President Urges No Carve Out for Auto Dealer Lenders as Senate Approves Snowe-Landrieu Amendment
President Obama said that there should be no carve out for auto dealers-lenders from the consumer financial protection provisions of the Senate reform bill. Auto dealer-lenders make nearly 80 percent of the automobile loans and should be subject to the same standards as any local or community bank that provides loans. Michael Barr, Treasury Assistant Secretary for Financial Institutions, said that many of these auto loans were originated and then securitized. Mr. Barr noted that companies that originate loans for the purpose of selling them off to Wall Street, such as auto dealer-lenders, often have skewed incentives. For example, Wall Street pays dealer-lenders more to bring in loans with higher interest rates than the borrower qualifies for. This encourages dealer-lenders to inflate rates and pack loans with expensive and unnecessary add-ons, while using deceptive tactics to make customers think they’re getting a good deal.
At the same time, the Treasury official endorsed the Snowe-Landrieu amendment, which he said makes clear once and for all that the Senate bill does not apply to small businesses, such as florists, that simply extend credit to facilitate sales of nonfinancial goods or services to their customers and keep the credit on their own accounts. These types of companies are not significantly engaged in providing financial goods and services within the meaning of the legislation, said Mr. Barr.
The Senate approved the Snowe-Landrieu amendment by a voice vote. The amendment clarifies that the new Consumer Financial Protection Bureau cannot regulate small businesses if they meet a three prong test. Specifically, the amendment exempts a business from CFPB regulation if it sells non-financial products, does not securitize its consumer debt, and falls within the North American Industry Classification System (NAICS) code’s definition of a small business. NAICS codes are used by the Small Business Administration to determine whether or not a business is considered a small business and are commonly used by small businesses when filling out their tax forms.
New businesses would also be exempt from the CFPB so long as a reasonable determination could be made that the business would fall within the NAICS code guidelines during its first year in existence and comply with the first two prongs of the test discussed above. In addition, businesses that fall under this safe harbor are specifically exempted from Section 1042(a) which allows state Attorneys General to bring lawsuits to enforce the provisions in this bill.