Consumers have gained a pair of major victories in the financial regulation overhaul and may end up saving substantial amounts of money on everything from debit cards to mortgages.
A Congressional conference committee that is drafting a compromise financial regulatory plan has agreed on two key points -- creating an independent consumer financial protection bureau and limiting fees banks charge merchants for processing debit-card transactions. The agreement came despite fearsome opposition by the financial services industry and represents a clear achievement for consumer advocates. The deals must still be approved by Congress.
"Despite the efforts of every powerful interest in America, we won and they lost," says Ed Mierzwinski, director of the consumer program U.S. PIRG, a federation of state public interest research groups. "Now they're trying to weaken it wherever they can. But they can't kill it, and that's a major victory for consumers."
Young Soldiers Vulnerable to Auto Loan Abuses
The new Consumer Financial Protection Bureau will have an independent director appointed by the President and its own budget -- but will be headquartered at the Federal Reserve under the compromise reached Tuesday night.
It will have the ability to investigate problems, set the rules for any financial product and enforce those rules. It will take over consumer oversight from the Federal Reserve and a number of other agencies, which were blamed for failing to protect consumers against widespread abuses in the sale of mortgage products during the recent housing boom.
"If only we had had this a couple of years ago, maybe we wouldn't be in the situation we're in now with all these toxic mortgages," says Susan Weinstock, financial reform campaign director at the Consumer Federation of America.
Two contentious points remain to be resolved before the legislation can be agreed. The major concern is a special exemption in the proposed bill for car dealers who give credit to consumers. The Pentagon had requested consumer protection on auto loans because young soldiers are frequently the target of abusive loan practices at car dealerships.
The other key point still being debated is an amendment by Sen. Olympia Snowe, R.-Maine, which would require the bureau to get the views of a committee of small businesses that might be affected before new rules are drafted. "Payday lenders, for example, would get to look at proposed rules before they go public and can hold them up," says Weinstock. "That's very problematic."
Swipe Fee Reduction a Win
When asked for comment on the compromise, the U.S. Chamber of Commerce provided a letter it had sent to the committee, which said in part: "The Chamber remains strongly opposed to the creation of a new regulator with unchecked and unprecedented powers that unwisely separates the regulation of financial products from the safety and soundness of the institutions that offers them."
The other major consumer victory was the adoption of the amendment proposed by Sen. Richard Durbin, D-Ill., which calls for a substantial reduction in the fees merchants are charged for processing debit-card transactions. Banks are major losers with the proposed rule because they currently receive an estimated $48 billion a year in the fees.
Previously, banks and credit-card processing companies took 2 cents of every dollar charged for the processing fee. Under the new legislation, the Federal Reserve will now determine "fair and proportional" fees based on how much the transaction actually costs the bank. That's likely to mean a flat rate replaces the current percentage of the charge.
"The Durbin amendment, even as modified, will help stop unfair practices at bank networks that lead to higher merchant costs," says Mierzwinski. "Those higher merchant costs mean everybody pays more at the store and at the pump. Transparency and competition will ultimately lower the cost to merchants."
The Durbin bill also opens up the market to competition by allowing merchants to offer discounts for consumers using cash or debit cards rather than credit cards. Both options had been prohibited by the card networks.
Exemptions and Amendments
Republicans forced the adoption of a number of amendments before agreeing to the package. The card networks that operate the systems, Visa and Mastercharge, were exempted from the law, so their network fees will not be subject to the fair and proportional rules. Only the "interchange" fee going to the consumers' and merchants' banks will be limited. The bank fees are the bulk of the $48 billion spent.
It also exempts federal, state and local governments, which now use debit and prepaid cards for paying benefits such as social security and welfare. Prepaid debit cards used by people without bank accounts are also excluded from the legislation. Without those exemptions, banks would have refused to process the cards.