The financial overhaul is about more than exotic derivatives and complex
risk assessments. It will change how you interact with the financial
system every day, from swiping your debit card at the store to applying
for a mortgage.
That includes new rules governing how we bank, borrow and invest, plus
the creation of a new regulator to make sure financial transactions like
signing up for a credit card are safer and easier to understand.
The legislation does not go as far as some would have liked. Auto dealers, who
make most car loans, won't face oversight by the new consumer bureau.
Nor will banks with less than $10 billion in assets, even though they
serve most communities in this country.
Here's a piece-by-piece guide to the new rules.
CONSUMER PROTECTION
A new Consumer Financial Protection Bureau, to be housed in the Federal
Reserve but run independently, will have the power to write consumer
protection rules for banks and other financial institutions, like
mortgage lenders.
It will also examine and enforce regulations already in place at
mortgage lenders and banks that hold more than $10 billion in assets.
The bureau will have the power to ban financial products that it
considers unsafe. It could also outlaw anything that might be confusing
to consumers, like the fine print on credit cards or mortgages.
In theory, it could also block credit-card companies from charging
especially high interest rates. The idea is to bring consumer regulation
under one roof, rather than spreading it out among seven different
agencies.
"It's hard to be an expert on economics and consumer protection at the
same time," says Jeffrey Sovern, a law professor at St. John's
University and an expert on consumer law.
Still, the new bureau will cover only half the bank branches in the
nation because of the $10 billion asset requirement, according to data
from the National Community Reinvestment Coalition, a Washington-based
consumer group.
It also may not be as independent as it seems. If federal banking
regulators object to new consumer protection rules, they can appeal to a
newly created council made up in part of their fellow banking
regulators.
CREDIT AND DEBIT CARDS
Say you walk into a gas station and pick up some soda, candy and gum.
The total is $11, but there's a sign at the register saying you can only
pay by credit card if the purchase is $20 or more.
Under the new legislation, the minimum can be no more than $10, and only
the Federal Reserve can raise it.
The Federal Reserve will also have the power to limit the fees that card
issuers can collect on debit-card transactions. But the rule applies
only to big banks, not to credit-card issuers such as Visa and
MasterCard.
Right now, banks usually charge stores 1 to 2 percent for each swipe —
fees that added up to nearly $20 billion last year. Stores and
restaurants say lower fees would allow them to cut prices, and to hire
more people.
But even if prices do fall at the store, banks might raise fees and
rates for their customers. They could also scale back "reward" cards or
free checking to make up for the money they're not collecting from
stores and restaurants.
CREDIT SCORES
Right now, it can be maddeningly difficult to figure out your credit
score. While you're entitled to one free credit report a year from each
of the three credit reporting agencies under federal law, you almost
always have to pay to see your actual score.
Under the overhaul rules, any lender that turns down a borrower —
whether it's for a mortgage, a department store credit card or an auto
loan — because of his or her credit score has to tell the borrower what
that score is, and for free.
MORTGAGES
Remember all those risky mortgages that borrowers got without ever
showing proof of income? The ones that blew up and set off the housing
crisis? Under the new rules, lenders will have to verify a borrower's
income, credit history and employment status.
On top of that, banks will have to hold on to at least 5 percent of the
loans they make instead of selling them to investors. The idea is that
they'll take fewer risks when they have skin in the game and aren't
slicing, dicing and selling all their loans.
"They don't care about whether they make bad loans if the risk isn't
theirs," says Dean Baker, co-director of the Center for Economic Policy
and Research, a liberal Washington think-tank. "Now they might have to."
Of course, if the banks are scaling back their risks, that means it
could be harder for you to get a mortgage.
INVESTOR PROTECTION
Regulators will have the authority to require all financial advisers to
act in their clients' best interest. Practically speaking, this means
disclosing fees, any disciplinary actions and potential conflicts of
interest, such as commissions.
Until now, not all brokers who sell stocks, bonds, annuities and other
investments have to make such disclosures. They could steer you into
mutual funds or college savings
plans that pad their firms' profits or their own commissions, and you
might never know.
The Securities and Exchange Commission will study the issue for six
months to determine whether average investors are sufficiently protected
by the rules already in place or whether something stronger is called
for.
So the SEC could still decide not to act at all, meaning investors would
still be stuck with a system in which their advisers can put their own
financial interests, not the clients', first.