After months of bitter debate and a Congressional all-nighter to hammer out a final agreement, President Obama signed legislation that overhauls financial regulation. Here's how the measure will affect your family finances in ways big and small.
A new consumer watchdog will be looking out for you. The Consumer Financial Protection Bureau (CFPB) will regulate financial products and services, including mortgages, credit cards, student loans and debt collection. It may sound like just another government bureaucracy. But an agency focused on consumers is a big deal because existing financial regulators, scattered among a half-dozen agencies, have traditionally been focused more on the institutions they regulate than on the well-being of their customers.
Although housed within the Federal Reserve, the new bureau will be largely independent, with a dedicated budget and a director appointed by the President and confirmed by the Senate. But the Financial Stability Oversight Council -- the collection of regulators charged with heading off risks to the financial system as a whole -- gets to override CFPB rule-making. And lending by car dealers won a controversial exemption from oversight.
The new law also aims to make us savvier -- or at least to let us sound off when we’ve been scammed. It creates a new Office of Financial Literacy within the CFPB, with a toll-free hotline for consumer complaints.
You'll get more mortgage protections. In the old days, it was in the lender’s interest to make sure you could afford a mortgage. This legislation aims to permanently restore a vested interest, along the entire chain of mortgage brokers, loan originators and borrowers, in making sure the mortgage you get is the right one. (Conspicuously absent from the legislation is any resolution of the troubles at Fannie Mae and Freddie Mac, the secondary mortgage market behemoths that buy loans and repackage them to investors.)
The bill requires that lenders verify the income and assets of borrowers. It prohibits financial incentives for steering borrowers into more-expensive loans, and it bans prepayment penalties on all but the most basic, plain-vanilla mortgages. Even then, the penalties are limited in scope, and if you’re offered a loan with a prepayment penalty, you must also be offered an alternative without one (such penalties often trapped borrowers in unaffordable loans). If you choose a variable-rate loan, your lender must tell you the maximum you could end up paying. Riskier loans aren’t banned outright -- but lenders selling them off to investors must have “skin in the game,” in the form of a 5% ownership stake.
Within 90 days, the Dodd-Frank bill requires interim home-appraisal rules that will ensure appraiser independence while ironing out some of the snafus that have foiled sales under the current guidelines; an in-depth study of appraisal issues is due within a year. Also due within a year: a study of reverse-mortgage loans to determine whether stronger consumer protections, such as suitability standards, are necessary.
You will be able to access your credit score for free. Most folks know they can monitor their credit report by ordering one each year from the three big credit bureaus at AnnualCreditReport.com. And you’re entitled to a copy if you’ve been declined credit or been turned down for a job or for housing. The Dodd-Frank bill gives consumers access to their credit score if it negatively affects them in a financial transaction or hiring decision.
Maintaining your financial reputation is akin to running a race: The credit report gives you data points along the route but the score tells you how close you are to the finish line. The two together deliver a fuller financial picture. So, for example, if the terms of your credit-card agreements change for the worse because of your credit, you’ll get to see your score. But you don’t get a free peek unless you have a negative experience.
You may have to carry cash for small purchases like coffee. Having a $10 bill in your purse or your pocket will make more sense because merchants will be allowed to insist on a minimum purchase, up to $10 for now, for any payment by credit card.
Meanwhile, colleges (and federal agencies) will be allowed to set maximums for credit-card charges they accept. That could potentially limit big-ticket charges, such as tuition payments -- and the frequent-flier miles and other rewards such charges generate.
The Federal Reserve will also issue rules capping how much merchants must pay banks every time a debit card is swiped (only banks with more than $10 billion in assets would be subject to the rule and certain pre-paid cards are exempted). That could pave the way for retailers to offer discounts when you pay with a debit card -- but don’t hold your breath. Right now, merchants can offer discounts for paying cash, but few do. What we may see instead is a scaling back on debit-card rewards as banks become less inclined to lure consumers to cards that are less lucrative.
Private student loans will be reined in. Student loans that aren’t subsidized or backed by Uncle Sam have been referred to as the Wild West of student lending. Private loans often carry variable rates with no cap and lack the consumer safeguards that federal student loans provide, such as deferment options, forgiveness programs and affordable repayment plans. You can’t cancel them in the event of death or disability, and you can’t discharge them in bankruptcy.
Financial reform will bring private student loans from banks, as well as student loans from for-profit career colleges, under the oversight of the CFPB. The final bill doesn't include a proposal that would have required lenders to certify with a college that a prospective student borrower was eligible for a loan -- the intent being to give colleges the opportunity to counsel borrowers about other options.
A Private Education Loan Ombudsman within the CFPB will give students a central place to turn for help with private student loans.
Federal deposit insurance limits will get a boost. This bill makes permanent one legacy of the credit crisis that we’d like to keep: the increase in deposit insurance for banks, thrifts and credit unions to $250,000 per account, retroactive to January 1, 2008. Before the credit crisis, the limit was $100,000 per account.
Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.
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