated entities.

Beyond the enumerated consumer laws, the Dodd-Frank Act provides a grant to prevent any unfair, deceptive or abusive acts. This standard has yet to be defined. However, this potentially allows very broad authority over actions of businesses. What the act does provide is potential for the Bureau to look into customers' knowledge when examining whether an action is abusive. This can be a potentially large liability for business participating in financial services. It might lead to more after-the-fact assessments by the Bureau of their activities. This creates substantial costs and logistical problems to maintain additional records that go beyond just the particulars of the business actions but also to record the knowledge of their customers.

In addition, Congress has defined the "Covered person[s]" of the act very broadly. A covered person is any person that offers or provides a "Consumer Financial Product or Service." This allows the Bureau to reach a much larger pool of businesses, many of which are small business operating in a niche market. Congress provides a list of some of these agencies that will be subject to this provision. The list though contains a catch-all provision that will allow the Bureau to reach almost any entity. The acts states that the Bureau has authority over any entity the Bureau believes is engaging in conduct that proposes risk to consumers with regard to financial products or services. This broad authority will subject, or potentially subject, many more small businesses to regulations that they have not been subject to before, thus creating significant costs and facilitating small businesses exit from many markets.

Entities that have already been subject to consumer laws will also be subject to additional costs because of new regulations through the Dodd-Frank