Inside the comprehensive financial overhaul bill approved by Congress and soon to be signed into law by President Barack Obama is a myriad of measures aimed at protecting consumers that could impact everyday lives in a variety of ways.
We walked you through the major structure of the Dodd-Frank Wall Street Reform and Consumer Protection Act, HR 4173, in this article last week. It clearly has intent to change practices on Wall Street and in the nation’s financial system, but it also has reforms aimed at Main Street, or everyday consumers and businesses.
For homeowners, credit and debit card users and small businesses, the Dodd-Frank bill could result in significant adjustments. Some changes are spelled out in the all-encompassing measure and some changes will only be instituted after regulations to implement the bill are completed.
In a combination of theory and reality, here is how the financial overhaul bill could impact businesses and shoppers on Main Street.
MORTGAGES
Mortgage reform is a major intent of the Dodd-Frank measure as the meltdown in the housing industry is largely blamed for the nation’s financial collapse.
The new law stipulates that mortgage broker commissions can no longer be based on the interest rate for a home loan, a move designed to strip incentives for pushing consumers into riskier mortgages. Dodd-Frank ties broker compensation to the principal amount of the loan not the interest.
Mortgage brokers are understandably opposed to this aspect of the bill. While admitting that the high-interest provisions will probably root out bad apples in the industry, they also complain that it takes away incentives to steer homebuyers into low-interest products because it won’t affect the brokers’ bottom line.
The bill does eliminate prepayment penalties for many loans, particularly ones with large balloon payments. For traditional 30-year, fixed-rate loans, penalties would be limited to the first three years of the loan.
Also, the new law pushes lenders to be more diligent on a homebuyer’s ability to pay a mortgage. While some of this reform has happened naturally, Dodd-Frank spells out that all of the payments, insurance, taxes and assessments can be afforded by buyers under terms of their loans.
The law expressly prohibits "no-doc" loans and, within two years, it will require government regulators to develop new, simpler mortgage loan documents aimed at clarifying the process and paperwork that homebuyers face when closing their home loans.
CREDIT AND DEBIT CARDS
Dodd-Frank empowers the Federal Reserve Bank to examine "interchange fees" or "swipe fees," which are fees banks and credit card companies charge retailers when consumers pay with debit cards. It’s a lucrative non-interest income generator for financial companies, but small businesses have complained that it "nickels and dimes" them into higher costs for goods and services or eats into their profits.
Changes to this swipe fee system, which will come after the Feds determine what is "reasonable and proportional," could transform this multi-billion dollar area of commerce. It could also alter debit card reward programs or result in other banking fees to make up that lost income.
Debit cards issued by financial institutions with less than $10 billion in deposits are apparently exempt from the rule as are prepaid debit cards used by government agencies for public benefits.
The bill could also allow a retailer to set a minimum purchase before they will accept a credit or debit card purchase, which could affect your next trip to Starbucks, McDonald’s or your local convenience store.
Small businesses are generally happy with these provisions of the new law as it could empower them against big banks and credit card companies that largely dictate business terms currently.
CONSUMER LOANS, EDUCATION
The newly created consumer watchdog agency, the Consumer Financial Protection Bureau, will have broad authority to investigate and summon information from financial institutions on products ranging from mortgages and credit cards to a variety of consumer loans.
There were exemptions brought into this arm of the bill for the auto and insurance industries – two powerful lobbying groups that argued they were not responsible for the financial collapse and shouldn’t have to play under different rules.
They won that argument.
The new consumer bureau, which will fold divisions of other regulatory agencies under its umbrella, will have a lot of leeway to investigate allegations of consumer fraud in many arenas. Armed with a $500 million budget, it is charged with being up and running in less than 18 months.
The bureau will collect and monitor consumer complaints and report their findings to Congress on a regular basis.
Opponents from the left and right are dissatisfied with many aspects of the CFPB. Some claim that their oversight authority doesn’t go far enough and exempts too many industries. Others contend that their regulation is going to tighten credit even further and choke commerce.
The bureau must also establish an Office of Financial Literacy, which will be charged with educating Americans about their personal finances.