October 2010

After months of debate, the Dodd–Frank Wall Street Reform and Consumer Protection Act is law — and a long one at that. At more than 2,300 pages, the law requires regulators to create some 240 new rules, conduct 68 studies and issue more than 20 periodic reports. All this will occur over time; in many cases, implementation dates and deadlines are unspecified.

Parts of the law will impact the products and services that are available to you; others are designed to improve the nation’s financial stability. Read on to learn about some of the law’s most important provisions.

Creation of a New Consumer Financial Protection Bureau.
The CFPB is expected to have expansive powers over financial products. As part of the Federal Reserve, which operates independently from the White House and Congress, the new bureau will enforce existing regulations and create new ones to protect consumers from hidden fees, abusive terms and deceptive practices by the financial services industry.

The CFPB will also serve as a centralized financial watchdog, combining consumer protection responsibilities now provided by other agencies. It will be responsible for examining and enforcing rules at all banks and credit unions with more than $10 billion in assets and all mortgage businesses, payday lenders, student lenders, debt collectors and consumer reporting agencies. (Smaller banks will be examined by their current regulators.) The bureau will offer a website and toll-free telephone number to collect complaints, which it will investigate. But the CFPB will not have prosecutorial powers; violations will be referred to the Justice Department.

The CFPB will create an Office of Financial Education to promote financial literacy through education campaigns, counseling and publishing information. An Office of Service Member Affairs will handle complaints from military personnel about financial abuse and exploitation. And a new Office of Financial Protection for Older Americans will promote financial literacy among seniors and monitor the certifications and designations of financial advisors who advise them.

Auto dealers that offer financing will not be regulated by this new agency; they will remain under the jurisdiction of the Federal Trade Commission. Likewise, securities transactions will remain under the Securities and Exchange Commission and derivatives will stay with the Commodity Futures Trading Commission.

Free Credit Scores.
Until now, credit reports have been free once per year, thanks to the Fair Credit Reporting Act. Now, you’ll be able to get your credit score for free if your credit card interest rate is raised, your credit limit lowered or a loan application denied.

New Mortgage Reform.
More than 200 pages of the law are dedicated “to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.” Lenders must now warn borrowers of the consequences of negative amortization loans, and first time homebuyers can only get an adjustable-rate mortgage if they first receive homeownership counseling from a HUD-certified agency. It’s also now illegal for lenders to steer borrowers with good credit into more expensive loans or lie to borrowers about their credit worthiness. When providing riskier loans, lenders will have to retain at least 5%. In the past, they were allowed to sell the entire loan to investors, immunizing themselves from risk if the borrower later defaulted. By being forced to retain some of the risk, Congress hopes lenders will be more careful in approving such loans. (Critics fear that the loans will become more expensive.) Finally, lenders will now be prohibited from offering loans with a prepayment penalty unless a similar loan without a prepayment penalty is also available.

Limits on Debit and Credit Card Fees.
The law limits the amount banks can charge retailers that accept cards. While this will lower the costs for retailers, it will also reduce the revenue banks receive, which may result in fewer rewards programs for card users.

Increase in FDIC Limits Made Permanent.
Bank deposit insurance protection was increased during the credit crisis from $100,000 to $250,000.This higher limit is now permanent.

Stockbrokers and Insurance Agents Must Meet the Fiduciary Standard.
Although the law does not require stockbrokers and insurance agents to register as Investment Advisors, the law requires the SEC to study the situation within six months and ultimately issue new rules requiring brokers and agents to serve their clients’ “best interests” — a standard they currently are not required to uphold.

No More “Regulator Shopping.” 
Because some regulators’ authority overlaps, banks have been known to file requests with what they consider to be the most lenient regulator. The law now stipulates who regulates what. Also, the Office of Thrift Supervision (which had oversight authority for AIG, Washington Mutual and IndyMac — all of which collapsed) is being eliminated.

New Financial Stability Oversight Council.
Ten regulators will join to form the council, which is charged with identifying risks to the nation’s financial stability. The council is to make it clear that the government will not shield shareholders or others when companies fail.

Stockholder Protection.
The SEC’s Office of the Investor Advocate will identify problems investors have with financial product providers and propose regulations to address them. Shareholders now have a nonbinding vote on executive compensation in cases of mergers or acquisitions and proxy access.

Ability to Avoid Future Taxpayer Rescues.
To protect the nation’s financial stability while reducing the risk that taxpayers must rescue failing companies, as occurred with AIG, Fannie Mae, Freddie Mac and dozens of banks, regulators now have the authority to take over and liquidate bank holding companies and nonbank financial firms, including insurance companies — similar to the powers that the FDIC has long had. Costs will be recouped by a fund administered by the FDIC and funded by financial companies with $50 billion in assets or more.

The Volcker Rule.
Named for former Chairman of the Federal Reserve Paul Volcker, who championed this idea, banks must increase the cash they maintain to cover possible losses. They also face restrictions on stock trading and the purchase of risky assets such as hedge funds and private equity funds. Derivative trading — which contributed to the financial crisis — is now more transparent, so it’s easier for regulators to see who owns which contract and thus verify they have sufficient reserves to cover potential losses.

It’s too early to tell how financial reform will ultimately affect the country. As the new rules, studies and reports come out, we’ll be sure to keep you updated on how they are likely to impact you.