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After a year of negotiations, the financial reform bill, which by some has been touted as the greatest financial overhaul since the Great Depression, last week passed the U.S. Senate, and now heads to the White House to be signed into law.
The new legislation has received kudos from consumer groups, mainly because it will establish a watchdog agency to ensure greater fairness and transparency in consumer lending products, particularly credit cards and mortgages.
The more than 2,000 page bill is a keystone of President Barack Obama’s legislative agenda, seeking to put regulations in place to avoid a repeat of the near-financial meltdown triggered by the subprime mortgage and derivative crises of 2008. The financial overhaul introduces tighter regulations over derivatives, gives the Federal Reserve greater powers over financial firms, and gives regulators authority to intervene and dismantle ailing financial companies.
While many of the bill’s provisions protect the economy by addressing larger regulatory concerns, many aspects of the new laws will directly affect the average consumer. The new consumer watchdog agency, a.k.a. the Bureau of Consumer Financial Protection will police credit cards, mortgages, and other consumer lending products, and will have the powers to write and enforce rules to protect consumers against deceptive or abusive lending practices. While the original House version of the bill established the Bureau as an independent agency, the final bill establishes the Bureau of Consumer Financial Protection as an agency within the Federal Reserve.
In addition to Consumer Financial Protection bureau, the new bill will make it easier for consumers to obtain a copy of their credit scores for free. If the law passes, consumers who are turned down for a loan or experience other “adverse action” (raised insurance rates, etc.) will be entitled to receive a free copy of the credit score their lender based that decision on.
Consumers are currently entitled to one free credit report per year from each of the three major credit bureaus (available through AnnualCreditReport.com). However, the free annual credit reports do not include FICO scores—a crucial piece of information needed to evaluate your eligibility for credit cards, mortgages, and other types of loans. So far, the only way to find out one’s credit score has been to pay for it.
Another component of the bill addresses consumer-merchant transactions. Under the bill, small, independent merchants will now be entitled to require a minimum purchase amount of up to $10 for credit card payments. On the flip side, merchants will also be allowed to offer discounts to customers who choose to pay in cash, by check, or even debit card. However, merchants will not be allowed to offer a discount favoring one card issuer over another.
The new bill also includes rules that would require interchange fees on debit cards, i.e. the money banks charge merchants for processing debit card transactions, to be “reasonable and proportional.” It will be up to the Federal Reserve board in the months that come to decide exactly what constitutes “reasonable and proportional.” Right now most fees hover between one to three percent of the transaction amount.
It remains to be seen whether a reduction in debit card merchant fees would benefit consumers. The National Retail Foundation has indicated that merchants may pass on savings to customers in the form of lower prices. Interchange fee-restrictions would not apply to debit cards issued by banks and credit unions with deposits under $10 billion.
