Now that President Barack Obama has signed into law the biggest overhaul of the banking industry since the Great Depression, many Americans are wondering exactly how financial reform will impact them.
Officially called The Dodd-Frank Wall Street Reform and Consumer Protection Act
, the far-reaching implications of the 2,300-page law will take many months, even years, to be fully felt. Moreover, since specific rules must still be written, observers fear that loopholes
and carefully-worded fine print could muddy various elements of financial reform.
Despite these uncertainties, there are some clear ways that financial reform will impact you and your wallet. Here are seven of them:Your Consumer Complaints
Upset with a debt-settlement agency or feeling ripped off by your mortgage lender? In as little as six months, maybe as long as a year and a half from now, you'll have a pit bull in your corner.
One of the most important changes to be ushered in by financial reform is the creation of a Consumer Financial Protection Bureau (CFPB). This watchdog agency, likely to be headed by the highly-regarded consumer advocate Elizabeth Warren
, will be charged with safeguarding the public from shady business practices, predatory lending and abusive financial products. The bureau will also collect consumer complaints and monitor them, providing regular reports to Congress.
Unlike some regulatory agencies, the CFPB won't be all bark and no bite. Armed with sweeping authority and an estimated $500 million budget
, this consumer advocacy powerhouse will pack a strong punch. Housed within the Federal Reserve, the CFPB will be an independent body that draws its funding from the Fed, not Congress. It will have the authority to write and enforce policies impacting virtually every area of consumer lending.
The agency will also likely reduce the mounds of paperwork and fine print contained in most financial agreements. In a recent article in the Boston Globe
, Warren said the CFPB should make financial disclosures to consumers shorter and clearer. "I would like to see a world with two-page mortgage disclosures, two-page credit card agreements and two-page overdraft contracts," she told the Globe
Because the Consumer Protection bureau will have broad powers to oversee an array of financial products and services, everything from credit counseling and payday loans to mortgages and credit cards will come under its jurisdiction. Even an ombudsman for private education loans will be appointed to help borrowers resolve complaints with college lenders. (An ombudsman for federal student loans
already exists within the U.S. Department of Education.)Your Home
Even before financial reform has been implemented, it is "already becoming tougher and tougher for an average person to get a home loan," says Ray Kuplaste, sales manager at United Capital Lenders
in Southampton, Pennsylvania.
Though mortgages will become harder to get, they'll be cheaper in many ways too. For example, the new legislation requires lenders to fully document a home buyer's income – preferably with tax records from the IRS. That means no more "stated-income" loans or fudging about how much money you make, a common practice during the housing boom.
Your Credit Scores
One year after President Obama signs the Dodd-Frank bill, you'll be eligible to get a free copy of your credit score if you suffer any "adverse" decision by an institution, such as getting rejected for a credit card or loan, denied insurance, or turned down for a job because of your credit rating.
Kenneth Lin, founder and CEO of CreditKarma.com
, which already gives out free credit scores to consumers, applauded this area of financial reform, but he expressed reservations about another credit-related aspect of the new regulations.
Under the law, the Consumer Protection bureau will study credit scores and issue a report on whether scores sold to consumers differ dramatically from those purchased by lenders, insurers and other businesses. The bureau will weigh in on whether such discrepancies hurt consumers – something Lin says will be tricky at best.
"In concept, it's a great idea," he says. "But to actually create legislation that discloses this complex (scoring) system, or discloses winners and losers, is going to prove challenging."
Lin questions, for instance, whether regulators will adopt a "preferred" credit score. "If so, will it be the FICO
score, the VantageScore
created by the credit bureaus, Experian's Plus
score, or some other score?"Your Investments
Under financial reform, the Securities and Exchange Commission (SEC) will ramp up its efforts. The SEC has already announced plans to hire 800 new staffers
and create three new offices
to meet the agency's new responsibilities.
One office will oversee large financial institutions, regulating swaps, derivatives and other complex Wall Street products. Another SEC office will better monitor asset-backed securities, like the toxic mortgages sold by Wall Street firms during the subprime meltdown. A final office will review newly-created Wall Street securities and make sure adequate investor protections and disclosures are in place.
While much of the SEC's focus will be on corporations, three key initiatives target individual investors, earning the bill praise from the Consumer Federation of America
. First is the appointment of an "Investor Advocate" within the SEC – a high-profile position intended to reinforce that the agency's mission is to put the public's interest above that of Wall Street.
Additionally, the Consumer Protection bureau will review the current practice of mandatory arbitration on Wall Street. In 2009, complaints lodged with the Financial Industry Regulatory Authority
(FINRA) -- the brokerage industry's self-regulatory organization which handles investment disputes -- rose 43% over 2008 levels. Yet investors won just 45% of all complaints against brokers last year, FINRA statistics show
. If the CFPB deems mandatory arbitration unfair, the bureau can limit or ban it, which could allow spurned investors to sue in court when they feel wronged by their stockbrokers.
Lastly, the SEC will have the power to mandate that your stockbroker serve as a fiduciary, acting solely in your best interest, just as financial advisers do. So despite criticisms of financial reform by former SEC Chairman Harvey Pitt
, a more investor-friendly SEC is certain to emerge.Your Financial Education
Much attention has been paid to the fact that the financial reform bill will create a national Office of Financial Literacy. In reality, though, there will be multiple new offices – all under the Consumer Financial Protection Bureau – whose goals are to boost your money-management knowledge.
The purpose of the Financial Literacy office will be to teach all Americans about saving money, credit and loans, liens and fees. Meanwhile, two other offices will focus specifically on educating and helping two segments of the public who often get scammed financially: older Americans aged 62 and older, and members of the military and their families.
Beyond these new offices, woven throughout financial reform are other educational safeguards. For instance, if you finance your home with an Adjustable Rate Mortgage, or ARM, your lender must also give you at least six months' notice before the first interest-rate reset, telling you how much your new payment is likely to be. Additionally, if you're a first-time home buyer and you want to use an option ARM – a home loan that can lead to negative amortization – you must first receive housing counseling from a HUD-certified agency.
Your Retail Shopping
This holiday season or the next, when you're gift-shopping at your favorite retailer, don't be surprised if you're offered a discount for turning over a $20 bill, instead of your well-worn Visa card. That's because the financial reform bill allows merchants to give you a discount on your purchase, if you pay with cash, a check or a debit card – as opposed to a credit card.
What's more, the new law will allow retailers to impose a $10 minimum
on credit card purchases, forcing consumers to stop using plastic for small purchases like that morning latte from Starbucks.
Paying cash for relatively low-cost items may be an inconvenience if you're used to whipping out a credit card for everything. In the long run, however, this switch may save you big bucks by not allowing you to rack up unnecessary debt.
Consumer advocates expect that many tweaks to financial reform will occur during the rule-making process. But they're hoping that the spirit of the overhaul envisioned by Congress will remain intact. They're also hoping that changes will come sooner, rather than later.
"Even with the best of intentions, maybe everything will be put in place in two years," says Sherry, of Consumer Action. Then she quickly adds: "But I think that's being optimistic."