The U.S. Senate just muscled through a sweeping financial bill (already passed in the House of Representatives) that provides the largest changes to financial regulation since the Great Depression. The financial reform bill took months of wrangling, but it has finally passed, and President Obama is expected to sign it into law fairly soon.
A lot of the bill focuses on how Wall Street is regulated, including providing the Federal Reserve with new powers, as well as providing the government with the power to shut down large financial companies that appear on the verge of failure. The bill also changes the rules about money financial firms can use to engage in risky and speculative behaviors. Additionally, shareholders are given more a voice in executive pay (although nothing binding).
However, what most people want to know is how the new financial reform bill affect them in their daily lives. Here are some of the ways that Americans can expect financial reform to affect them:
Consumer Financial Protection Bureau
The creation of this new agency is designed to protect consumers. It brings the regulation of consumer financial products and services under the auspices of a single agency. Instead of a crazy quilt of different regulators more focused on the institutions they are regulating, the Consumer Financial Protection Bureau is supposed to be focused on consumers, providing education through the Office of Financial Literacy, and providing an easy hotline for consumers to complain about financial practices.
Lending overseen by the Consumer Financial Protection Bureau is meant to be more transparent, with contracts that are easier to read, and the abolition of hidden fees. The only exemptions from the lending oversight of this Bureau are car dealerships. (So maybe it’s best to avoid dealer financing from here on out.) However, the FTC has been granted powers to oversee auto dealer financing more closely in the name of consumer protection.
New Mortgage Lending Rules
Consumers are likely to see more protection in the form of new mortgage lending rules. First of all, the bill insists that lenders retain an interest (at least 5%) in the loans they make. This means that they can no longer approve mortgages to people they know can’t afford them, and simply sell the mortgage off, retaining the commissions but not the risk. Additionally, the bill forces lenders to verify borrow income, in order to help reduce the number of unaffordable mortgages.
This means that you may have a more difficult time getting a bigger mortgage. You will be required to prove you can afford the mortgage. While this means that you may not be able to buy a bigger house, it does mean that you are less likely to be steered gamely into a mortgage you will not be able to afford (losing the bigger house to foreclosure anyway). Mortgage terms are also supposed to be more transparent, with prepayment penalties severely limited, and mortgage products without them offered as alternatives.
Also, appraiser independence is meant to be strengthened, so that banks aren’t influencing home values in order to justify larger mortgage loans. However, the bill acknowledges that further study is needed, and appraisal rules are likely to be overhauled down the road. Also required for study under this bill: Reverse mortgages.
Private Student Loan Regulation
Last year, the government took over government student lending (subsidized government loans) in order to rein in the student loan industry. However, the private student loan industry remained mostly as it was. Private student loans don’t come with the same protections as government student loans, so this bill aims to help by bringing the private student loan industry under the supervision of the Consumer Financial Protection Bureau. It also creates a central place for students to turn for information about private student loans.
New FDIC Limits and Free Credit Scores
Many people have been asking for the temporary FDIC limit of $250,000 per insured account to be made permanent, and it will be. The financial reform legislation gets rid of the January 1, 2014 date for reversion to the $100,000 limit. Now, all accounts will be insured for up to $250,000. This means that your bank accounts can be bigger, and still protected by the FDIC.
Another change is that you are entitled to a free credit score, if your score was material in a decision to deny a credit application, or if you were denied housing or a job. If a credit card issuers cites your credit score as a reason for changing some of the terms of your account, you can request a free copy of your score. You don’t get a free look at your score, though, if you don’t have any negative experiences. But at least you still get access to a free credit report each year from each bureau at www.annualcreditreport.com.
For Further Consideration: Broker Fiduciary Duty Toward Retail Customers
One of the sticking points for many is that brokers do not have a fiduciary duty to retail customers. This means that a broker/dealer can recommend products that may not be in the client’s best interest, banking a fat commission without having to worry about the ultimate financial fate of a retail customer. The financial reform law requires that the SEC spend six months studying the obligations that a broker has toward his or her clients. Then, if the SEC feels it necessary, brokers can be placed under the same fiduciary requirements that investment advisors adhere to.
Bottom line: While this massive bill deals mainly with Wall Street regulation, there are still measures that will affect consumers. Even the move allowing merchants to institute up to a $10 minimum for credit card purchases could affect consumers, by requiring them to pay cash for small purchases, rather than simply swiping their plastic.
What do you think of U.S. financial reform? Will it really protect consumers?
Most of this doesn’t affect me that I can see. The credit card changes may affect Rewards Checking because it is based on number of transactions rather than the dollar amount. So not being able to swipe for small amounts can impact those users.
The inevitable conclusion to reach here is that government regulation regularly fails, and the only cure is further regulation.
Government bureaucrats will “require” borrowers to document their income before applying for loans? Why would a self-interested lender would require the borrowers to do so anyway? Because if the lender is large enough, and thus able to donate to the appropriate legislators, there’s no incentive for being prudent. Add to that the absurdity of the Community Reinvestment Act, in which ethnic background is a more important criterion for lending than the ability to pay is, and chaos is inevitable.
As always, the responsible people get screwed. If legislators cap the interest rates my credit card issuer can charge, the issuer will make it up in other ways – say by increasing the holdback it takes from merchants, which raises prices for everyone. The new regulations also hamper the magical convenience of consumers not having to carry cash, if we now have to pay for small transactions via the 19th century method of forking over bills every time.
“Even the move allowing merchants to institute up to a $10 minimum for credit card purchases could affect consumers”
The only thing that will affect me.
If the leaders of the GOP (who are bought and paid for by big business interest}
don’t like it ….it MUST be good.
If they were to say it was a fair good bill, then I would ask Obama not
to sign it. We do NOT need Herbert Hoover policies of the 1920’s
again.
Great concept of a website! I am glad I stumbled across it on Twitter as I will continue to check out your blog postings in the future!
As far as financial reform there should be some interesting tactics that are used to force credit card companies to adjust standards but we will end up seeing what happens.
When does this all go into effect?
That’s a tricky question. Some of the measures go into effect immediately, while others require study first. Many of the items under study get about six months for study, and then recommendations will be made. Regulatory agencies will need to hire staff, but then can start making some rules and enforcing them. For the most part, the implementation of these reforms will be a process, since the bill is rather open ended on many start dates.
Unfortunately, this reform doesn’t help my son who had to get private student loans to complete college like $80,000 in debt. I wish there was some kind of bail out program for these students instead of Wall St. and Corporations getting the help. So sad what these private banks have done to these young Americans who want to better their life and can’t get a good paying job after they have graduated.
I’m sorry I’m a little bitter.
Hi , I am agree with Marty.
Regards
Victor