Financial Overhaul Bill – What does that mean to me?

President Obama has signed the Wall Street Reform bill into law today. Congress passed the bill last Thursday with 3 Republican senators joining the Democrats to prevent a filibuster. The bill aims to “Create a Sound Economic Foundation to Grow Jobs, Protect Consumers, Rein in Wall Street and Big Bonuses, End Bailouts and Too Big to Fail, Prevent Another Financial Crisis”. Sounds good… Excellent… But what does it mean? It means different things to different entities. There are regulations that will affect the banks, mortgage companies, investors and the consumers. Everyone other than the consumers will have their own lawyers telling them what exactly it means to them. What do I, a common consumer, gain from this bill? Here is the list of things that are relevant to us, the consumers.

Consumer Protection

1. Consumer Protection Agency : A new independent watchdog, Consumer Financial Protection Bureau (CFPB), will be created within the Federal Reserve to oversee financial products and services including credit cards, mortgages and loans. This office will be accountable for all the consumer protection issues. Auto dealers and pawn brokers are exempt. An Office of Financial Literacy will be created to educate consumers.
2. Consumer Hotline : A single national consumer complaint hotline will be created. Consumers can report all the problems with the financial products and services using this toll free number.

My Thoughts: I don’t see anything wrong with this. People will be encouraged to report unethical or illegal practices if the complaint system gets simpler. And it looks like it will.

Banking and Credit Cards

1. Deposit Insurance : The FDIC insurance for banks, credit unions and thrifts will permanently increase to $250,000 retroactive to January 1, 2008.
2. Limits on the debit card transaction fees : The Federal Reserve will have the power to regulate and ensure that these debit card fees charged by the banks are reasonable and proportional to the cost of processing those transactions.
3. Access to credit scores : Right now, anyone can get their credit reports for free, but the elusive credit scores which decides a lot of your borrowing capability remains mysterious. The new law will require the disclosure of credit score IF it is part of an adverse action. Meaning, if you got rejected for a loan or employment opportunity due to your credit score, you have to right to know your score, for free.

My Thoughts: I have mixed feelings on this one. The FDIC limit is good news. The other two… Providing the credit score is good, but it is free IF and only if it negatively affects the consumers. Personally I think, it should be available along with the credit report. Regarding the debit card transaction fees, it COULD potentially lead to lower prices if the companies that accept the credit/debit card pass part of the savings along to the consumers. But I highly doubt that will happen, on the other hand, the reward credit cards and rewards checking might take a big hit.

Mortgage and Housing

1. No more Stated Income/Stated Assets loan : The mortgage institutions must ensure that the borrowers have the ability to repay the loans by checking their credit history, income and employment. No documentation, no loan, period.
2. No pre-payment penalty : Prepayment penalty prevented a lot of borrowers from getting out of subprime/unaffordable mortgages. This bill prohibits pre-payment penalties.
3. No incentive to sell inflated loans : Mortgage companies cannot pay a bonus or any incentive to encourage brokers to sell more costly loans to the borrowers.
4. Emergency Mortgage Relief: Building on a successful Pennsylvania program, provides $1 billion for bridge loans to qualified unemployed homeowners with reasonable prospects for reemployment to help cover mortgage payments until they are reemployed.
5. Foreclosure legal assistance : Low- and moderate income homeowners and tenants will be provided legal counsel related to prevention of foreclose or tenancy associated with foreclosure.
6. Additional disclosure on cost of mortgage : Lenders must clearly disclose to the consumers taking a variable interest loan, that their payments will vary based on interest rate change. And also disclose the maximum they could pay on the variable rate mortgage.
7. Expands Consumer Protections for High-Cost Mortgages: Expands the protections available under federal rules on high-cost loans — lowering the interest rate and the points and fee triggers that define high cost loans.
8. Home ownership and rental Counseling : An Office of Housing Counseling will be established within HUD to boost homeownership and rental housing counseling.
9. Combat the impact of foreclosure crisis : Allocates $1 billion in funding to the States and localities to stabilize the foreclosure impacted neighborhoods. This funding will be used to combat the falling property values and increased crime by rehabilitating, redeveloping, and reusing abandoned and foreclosed properties.
10. Penalties for lenders not following these standards :  If the lenders and mortgage brokers are irresponsible and violate any of these standards, they will be penalized and accountable for as high as 3 yrs of interest payments and damages by the consumers. This intents to protect borrowers against foreclosure for violations of these standards.

My Thoughts: Overall it shifts a lot of responsibilities to the lenders from the consumers. Why did people take mortgages in the first place if they didn’t have the ability to pay back? How did they not realize that variable rate loan means your payment will change over time? I am/was not in that situation so may be I am notaware of all the issues. The above rules will make it difficult for people to get mortgages, but it might be for the better. If I find it hard to get a mortgage may be I am looking for a larger mortgage than my income would allow. In that case, I shouldn’t be buying a house anyways, so its all good.

Investments

1. Fiduciary Duty: Gives SEC the authority to impose a fiduciary duty on brokers who give investment advice –the advice must be in the best interest of their customers.

My Thoughts: This rule is still “tentative”. The SEC has 6 months to complete a study to see if the existing rules are good enough, so this might go unimplemented. I don’t have and don’t plan to use a broker or investment advisor. So I am not sure what the actual impact would be.

Insurance

Federal Insurance Office : A federal government office focused on Insurance will be created. This office will gather information about the insurance industry, including access to affordable insurance products by minorities, low- and moderate- income persons and under-served communities. The Office will also monitor the insurance industry for systemic risk purposes.

My Thoughts: This rule doesn’t directly impact any of us, yet. How the office will use the information IF they find that access to insurance is not affordable will determine whether this rule useful or not.

There are other rules that affects companies. For example, it might end the possibility of taxpayer-funded bailouts for the too big to fail companies. The summary I have provided above is what I understand from the bill (For more details on all the rules please refer to the full text of H.R. 4173).

These are the rules that were included in the bill that was signed into the law today. Whether these will be strictly enforced or how much impact these will have on the economy and more importantly whether this will prevent the next financial crisis, remains to be seen. Any measure in the right direction would be a welcome now!!!