How Congress' proposed overhaul will affect mortgages, credit cards, credit scores, and more.
View full sizeIn this May 11 file photo, a chart shows the sudden market drop that led to the worst recession in 70 years during a House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises hearing on Capitol Hill.Compiled from The New York Times and The Associated Press
At last, it's settled.
After months of haggling, the terms of financial reform are set, so long as both houses of Congress vote to accept them in the coming days.
While elected officials spent much of their time working out the details of regulating complex derivatives and grappling with whether banks ought to make big bets with the banks' money, they also set a number of rules that will directly affect consumers.
The bill creates an independent Consumer Financial Protection Bureau that would write and enforce rules for most banks, mortgage lenders, credit-card and private student-loan companies.
Here's a look at three areas where the legislation will affect consumers:
Mortgage restraints
The bill offers new protections, many of which are a bit like closing the barn door after all of the animals escaped.
Lenders, for instance, will have to check borrowers' income and assets. Most lenders have learned that lesson or have ceased to exist.
Other rules include a ban on prepayment penalties for people with adjustable rate and other more complex types of mortgages. Mortgage brokers and bank employees will no longer be able to earn bonuses based on the type of loan they put you in. That will presumably eliminate any incentive to push high-interest loans on borrowers (who might otherwise qualify for a better deal) to inflate bank profits.
There will be, with some exceptions, a cap limiting mortgage origination fees to
3 percent of the loan.
Plastic discounts
Hate those merchants who won't let you use your credit card unless you spend more than a certain amount? Well, now they have Congress' blessing, as long as the minimum is not higher than $10.
Merchants are free to offer discounts to people who pay cash instead of using cards, or who use debit instead of credit cards. However they will not, for example, be able to charge one price for people using American Express cards and a lower price for people using Visa and MasterCard credit cards.
Merchants will also not be allowed to give discounts based on which bank issued the debit or credit card you use.
Keeping scores
Let's say a mortgage lender, credit-card issuer, insurance company or landlord quotes you a more expensive interest rate or premium price or refuses to rent you an apartment because of problems with your credit score. If that happens, the company or individual would have to give you, for free, the score that led to your troubles.
Keep in mind that nothing is stopping you from asking for the score, even if you like the rate or result of your application. You might be able to get it for free even if the lender, insurer or landlord is not legally required to give it to you.
More highlights of the financial reform plan
- Oversight: A 10-member council of regulators led by the Treasury secretary would monitor threats to the financial system. It would decide which companies were so big or interconnected that their failures could upend the financial system. Those companies would be subject to tougher regulation.
If such a company teetered, the government could liquidate it. The costs of taking such a company down would be borne by its industry peers.
The council could overturn new rules proposed by the consumer protection agency. That’s supposed to happen only to rules deemed a threat to the financial system. - Federal Reserve: The Federal Reserve would lead the oversight of big, interconnected companies whose failures could threaten the system. Those companies would be identified by the council of regulators.
The Fed’s relationships with banks would face more scrutiny from the Government Accountability Office, Congress’ investigative arm. The GAO could audit emergency lending the Fed made after the 2008 financial crisis emerged. It also could audit the Fed’s low-cost loans to banks, and the Fed’s buying and selling of securities to implement interest-rate policy. - Capital cushions: Big banks would have to reserve as much money as small banks do to protect against future losses. But big banks would have to replace hybrid forms of capital called trust preferred securities with common stock or other securities. Banks with under $15 billion in assets wouldn’t have to replace those securities, but could not add more to their reserve funds.
- Derivatives: Derivatives are financial instruments whose values change based on the price of some underlying investment. They were used for speculation, fueling the financial crisis. Under current law, they have been traded out of the sight of regulators. The new law would force many of those trades onto more transparent exchanges.
Banks will continue trading derivatives related to interest rates, foreign exchanges, gold and silver. Those deals earn big profits for a handful of Wall Street titans.
But riskier derivatives could not be traded by banks. Those deals would run through affiliated companies with segregated finances. The goal is to protect taxpayers, since bank deposits are guaranteed by the government. - Bank restrictions: Companies that own commercial banks could no longer make speculative bets for their own profits.
A related provision would have banned banks from investing in private equity and hedge funds. The final compromise scaled that back. Banks will be allowed to invest up to 3 percent of their capital in private equity and hedge funds. - Executive pay: Shareholders would vote on executive pay packages. But the votes wouldn’t be binding. Companies could ignore them.
The Fed would oversee executive compensation to make sure it does not encourage excessive risk-taking. The Fed would issue broad guidelines but no specific rules. If a payout appeared to promote risky business practices, the Fed could intervene to block it. - Credit rating agencies: Credit rating agencies that give recklessly bad advice could be legally liable for investor losses. They would have to register with the Securities and Exchange Commission.
Regulators would study the conflict of interest at the heart of the rating system: Credit raters are paid by the banks that issue the securities they rate. Before the crisis, they bowed to pressure from the banks, lawmakers say. That’s why the agencies gave strong ratings to mortgage investments that were basically worthless.