What the New Financial Overhaul Bill Means to You
Opinions vary on the latest financial bill passed by congress last week. Some say it left a lot undone like controlling auto dealers who finance (a huge part of consumer finance) and banks under 10 billion in assets (which are mostly local banks). And then there’s the new Consumer Financial Protection Bureau that is tied to close to bank regulators and may be unduly influenced.
But there is some good news regardless of the detractors (right or wrong). Both investment firms and mortgage companies have several new requirements that should help both consumers and large private investment firms like pension plans and 401K investment managers.
Mortgage companies must now require people who make applications for mortgages to demonstrate income, credit history, and employment status and the financial institutions will have to verify. Financial institutions that provide mortgages will have to hold at least 5% of all transactions too. This means that they won’t be able to sell off all of the mortgages and therefore will be more prone to insure that the loans are not just an investment to be sold off with little risk.
Investment advisors of any type will have to also provide disclosures on what commissions or additional compensation they will receive on anything they recommend to consumers and investment mangers. Before this bill investors rarely knew if the company or agent was receiving income for their advice beyond the fees they charged for their services. The catch 22 here is that the Securities and Exchange Commission has a 6 months review period to judge whether the current rules in place provide enough protection so these new rules may not stick.
And on the credit side there are two points that directly affect credit transactions and records in the new financial bill. Retailers will have lower limits on the minimum amount of purchases that are required to use a credit or debit card. Right now there is no control and this new law requires them to limit the amount to $10.
The newly created Consumer Financial Protection Bureau will have the right to create new procedures and rules for financial institutions that loan money and mortgage companies. The bureau will have the right to ban certain financial products or services that it judges unsafe or presents to high a risk. Of course this is a very subjective area and it may face some serious hurdles in enforcement.
Consumers who apply for credit will get some new benefits too. Before this law if you applied for credit and were turned down the credit bureaus had to provide a free credit report. And consumers could also receive one free copy of their credit report each year fro each of the three larges Credit Bureaus. The problem with both of these scenarios is that this credit report did not include a credit score. And trying to figure out exactly what your credit report translates to your credit score was difficult for most consumers.
The new law requires the lender to also provide a free credit score. Theoretically this would make it easier for the consumer to take some corrective action to improve their credit score. Unfortunately this did apply to the credit bureaus with your free annual credit report that would have been much more helpful according to many experts.
So as usual this new Financial Overhaul has it’s good and bad points. Some say it’s not enough to stop the next financial meltdown but most agree it’s a step forward. Trying to eliminate the shady practices before they can occur is always difficult due to the complexity and broad financial activities. Remember that the Sarbanes Oxley Bill in 2002 was intended to stop companies like Enron from misrepresenting financial information and not 6 years later we got caught in the worst financial nightmare in 70 years.
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