By Randy Neumann
On July 15, 2010, the U.S. Senate, by a vote of 60-39, passed the biggest financial industry regulation since the Great Depression
Sen. Chris Dodd (D-Conn.), the architect of the legislation, said, “Never again, ever again should we have to go through what we did in the fall of 2008 to ask the American taxpayer to write a check for $700 billion to bail out a handful of financial institutions that frankly, in many cases, helped create the mess we were in.”
Sen. Richard Shelby of Alabama, the banking committee’s top Republican, called the bill a “2,300-page legislative monster.” Shelby said: “It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy.”
The size of the bill made it similar to the health-care law of which then-Speaker of the House Nancy Pelosi remarked, “But we have to pass the bill so that you can find out what is in it, away from the fog of the controversy.”
Here are some of the issues addressed in the finance bill.
It created the Bureau of Consumer Financial Protection (BCFP). This new consumer agency, answering to the Federal Reserve, would supervise mortgages, credit cards, student loans, and the banks, credit unions and private lenders that issue them. Although institutions holding less than $10 million in assets wouldn’t be regulated by the BCFP, they will have to follow its rules. The BCFP will aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.
You may be able to see your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Before, you could request three free credit reports each year, but you couldn’t see your actual score. That’s pretty funny.
The bill provides tougher rules for mortgage lenders. Of course, these rules should have come into play years ago, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for “liar loans.”
Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with adjustable rate mortgages (ARMs) and other types of complex home loans cannot be hit with prepayment penalties should they pay off a mortgage before the end of its term.
Under the new legislation, stores can set minimums for credit card use. Score one for retailers, who are unhappy when consumers make $2 credit card purchases because the swipe fee alone cancels out the revenue. The minimum transaction level could be as high as $10 if a store chooses; furthermore, the Federal Reserve could raise that $10 minimum limit with time.
Alternatively, stores could offer consumers discounts if they pay for items with cash or debit cards. (However, they wouldn’t be able to vary the discounts for different debit cards.)
Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.
Stock brokers could be held to a fiduciary standard. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to financial advisers – that is, investment brokers would have to put a client’s best interest first and not simply recommend a “suitable” investment to a client. That new standard may or may not come into play; however, the SEC, after undertaking a six-month study to see if such a rule would amount to regulatory overlap or not, made no changes.
The big banks got a key concession from Congress: They don’t have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can continue to be involved in foreign-exchange and interest-rate swaps dealing.
An Office of Credit Ratings will be created to oversee the actions of Moody’s, Standard and Poor’s and others. One of its objectives would be to flag potential conflicts of interest.
The SEC would no longer regulate equity-indexed annuities. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.
Interestingly, there is no mention in the 2,300-page bill of housing giants Fannie Mae and Freddie Mac, the longtime “government-sponsored enterprises” (GSE). In the summer of 2009, the Congressional Budget Office estimated that the cost of subsidizing the GSEs would amount to $389 billion through 2019.
Oh well, better luck next time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.