Will Credit For Small Businesses Shrink With New Consumer Protection Agency?

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The opposition to President Barack Obama's proposal that would create a new consumer financial protection agency is growing, with multi-million TV ad campaigns and critical studies. One such study shows that such an agency would?harm small businesses dependent on credit cards and other爁inancial爌roducts.

The most notable salvo has come from the U.S. Chamber of Commerce, the world's largest business federation,爎epresenting more than three million businesses and organizations. More than 96 percent of the chamber's members are small businesses. The chamber has launched a $2 million TV ad campaign to kill the agency proposal.

Despite the chamber's opposition, as well as denouncements from banks and other financial institutions, President Obama on Oct. 11 reiterated his commitment to convincing Congress to move forward on the new agency proposal, asserting in a speech that its creation was vital for the "financial interests of ordinary Americans."

"The Consumer Financial Protection Agency that will stand up not for big banks, not for financial firms, but for?hard-working Americans," Obama said. "It will be charged with setting clear rules of the road for consumers and?banks, and it will be able to enforce those rules across the board.

"It will have the ability to enforce and build on the credit card reforms we passed earlier this year, so that consumers aren't hit with unfair rate hikes and penalties, or hidden charges."

But the U.S. Chamber of Commerce paints a grim picture for small businesses across the country.

"We oppose the Consumer Financial Protection Agency Act of 2009 (CFPA) because we believe it is the wrong way to enhance consumer protections and will have significant and harmful unintended consequences for consumers, for the business community, and for the overall economy," said David Hirschmann, the chamber's senior vice president. "We are particularly concerned that these unintended consequences may fall disproportionately upon爏mall businesses."

The American Bankers Association has also joined the opposition, citing legal ramifications and the burdens that the new agency could place on banks. "Traditional" banks adversily impacted would include those which had爊othing to do with the financial crisis of 2008 that stemmed primarily from the issuing of subprime loans and related deratives-trading practices. The financial crisis has already led to the enactment of sweeping credit card reform laws set to take full effect in February 2010.

The ABA has said that it is "concerned about the bill's impact on preemption of state and local laws; the vast, unchecked power of the new agency; and the regulatory burden that would be placed on traditional banks that never made a single subprime loan."

The U.S. Chamber's Hirschmann testified last month before the U.S. House Committee on Small Business. In his testimony, he outlined the results of a study commissioned by the chamber that examines the CFPA and its potential effect on small business access to credit. The study is authored by Thomas Durkin, an economist that?spent more than 20 years at the Federal Reserve Board, serving as Senior Economist in the Division of Research and Statistics.

Durkin concludes that the proposed Consumer Financial Protection Agency would result in reduced access to credit for small businesses.

In his study, Durkin states that the CFPA will likely "cause disruptions in consumer credit markets due to extensive legal uncertainty arising from provisions of the proposed Act."

Specifically, the bill would apply an unclear "abusive" standard to allow the CFPA to prohibit products and?practices, but there are no existing legal precedents for guidance about how to interpret "abusive," according爐o Durkin. This would in turn create significant legal uncertainty regarding products and practices and their compliance with the law, creating disincentives and higher costs associated with products - particularly new products.

"Small businesses need a flexible set of credit products that meet the short term fluctuations in their credit needs without a long outstanding line of credit," Hirschmann testifed. "These factors give them a different risk?profile and credit needs than a consumer, yet the CFPA adopts a one-sizefits all approach to credit products."

By encouraging standardized products, the CFPA will seek to respond to the "average consumer," Hirschmann added, leaving small businesses adversely affected.?/p>

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