The Effects of the Consumer Financial Protection Agency on Credit and Small Businesses

March 18, 2010

Senator Chris Dodd, Chairman
Committee on Banking
United States Senate
Washington, DC 20510

Senator Richard Shelby, Ranking Member
Committee on Banking
United States Senate
Washington, DC 20510

Dear Chairman Dodd and Senator Shelby,

The undersigned small business groups are writing to express concern over the creation of a Consumer Financial Protection Agency (CFPA) contained in financial regulatory reform legislation under consideration by your Committee. We believe that the CFPA will restrict the availability of credit to small firms, stifling the ability of small business to grow, provide new jobs, and lead our economy out of the recession.

Small businesses rely heavily on credit. The Ewing Marion Kauffman Foundation, the world’s largest foundation devoted to entrepreneurship, refers to credit as the “oxygen for new and young firms.” Almost 90 percent of the nation’s 26 million small businesses use some form of credit. The smaller the business, the less likely credit is obtained from a traditional loan. Many small businesses can not get traditional bank loans because they may not have a credit history. Nor do they have collateral in their new ventures. According to the Federal Reserve, over 50 percent of new firms that have applied for traditional bank loans had a least one application rejected. Instead, small businesses use home equity loans, personal loans, auto title loans, and credit cards to obtain credit.

The creation of a new federal agency that will cover these lending products may complicate oversight of our country’s financial system, not simplify it. The creation of the CFPA will mean new paperwork and record-keeping requirements, and a new bureaucracy. Those costs will be passed on to consumers of credit, including small businesses. Economists speculate that the credit squeeze caused by the creation of the CFPA will raise interest rates by 160 basis points (loan at 6% will increase to 7.6%).

A rise in the cost of capital will harm small business and will stifle job growth, slowing an economic recovery. New firms are responsible for almost all net new jobs. Census Bureau data show the startups with fewer than 20 employees account for 86.7% of net job creation. Data from the 1990’s show small business are the only sector producing jobs coming out of a recession. We strongly discourage legislation that will curb small business growth, especially now. While some experts currently see signs of economic growth, small firms are still unable to boost their employment, leading experts to question how quickly the United States can work its way out of the recession.

Since access to credit is so important to small business, we ask that legislation to simplify the regulatory structure and ensure tougher oversight be fully cognizant of how any new regulatory structure will impact the cost of credit and the ability of new firms to grow.

We compliment the Senate Banking Committee’s focus on proper oversight of the financial sector and we want to assist your efforts in preventing future economic catastrophes. However, we do not believe that the CFPA is sensitive to how the agency will tighten credit and impact small business and we ask that you consider these views when moving forward on financial reform legislation.

Small Business & Entrepreneurship Council

Associated Builders and Contractors

Hispanic Leadership Fund

Independent Electrical Contractors

International Franchise Association

Institute for Liberty

National Association for the Self-Employed

Society of American Florists

Society of Chemical Manufacturers & Affiliates

U.S. Chamber of Commerce


(1) Dane Stangler and Robert Litan, Where Will the Jobs Come From?, Ewing Marion Kauffman Foundation , November 2009.
(2) See, U.S. Small Business Administration, Small Business in Focus: Finance, A Compendium of Research by the Small Business Administration’s Office of Advocacy, July 2009.
(3) See, e.g., Thomas A. Durkin, The Impact of the Consumer Financial Protection Agency on Small Business, Center for Capital Markets Competitiveness, September 2009.
(4) Id.
(5) Id.
(6) Id. at 12.
(7) See, e.g., Durkin, supra note 3.
(8) David S. Evans and Joshua D. Wright, The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit, October 2009.
(9) See, e.g., Durkin, supra note 3.
(10) Id.

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