Financial Reform Bill Summary – What it Means to Your Future. Free Credit Score, Bank Stocks and Consumer Protection Measures

[Updated] Approved! Congress and the President have approved the financial reform bill (detailed below) that would revamp the nation’s financial regulatory system. It will allow for the creation of a consumer financial protection bureau at the Federal Reserve, give regulators new powers to liquidate failing financial firms whose collapse would threaten the economy and create a council of financial regulators to monitor systemic risk. It is aimed at curbing risk-taking by Wall Street firms and lessening the impact of any future financial crisis.

Financial reform will continue to be clarified by the regulating bodies over the next couple of months and will post these updates when available. I encourage you to subscribe (free) via Email or RSS to get the latest news.

Congressional negotiators approved a sweeping overhaul of U.S. financial regulation reshaping oversight of Wall Street banks, brokers and investment firms. It contains new laws covering how derivatives will be traded, credit agencies regulated, investor rights and more credit card company reforms. Consumers and business will be significantly affected over the next few years by the financial reforms.

Obama today praised lawmakers for agreeing on what he called the “toughest” consumer reforms in history. “Credit card companies will no longer be able to mislead you, The new rules in the U.S. will be a model for safeguards that “can protect all nations.”

Here’s how some of the main provisions will impact your financial and investing future:

  • Banking stocks will not be able to generate outsized returns and high dividends as in the past because they can not take as much risk. Banks will be allowed to invest in private-equity and hedge funds, though they will be limited to providing no more than 3 percent of the fund’s capital. Banks also can’t invest more than 3 percent of their Tier 1 capital. The ban on propriety trading, in which a company bets its own money, may reduce profits. Goldman Sachs Group Inc., the most profitable firm in Wall Street history, has said proprietary trading generates about 10 percent of its annual revenue. The firm made $1.17 billion in 2009 from “principal investments,” which include stakes in companies and real estate, according to a company filing. To pay for the costs of the bill, negotiators agreed to assess a fee on banks with assets of more than $50 billion and hedge funds of more than $10 billion in assets to raise $19 billion over 10 years.

–  A Consumer Financial Protection Bureau will be created within the Federal Reserve to police banks and financial-services businesses for credit-card and mortgage-lending abuses. Responsibility for these areas is currently scattered across a variety of government agencies, and experts say that creating a single supervisor will help make financial products easier to understand and not take unfair advantage of borrowers. While the bureau will be housed at the Fed, it will have independent authority. Led by a director appointed by the president and confirmed by the Senate, the bureau will write consumer-protection rules for banks and other firms that offer financial services or products. It will enforce those rules for banks and credit unions with more than $10 billion in assets.It will also impose regulations prohibiting brokers and bankers from earnings bonuses based on the type of loan they sell, which would reduce the incentive to write higher-risk loans.

– Free Credit Scores. If you get turned down for a loan because of your credit score, or are offered an interest rate you deem too high, you would have the right to see the score your lender is working with, for free. Consumers may currently see their credit report, but don’t have access to their FICO score. The new provisions in this bill will help consumers understand whether their lenders’ concerns are legitimate.

  • Regulating $600 trillion derivatives and swaps market. Banks will be able to maintain their trading operations so long as they are used to hedge risk or trade interest rate or foreign exchange swaps, a victory for banks that were on the verge of losing the desks entirely. The proposal will force a fundamental shift in the industry, giving federally insured banks up to two years to send instruments such as un-cleared credit default swaps off to a separately capitalized subsidiary.  Beyond the swaps-desk provision, the Senate legislation will push most over-the-counter derivatives through third-party clearinghouses and onto regulated exchanges or similar electronic systems, a measure that will make it easier for the market and regulators to track the trades. It will mean higher margin costs on some transactions.

–  Auto Dealers Excluded. The bill exempts auto dealers from regulation by the new consumer bureau, even though they originate nearly 80% of auto loans. But it does make it easier for the Federal Trade Commission to crack down on abuses in auto lending, payday lending and check cashing. Regulation by the new consumer protection bureau would have driven up the costs of auto loans.

  •  Swipe Fee on Debit Cards limited. The Federal Reserve will get authority to limit interchange, or “swipe” fees, that merchants pay for each debit-card transaction. The fees for debit cards average 1.6%; credit card swipe fees average more than 2%. Under the new law, the Federal Reserve can cap the fees on debit cards (but not credit cards) to what is “reasonable and proportional to the actual cost incurred. The provision will take effect a year after enactment. Retailers will reap the benefits of this change by being be allowed to give discounts for cash purchases, meaning you might want to start carrying cash more often. This could cost banks billions of dollars each year, prompting them to move away from offering products like free checking.

The bill would be paid in part with $11 billion generated by ending the unpopular Troubled Asset Relief Program, the $700 billion bank bailout created in the fall of 2008 at the height of the financial scare. It would cover additional costs by increasing premium rates paid by commercial banks to the Federal Deposit Insurance Corp. to insure bank deposits. The increase would not affect banks with assets under $10 billion.

While the legislation addressed the causes of the last meltdown — and more — it left for later a restructuring of government-related mortgage giants Fannie Mae and Freddie Mac. Time and again, Republicans tried to shift the debate to the mortgage purchasing firms, to no avail.

Reference sources: Bloomberg, USA today

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9 thoughts on “Financial Reform Bill Summary – What it Means to Your Future. Free Credit Score, Bank Stocks and Consumer Protection Measures”

  1. The following information was released by Georgia Senator Johnny Isakson:

    This rush to judgment on the financial regulatory bill is wrong. It is wrong because it excludes Freddie Mac and Fannie Mae from any scrutiny or increased regulation. It is critical that we have all the players under scrutiny and all the players under regulation, not just trying to create a feel-good system where we reregulate those who are already regulated, saying we are doing something about the conditions in the market when, in fact, we are raising the cost of doing business, lowering the ability for banks and lending institutions to extend capital and, in fact, in some ways contributing to a continuation of the recession we experience today in America.

    We find ourselves in the position of getting ready to pass a financial reform bill knowing that we are going to have a forensic audit of our financial system done by the Financial Crisis Inquiry Commission, which we unanimously funded and demanded, in six months. It’s like a doctor doing surgery before he does a diagnosis. It does not make a lot of sense.

  2. The Dodd/Frank bill, just like everything else this administration has signed in to law, will be heralded as a great accomplishment by the president in front of cameras….. However, just like Obamacare,,,once the damn bill is read most people will be in agreement when they say, “it ain’t worth the time it took to type it”.

    I’m sick of hearing the democrats on The Hill say there wasn’t enough time to address Fannie and Freddie in the bill…….. It’s because of the majorities refusal to attack those 2 dinosaurs the resulting bill has no real teeth.

  3. We’re about to receive legislation that could better be entitled “The Lawyers’ and Lobbyists’ Full Employment Act.” The bill doesn’t do what it set out to accomplish. The most important goal of this bill was to fix the regulatory regime that permitted—and even fostered—the last crisis. Viewed from that prism, the ugly truth is this bill will make our system more vulnerable, not less. What was, and is still needed, is a regulatory regime with better flexibility that is more nimble, and able to spot potentially damaging trends before those trends become full-blown crises. Instead, what we have is a bill that makes government less nimble, and more ponderous. The systemic regulator—the FSOC—can override decisions of individual regulators. The Consumer Financial Protection Agency can bog down any other agency by encumbering agency rules or policies. And worst of all, the bill doesn’t provide the transparency so desperately needed for new products, new services, and new activities. In short, the bill addresses last year’s crisis, but does nothing to prevent the next crisis we’ll surely confront in short order.

    In other words: Congress has labored mightily, and brought forth a mouse

  4. Harry Reid is in a great rush to pass this 2300 page Financial Reform legislation. Some of the contents have been leaked to the press. One good thing, if it is actually in the bill, is that borrowers will have to prove their ability to repay, which was not done in the recent bubble of home loans that were granted to individuals who normally would not have qualified for their mortgage loans.

    However the bill allows federal moniters one to two years to write the new rules which are not contained in the bill nor is a dead line date included. In fact the bill does direct regulators and other government agencies to undertake more than 60 studies that will determine if or how the new rules will br put in place.

    The only thing for certain is that the number of individuals to do all this work will only increase the size of the federal payrole.

    Just another case of “Pass the bill, let the President sign iit into law, and then we will find out what is in it.”

    I wonder just how many Democrats and Republicans manage their own family funds that way – “Buy whatever you want and then we will see if we can afford it and how can we pay for it?” I sure as hell don’t and I hope that none of you do either.

    God protect us from ourselves.

  5. Here is a summary of the Bill from Financial Services house committee for those that want the official details. Once signed into law, this package of reforms will work together to address the myriad causes – from predatory lending to unregulated derivatives – that led to last year’s meltdown. The Wall Street Reform and Consumer Protection Act includes the following major provisions:

    Consumer Protections: Creates the Consumer Financial Protection Agency (CFPA),
    a new, independent federal agency solely devoted to protecting Americans from
    unfair and abusive financial products and services.

    Financial Stability Council: Creates an inter-agency oversight council that will
    identify and regulate financial firms that are so large, interconnected, or risky that
    their collapse would put the entire financial system at risk. These systemically risky
    firms will be subject to heightened oversight, standards, and regulation.

    Dissolution Authority and Ending “Too Big to Fail”: Establishes an orderly
    process for dismantling large, failing financial institutions like AIG or Lehman
    Brothers in a way that ends bailouts, protects taxpayers, and prevents contagion to the
    rest of the financial system.

    Executive Compensation: Gives shareholders a “say on pay” – an advisory vote on
    pay practices including executive compensation and golden parachutes. It also
    enables regulators to ban inappropriate or imprudently risky compensation practices,
    and it requires financial firms to disclose any compensation structures that include
    incentive-based elements.

    Investor Protections: Strengthens the SEC’s powers so that it can better protect
    investors and regulate the nation’s securities markets. It responds to the failures to
    detect the Madoff and Stanford Financial frauds by ordering a study of the entire
    securities industry that will identify needed reforms and force the SEC and other
    entities to further improve investor protection.

    Regulation of Derivatives: Regulates, for the first time ever, the over-the-counter
    (OTC) derivatives marketplace. Under the bill, all standardized swap transactions
    between dealers and “major swap participants” would have to be cleared and traded
    on an exchange or electronic platform. The bill defines a major swap participant as
    anyone that maintains a substantial net position in swaps, exclusive of hedging for
    commercial risk, or whose positions create such significant exposure to others that it
    requires monitoring.

    Mortgage Reform and Anti-Predatory Lending:
    Would incorporate the tough
    mortgage reform and anti-predatory lending bill the House passed earlier this year.
    The legislation outlaws many of the egregious industry practices that marked the
    subprime lending boom, and it would ensure that mortgage lenders make loans that
    benefit the consumer. It would establish a simple standard for all home loans:
    institutions must ensure that borrowers can repay the loans they are sold.

    Reform of Credit Rating Agencies: Addresses the role that credit rating agencies
    played in the economic crisis, and takes strong steps to reduce conflicts of interest,
    reduce market reliance on credit rating agencies, and impose a liability standard on
    the agencies.

    Hedge Fund, Private Equity and Private Pools of Capital Registration: Fills a
    regulatory hole that allows hedge funds and their advisors to escape any and all
    regulation. This bill requires almost all advisers to private pools of capital to register
    with the SEC, and they will be subject to systemic risk regulation by the Financial
    Stability regulator.

    Office of Insurance: Creates a Federal Insurance Office that will monitor all aspects
    of the insurance industry, including identifying issues or gaps in the regulation of
    insurers that could contribute to a systemic crisis and undermine the entire financial

    Source : House Financial Services Committee

  6. More government intervention… Absolutely fantastic.

    Excuse me while I go back to hoarding my metals away again. D:

  7. So Visa and Mastercard are getting another get out of jail free card. Easy credit is a big part of the problem today. If a person makes $50,000 in one year and they have a credit card already with a $20,000 limit, which is $2000 from being maxed out, why on earth would a company issue another credit card with a $30K limit AND expect them to be able to pay the bill? Why does a company send a 16 year old a credit card application and then ISSUE the darn thing?

    When are the credit card companies going to be held responsible for their participation in the financial meltdown through “predatory loans”?

    It is all very frustrating and the most frustrating part is Washington is STILL letting these companies skate and continue to rape consumers while their lobbyists are living high on the hog in Morocco.

    No I am not letting the consumer off the hook either. If they were dumb enough to continue to apply for and receive credit cards and live above their means then they are surely to blame also. Unfortunately there is a large group of adults who have proven themselves to be irresponsible and now we are all paying for it.

    To those people who have been forced into living off the credit cards by the banks this statement is not directed to you. I have some friends who have been put in the same position.

  8. This bill will do little to change financial institutions and better our economy. Banks will find new ways to get around these regulations; they always do. If you are in the 95% who have your mortgage sold it is no consolation that 5% of the folks can renegotiate with the originator of the loan. Fewer people will be able to get mortgages, which is fine with banks as they can always come up with other ways to make money. And if you think Congress or regulators are going to utilize their “discretionary” rights to control banks you also believe in Santa…they haven’t in the past so why now…remember the banks had a huge hand in writing this bill. Their stock prices soared after the passage of the bill so I guess they loved it….America…the answer is campaign finance reform and term limits so we can get legislators who will care about us and their their corporate contributors.

  9. More government fiddling with the free market. We pay our bills on time, get free checking, cash back on credit cards (which we don’t carry a balance). Now to “protect” consumers who are poor savers and/or manage their money poorly, good money managers will see their costs go up. Welcome to the nanny state.


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