Should auto dealers be subject to new rules set by a consumer financial protection bureau? How about orthodontists? And lawyers? It would be difficult for Congress to carve out every kind of firm that should or should not fall under a new regulator's jurisdiction. For that reason, Senators Olympia Snowe (R-ME) and Mary Landrieu (D-LA) will introduce a financial reform amendment that would provide criteria to determine what companies need to follow the new bureau's rules.
The Wall Street Journal's Washington Wire reports that the upcoming amendment would require a three-prong test to make a company exempt from regulatory oversight of the new bureau:
1) The business must sell nonfinancial products.
2) It must not securitize its consumer debt.
3) And it must fall within the North American Industry Classification System code's definition of a "small business."
All three conditions must be met.
So what type of firms would meet these criteria? Would an auto dealer? Probably not. Most auto loans and leases are securitized these days. Would the orthodontist? Certainly. A small law firm would be exempt as well.
The securitization requirement is a little odd. It's likely included with the intent of trying to protect investors from poor underwriting practices, which presumably the new bureau will have something to say about. Yet, the only asset-backed bonds that really suffered over the past few years were those related to mortgages. Securities backed by credit cards, auto loans and other non-mortgage assets have performed fairly well. So it's a little unclear why this criterion is necessary.
Critics across the spectrum might have some issues with the companies these criteria do or don't exempt, however. Should an independent lawyer or independent furniture retailer be allowed to use abusive tactics to collect money they're owed? These firms might meet the criteria above if considered "small businesses." But consumer advocates might argue that the distinction of being a small business is irrelevant: the rules should apply to everyone. Of course, small companies will say that if the bureau has jurisdiction over their business, it would harm their growth and competitiveness.
On that note, what about community banks? They are very concerned about the stress that additional regulatory oversight from the new consumer bureau might put on their businesses. They believe that big banks will be better able to handle the costs imposed by new rules, but these criteria wouldn't exempt them. Even though they might be considered a small business, they sell financial products.
So this proposal isn't perfect. It would, however, catch a large universe of firms that most Senators probably want to keep exempt from new regulation. For those that it misses or unintentionally fails to exempt, additional clarifying detail can be added.