Three Republican Senators joined 57 Democrats Thursday to get the necessary votes to pass the financial reform bill, soon to be known as the Dodd-Frank Act (in honor of its two originating supporters). It is now headed to President Obama for his signature.
The law is primarily focused on avoiding future systemic banking system failure, the kind of which has pushed us into the largest recession since the Great Depression. Here’s a quick overview of some of the measures put in place to help achieve that goal.
* Volcker Rule will force big banks to sell hedge funds
*New transparency, reporting and capital rules for derivatives
* Liquidation mechanism for big failing banks to minimize market impact
* Combine two bank regulators at the center of the crisis
* Create a council of regulators to watch for systemic risk
* Give shareholders more power in corporate governance and CEO pay
* Audit of the Fed’s emergency and other lending facilities
Those may sound all fine and dandy, but probably come across as being relatively meaningless to the average consumer. That’s where the new Consumer Financial Protection Bureau, housed in the Federal Reserve, comes in. It is solely devoted to combating consumer abuses in the marketplace.
Here are four of the big changes that you can expect — and their consequences, both intended and unintended.
The upside: Long before this regulation was passed, you could get three free credit reports from annualcreditreport.com, under federal law. That was not the case with credit scores. You almost always have had to pay for those or sign up for something (credit monitoring) that you probably shouldn’t.
Now, however, if a lender turns down your application for credit because of your credit score, the lender is required to tell you what your credit score is, for free.
The downside: Credit scores, like credit reports, should be free to consumers at least a few times per year. Oh well, maybe next time.
The upside: A former employee of the defunct mortgage company Countrywide Financial, which was gulped up by Bank of America (BAC), once told me “Yeah, we approved everything, often times without even looking at credit history or income. We were making good money, so why not?”
Under the new rules, lenders must verify a borrower’s credit history, income, and employment status, so that we don’t get into the foreclosure mess that companies like Countrywide put us in.
Banks will also be required to hold on to at least 5% of the loans they make instead of selling them to investors. More risk should equate to more precaution if you can’t unload the cancerous loans.
The downside: With tighter requirements, banks are scaling back their risks, which might make it harder for you to get a mortgage. My opinion? If it’s hard for you to get a mortgage, you probably shouldn’t be buying a house.
Credit and debit cards
The upside: Credit card minimums imposed by retailers now cannot exceed $10. Only the Federal Reserve can raise that limit, which theoretically will protect consumers from spending more at the local store or coffee shop just to hit the minimum requirement. (Read more about this here.)
Also, the Fed will have the power to limit interchange fees on debit-card transactions. (Interchange fees are the fees that card issuers, Visa (V) and MasterCard (MA) collect from merchants as a percentage of each transaction.) However, the rule applies only to banks, not to Visa and MasterCard. Banks usually charge stores 1% to 2% for each transation, but retailers say that lower fees could allow them to cut prices and bring on more workers.
The downside: Retailers now legally have the right to require a minimum charge of $10, if they so choose, in order for you to be able to use a credit card. This may be prohibitive if you just want to buy a candy bar, for instance. (On the flip side, the question is whether you really need to be using a credit card to buy a single candy bar, rather than paying the $1 or $2 cash.) Prior to this law, merchants were actually breaking violating their contracts with Visa and MasterCard, which required to accept all transactions regardless of their amount.
Also, an elimination of yet additional bank revenue streams (this time in the form of interchange fees) might lead to introducing fees in other areas – higher interest rates, lower rewards, or the disappearance of ‘free checking’ accounts.
Financial Adviser Disclosures
The upside: Financial advisers must now disclose all fees, any disciplinary actions and potential conflicts of interest, such as commissions. Brokers who sell stocks, bonds, annuities, and other investments have not always been required to make such disclosures, permitting them to act in their or their company’s best interests, and not yours.
The downside: This isn’t a done deal. The SEC has commissioned a six-month study to determine whether average investors are sufficiently protected by the rules already in place or whether something stronger is necessary.
For more details on what the bill aims to accomplish, read Senate Banking Committee Chairman Senator Dodd’s 16-page summary here. Appreciate it: the full bill is rumored to fill 2,232 pages.
GE Miller discusses personal finance topics for young professionals at 20somethingfinance.com.