Financial reform Q&A: How changes affect you
The voluminous financial reform package hammered out by lawmakers Friday extends far beyond Wall Street.
The legislation, about 2,000 pages long, would touch on the financial lives of millions of consumers, affecting a wide range of transactions including how Americans take out a mortgage and use their credit cards.
Though the impetus of the legislation was to rein in the abuses that lay behind the global financial crisis, the Obama administration was keen to boost consumer protections in an era of more complex financial products.
Strengthening consumer protections, advocates argued, also would improve the stability of the financial system. The subprime mortgage crisis would have been muted, they said, had basic regulations been in place to protect borrowers from unscrupulous lenders.
Consumer advocates didn’t get everything they wanted. Some sought-after rules for stockbrokers and auto dealers ended up on the negotiating room floor.
But consumer advocates got far more than experts once thought possible — and far more than Wall Street lobbyists wanted. Here are answers to key questions consumers have:
Question: What is the major consumer provision?
Answer: The creation of a new agency known as the Consumer Financial Protection Bureau. It would have broad oversight of financial products and far-reaching powers to ban abusive products or practices. The agency will oversee banks, mortgage lenders and credit card companies.
The basic idea is to have an agency whose only job is to look out for consumers, replacing the current system in which those functions are spread across a hodgepodge of seven government entities.
“The consumer agency is a landmark reform, probably the biggest consumer protection since deposit insurance,” said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group.
Q: How does the legislation affect credit cards?
A: If you want to use a credit card to buy a pack of gum, you might be out of luck. Over time, however, that pack of gum could become less costly.
The new rules clear the way for retailers to require a minimum purchase of up to $10 on credit cards. They want to avoid forking over fees to card issuers. Consumers could be inconvenienced, but might ultimately save money because retailers mark up prices to cover the fees.
Q: How would mortgages be affected?
A: To avoid a repeat of the ill-conceived lending practices that led to the subprime meltdown, banks would have to make sure borrowers are creditworthy. They also would have to retain a financial interest in the loans they make.
Mortgage brokers and bank loan officers would be prohibited from earning bonuses based on the type or profitability of loans that consumers choose. That theoretically would remove the hidden incentives that lending officers have to place clients in risky or expensive mortgages when cheaper alternatives are available.
Q: Is there any downside for consumers?
A: Expect banks to try to recover the revenue lost to tighter credit card and mortgage rules by adding fees to existing products. Free checking, for example, might be a thing of the past at many banks, at least without carrying hefty minimum balances.
