Financial Reform: Effects on Consumers

15 Jul

By Erin Adams

The newest Obama administration reform bill is very close to becoming law, needing only Senate passage to get to the president’s desk. This reform bill deals with the American economy and finances. The bill, if passed, will focus mainly on regulating Wall Street and the banks, which will also drastically affect American consumers.

One of the largest changes is the creation of the Consumer Financial Protection Bureau. The bureau will act as a regulator of financial companies such as banks, credit unions, and even debt collectors and payday lenders. While housed in the Federal Reserve, it will be mostly independent, able to write its own rules and run by a President-appointed director.

“The economic crisis was driven by an across-the-board failure to protect consumers,” states a summary of the bill by Donny Shaw of the Open Congress blog. The new bureau seeks to change this by consolidating the current protection responsibilities held by various agencies. It also seeks to educate citizens with the Office of Financial Literacy and will provide a national toll-free consumer hotline to report problems.

Photo by flickr user Andres Rueda

A more direct change for consumers will be in the regulation of credit and debit cards. Currently, stores are charged fees from card issuers for every consumer use of a card, which has led to complaints from store owners. The new bill will allow the store owners to set minimum prices to use credit or debit cards, up to $10. Any price below the minimum will have to be paid in cash.

Colleges and federal agencies will also have the power to set maximum credit card charges allowed. This could limit large charges and the card holder rewards generated by them.

The Federal Reserve will also have the power to regulate the fees card issuers charge, possibly reducing consumer prices. However, as Gerri Detweiler, a credit advisor for Credit.com, states in an article for abc World News by Dalia Fahmy, “If you take away [consumers’] ability to use their cards anywhere, anytime, they’re not going to be happy.” Even though prices may be lower, most Americans are used to the convenience of credit and debit cards.

Non-federal loans will also be changed by the bill, including private student loans. Private loans lack consumer safeguards that federal loans do. They can’t be discharged in bankruptcy or cancelled, even for disability or death. Under the new bill, these loans will fall under the responsibility of the Consumer Financial Protection Bureau. Specifically, private student loans will be handled by a Private Education Loan Ombudsman within the bureau.

Right now, credit scores can not be accessed for free. Free credit reports are available once a year at AnnualCreditReport.com, but credit scores are never free. However, with the new bill, credit scores can be accessed for free if they negatively affect consumers in job decisions or financial transactions. They can also be accessed if the interest rate on a loan seems too high.

Many parts of the new bill deal with regulating mortgages. Unchecked lending was one of the main causes of the housing crash, which itself was a main cause of the current financial crisis. One of the main changes will stop brokers from receiving financial incentives to give borrowers higher interest rates. “If someone qualifies for a lower-rate loan, then they ought to get that,” stated Ruth Susswein, deputy director of national priorities at the advocacy group Consumer Action, in an article for Smart Money by Lisa Scherzer.

Other changes include restricting fees on prepayment. These fees are charged to borrowers who pay off loans earlier than they originally planned. They will be completely abolished for riskier, adjustable-rate loans, but traditional fixed-rate loans will keep limited prepayment fees. Lenders are also prohibited from loaning money without verifying the borrower’s ability to repay. Verified documentation will be required for all loans. The Consumer Financial Protection Bureau will also have authority over home appraisals. The Home Valuation Code of Conduct holds this position now, separating the lenders and appraisers. However, most appraisals are outsourced to appraisal management companies, which results in appraisers being chosen who are cheap rather than qualified. A new committee will take over under the bill to set new home appraisal standards.

Photo by flickr user psyberartist

Attempting to prevent more costly bailouts of companies “too big to fail,” the bill also includes a new Financial Stability Oversight Council. It will mostly accomplish this through strict rules and requirements for large companies, discouraging excessive growth. Large companies will also need to have plans for potential shutdowns of the company. Higher restrictions will be placed on companies that fail to comply. The largest businesses will also be charged $50 million for a fund to be used for possible liquidation should the business fail, rather than charging the taxpayers. Mainly, however, the goal of the council is to lower systemic risk. This risk is what led to the costly bailouts, large financial institutions becoming so important to the economy that their failure ended in disaster for many citizens.

The new bill, if passed, will change American finances greatly. As U.S. Treasury Secretary Timothy F. Geithner said in a statement, “It establishes the greatest consumer financial protections in American history…prevents financial firms from taking risks that will threaten the economy…it provides the government with significant new tools to better protect taxpayers from the damage of future financial crises.” A decision on the bill should be made very soon. If it is passed, American consumers will have a lot to get used to.

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