Tom LeFevre, a business-law attorney with the Gainesville, Ga. law firm Stewart Melvin & Frost, helps break down this very complicated piece of legislation and what it means to us as average consumers.
Question: From your vantage point of reviewing legal contracts and documents on an everyday basis, just how complicated is this new financial reform law?
Tom: Dodd-Frank Wall Street Reform and Consumer Protection Act is highly expansive and far-reaching. It is the most ambitious rewrite of financial regulation since the Great Depression of the 1930s. The new law is 390,000 words which is roughly half the size of the King James Bible.
As a business attorney, I have reviewed the basic components of this legislation for its impact on my clients but don’t profess to have read every word. My understanding is that this law leaves many areas open to interpretation and further refinement. It will be many years before we can assess the true impact.
Question: What is the goal of this new legislation?
Tom: In a nutshell, the legislation establishes new rules to allow the federal government to play a stronger watchdog role in its oversight of financial markets and the practices of individual banks. It also gives the government greater power to intervene when a bank is on the verge of collapse.
I don’t want to get into politics, but basically the Democrats that pushed for this legislation see it as necessary to rein in Wall Street abuses. While the Republicans say the legislation gives too much power to Washington and could stifle economic growth and competition.
Question: Regardless of what anyone thinks of the new law, it does impact virtually every sector of our economy. What are some of the highlights?
Tom: The biggest change is the creation of the new federal Consumer Financial Protection Bureau. This new watchdog agency will have the power to write and enforce regulations covering everything from mortgages, credit cards, gift cards, student loans, payday loans and many other financial products. The intent is to protect consumers from some of the abusive financial practices that over-extended so many borrowers in this recession.
Question: What is the law’s impact on mortgage loans?
Tom: Lenders now required by law to make sure that borrowers can afford their monthly mortgage payments – along with insurance and taxes. (Sounds like common sense. But lending practices had become very lenient during the housing boom). Pre-payment penalties on mortgages will be limited or prohibited.
Mortgage borrowers should also benefit from lower fees. The new law caps mortgage fees, including points, at 3 percent of the loan amount. You will see borrowing options restricted to more “plain vanilla” loans such as the traditional 30-year fixed mortgage. It will be much more difficult to qualify for riskier mortgages such as interest-only loans.
Lenders can no longer pay a commission to mortgage brokers based on a loan’s interest rate. If a bank rejects your application for a mortgage loan, the bank will now be required to show you the actual credit score rating that it used to turn you down. And they are to provide it to you for free.
Question: How does the new financial reform law impact credit cards?
Tom: The credit card fees charged to retailers will now be limited. The hope is that lower “swipe fees” (transaction charges) will allow store merchants to pass along the savings to shoppers. Retailers also are allowed to offer consumers a discount for using cash, a check or a debit card, instead of a credit card. If you’re used to using your credit card for virtually every little expense, such as a $2 cup of coffee, you may need to start carrying cash. The new law allows retailers to require a minimum purchase with a debit or credit card. In some cases, retailers have been prohibited under their card association rules from setting these minimums, which cut into their sales revenues.
Easy-to-read credit card agreements will now be required in order to help consumers better assess cost and risk when they apply for a credit card. Like the banks, credit card companies also will be required to provide you with a free copy of the credit score that was used to take adverse action against you – such as raising your card’s interest rate.
Question: What about the banking industry?
Tom: You’ll remember during the early days of the financial crisis that Congress temporarily raised the FDIC limit from $100,000 to $250,000 to re-assure and protect savers from a rash of bank failures that continues to this day. The financial reform act makes that change permanent.
Question: We know that the financial reform law regulates a lot of the practices of big banks and investment firms. How are local community banks impacted?
Tom: For the most part, banks with under $10 billion in deposits are exempt from direct oversight by the new Consumer bureau, though they still have to follow the new rules. And there are an estimated 5,000 pages of new regulations coming out that community banks will have to digest, review and follow. Community banks also are exempt from caps on bank debit card fees that the big banks must follow. But the Community Bankers Association is still predicting that small banks will be affected by competitive price pressures from the larger banks, such that the community banks are still expecting to see their income from debit card transaction fees reduced by as much as half.
Community bankers seem to be concerned that all the new regulations will require much more reporting on their behalf, which will translate into less income. Products like free checking, for example, may become a thing of the past if these new regulations end up costing the smaller banks too much.