Let's take a look at exactly how this reform bill will impact your life in the coming months and years.
Mortgage Lending
The changes made to mortgages will help assure that consumers are less likely to get nailed with high fees and bad loan terms. The days of the "liar loan" are now officially over. Lenders will now be required to fully document a borrower's income before agreeing to provide a mortgage loan. They will also be required to determine that the borrower can otherwise repay the loan.
The bill also prohibits lenders from offering incentives (called yield spread premiums) to mortgage brokers in exchange for originating loans with terms unfavorable to borrowers, such as higher interest rates.
• Prepayment penalties for most mortgage loans will no longer be allowed.
The downside of these consumer protections? By making mortgages less profitable for lenders, they could become tougher to get for borrowers. For example, we're already seeing stricter lending standards with higher required down payments.
Free Credit Scores
Consumers can already get a free look at their credit histories once every year from the big three credit bureaus -- Experian, TransUnion and Equifax (NYSE: EFX - News) -- by going to AnnualCreditReport.com. In its earlier form, the new law had extended that ability to credit scores as well, offering one free look at our credit scores annually.
In the final version, however, the bill only allows consumers who are denied a loan or suffer some other sort of "adverse action" to get a free look at their credit score.
In addition to being turned down for a loan, other "adverse actions" that could result in a free look at your credit score include an increase in your cost of insurance, being charged more for, or being denied, a car lease, or if the interest rate you're offered on a credit card or loan is higher than one being offered for those with excellent credit.
Debit Card Interchange Fees
While final changes are still months away, the new bill will very likely save merchants money. Whether it will save any for you, on the other hand, is less certain.
• Interchange fees, also known as "swipe fees," are charges merchants have to pay Visa and Mastercard for processing debit and credit card transactions. The fee for debit cards currently averages 1.6% -- credit cards' swipe fees average more than 2%. Under the new law, the Federal Reserve can cap the fees on debit cards (but not credit cards) limiting them to what they decide is "reasonable and proportional to the actual cost incurred."
• It will take months for the Federal Reserve to decide what's reasonable, but in Europe, Visa and MasterCard interchange fees are as low as 0.2% -- in Australia they're capped at 0.5%. Odds are that caps here will be higher than those charged on other continents, but lower than they are today. In lobbying for this change, retailers virtually assured Congress that they would pass along their savings to consumers. Many consumer advocates, however -- including this one -- are skeptical.
• Merchants will be allowed to offer a discount to customers who pay with cards that carry lower transaction fees -- that's something that hasn't been allowed in the past. They'll also be allowed to set both minimums and maximums for card transactions.
An All-Powerful Consumer Watchdog
One of the primary changes brought about the new law is the establishment of a Consumer Financial Protection Bureau within the Federal Reserve. This new agency will have sweeping powers to regulate virtually every kind of lending activity and lender, from the largest banks to the smallest pawn shops.
But there is one large group of lenders that escapes oversight by the new agency: car dealers.
According to Edmunds.com, of the 11 million cars expected to be sold this year, about 70% will be financed or leased through a car dealership. But despite opposition from both consumer advocates and the White House, Senate republicans successfully excluded car dealers from regulatory overview by the newly formed Consumer Financial Protection Agency.
The argument from car dealers and their lobbyists? They're already regulated by plenty of state and federal consumer protection rules that are designed to prevent practices such as "bait and switch" lending and loans packed with undisclosed extras such as extended warranties.
In addition, dealers argued, if another layer of regulations are imposed on them, lending and leasing may become so unprofitable that many dealers would simply stop offering it, ultimately hurting consumers.
Bank Bailouts
While the bill didn't go as far as many wanted -- for example, it doesn't give the government carte blanche to preemptively break up banks it considers "too big to fail" -- it did establish some new rules that could head problems off before they become systemic. It also should reduce the amount of money taxpayers would be required to shell out should good banks go bad.
• In the case of a failing financial institution, the Federal Deposit Insurance Corp. (FDIC) will borrow from the Treasury to pay for the cost of liquidation, then get its money back by selling off the institution's assets. If asset sales aren't enough to repay the Treasury, the FDIC could charge a fee to other banks.
• Payments to creditors of a failing institution designed to prevent a crisis from spreading will be limited to payments a creditor would receive in bankruptcy. In other words, money owed by failing financial firms to other companies might not be entirely repaid. This would prevent a repeat of the $160 billion taxpayer bailout of AIG.
• If a bank fails, the FDIC will have the ability to take back compensation paid to its current or former senior executives for the two years preceding its failure. In addition, the government can ban senior executives found responsible for a bank's failure from future work in the financial services industry.
Additional Protection for Investors and Consumers
• Financial literacy: The legislation requires the SEC to conduct a financial literacy study. It also creates an Office of Financial Literacy that will be tasked to develop programs to teach Americans about savings, loans, liens and fees. The agency would establish standards for financial advice programs and help keep Americans, particularly seniors, from becoming victims of scams.
• Investor Advocate: The legislation creates an Investor Advocate within the SEC that will represent the interests of retail investors.
• Greater disclosure to retail investors: The legislation requires that adequate disclosures be made to retail investors before they are allowed to invest in financial products.
• More protection for underserved investors: Another goal is to allow the un-banked and under-banked greater access to mainstream financial institutions.
By: Stacy Johnson
CREDITS: Money Talks News
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