What Regulatory Reform Means to You

Other than perhaps health care reform, financial reform has been one of the most bitterly contested pieces of legislation to hit capitol hill since the Democrats seized power in 2008.

While the final bill is expected to be on the President’s desk prior to the July 4th recess, it’s not too early to check out the key provisions and see which were cut, which stayed in and most important: exactly how changes on Wall Street will effect Main Street.

Free Credit Scores

A law passed in 2003 allows all consumers to view their credit history once a year from each of the three major credit reporting bureaus by going to AnnualCreditReport.com. The new law will extend this privilege to credit scores as well, but only for consumers who are turned down for a loan or if they’re offered a loan at a less-than-favorable rate. You’ll also have the right to a credit score if it results in an “adverse action” – for example, getting a higher insurance rate or getting turned down for a job.

My Take: Not good enough. For years credit scores have been used by employers to judge job applicants, by insurance companies to set rates and by landlords and lenders to judge credit worthiness. As I’ve said many times, charging people to see that score is nothing less than a rip-off.

Debit Card Fees

Retailers argued that the fees they pay to accept credit and debit cards, known as interchange or “swipe” fees, were way too high. Lawmakers agreed – sort of. The new law will allow the Federal Reserve to consider the actual cost of processing debit card transactions, then set rate ceilings. Credit cards, however, which typically cost the merchant more to accept than debit cards, were left unregulated.

My Take: Every year big banks, along with Visa and MasterCard earn up to $50 billion on swipe fees by charging rates higher than almost any other western country: see this recent story. In getting this portion of the bill passed, the retail industry argued that lowering them would allow them to pass the savings on to consumers. They got their way – yet to be seen is whether those savings will go to their bottom lines or ours.

Derivatives Regulation

I recently wrote about what derivatives are and what effect regulation would have. The new bill will force most of these complex contracts onto exchanges, which will increase transparency and therefore help prevent another AIG or Lehman Brothers. Some contracts will still be allowed to trade off-exchange, however.

My Take: Probably a good compromise. The banks can still make money on derivatives (good for investors who own bank stocks – like me), and the ludicrous bets that nearly brought down our financial system will be more difficult to make. Keep in mind, however, that what really brings down financial systems isn’t derivatives. It’s a combination of greed and stupidity. Neither were outlawed by the new bill.

Consumer Protection Agency

A new and independent Consumer Financial Protection Bureau will be formed inside the Federal Reserve. Bank fees will pay for it, and it has the power to oversee virtually any type of consumer loan, from mortgages to pay-day loans. Conspicuous by its absence, however, is the ability of this new agency to oversee financing provided by car dealers.

My take: Car dealers were able to successfully argue that they don’t often directly provide financing – they send that business to banks and thus shouldn’t be overseen by this new agency. Hogwash. Car dealers have been one of the largest sources of consumer complaints for decades, and should have been included in the oversight. As for the agency itself, it could be a Godsend or just another red-tape factory. The concept is good – the devil is in the execution.

Too Big to Fail

The bill creates an oversight council of financial regulators charged with overseeing “the big picture” by examining key players in the financial system. It also allows the FDIC to take over any financial firm in danger of taking down the entire system the same way it now can take over failing banks. The proposed fund to be used to unwind failing institutions and paid for by banks didn’t make it into the final bill. Instead, banks would be taxed after the fact to reimburse the government should a failure occur. The bill also gives regulators the power to break up institutions it deems dangerously big, but only if there’s proof the company is large enough to potentially create systemic risk.

My Take: While lacking some of the teeth and the funding it contained in earlier incarnations, this provision is better than what we had before – basically nothing. If it does its job, these new provisions should reduce systemic risk.

Bottom line?

If you’re a consumer advocate, the bill probably doesn’t go far enough to protect consumers. If you hate big government, it probably goes too far. Since neither side can claim victory, it’s probably a decent compromise.

But those are just the broad strokes – I’ll be reporting on more details in the days ahead as the bill becomes closer to becoming law in the days ahead. Stay tuned.