Financial Regulatory Reform to Provide Consumer Protections

Learn how a new federal law provides better protection over consumer credit and lending practices, and what it all means for you.

Two years ago, Americans witnessed a financial collapse that almost reached the depths of the Great Depression. Many businesses closed their doors, banks failed and thousands of people lost their jobs. In some cases, people even lost their homes because they couldn't afford to make payments on their ill-conceived mortgage loans.

But in July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Otherwise known as Financial Regulatory Reform, the legislation is aimed at preventing another hard hit to the U.S. financial system and American taxpayers. Whether it will work remains to be seen, but the goal is to inject some reform into an otherwise broken system by promoting financial stability, and improving accountability and transparency.

What does this all mean to you? Well, the idea behind the legislation is to restore consumer confidence in the U.S. financial system by protecting individuals from abusive financial services practices, overhauling existing rules and creating more oversight.

Let's be clear: There's no bailout of your personal debt

Once again, similar to what happened following passage of the Credit CARD Act, deceitful advertising directed at uninformed consumers implies that the new financial reform legislation bails consumers out of their past financial mistakes. But that belief is far from the truth. Don't be duped into thinking that the U.S. government is going to erase your debt. You are still the best watchdog over your own finances and you are still the person responsible for paying off any debts. The government isn't going to do that for you.

The good news: New protections help consumers

What the government does plan to do for you, however, is make it easier for you to be a smarter consumer, and manage your debt and credit more responsibly. So let's get down to business and share some truth about what the new legislation really does for you:

• Creates a consumer watchdog organization: The law calls for the creation of the Consumer Financial Protection Bureau, a federal agency capsuled within the Federal Reserve designed to rein in the big banks, and prohibit their participation in risky financial activities. The law empowers the new agency to write and enforce rules regarding various consumer financial products and services, including credit cards and lending products (e.g., home mortgages and education loans). Basically, the objective is to make sure everyone's playing nicely on the credit/lending playground, and to provide ordinary consumers with long-overdue protections that help prevent abusive lending practices that prey on uneducated consumers.
• Educates consumers: To prevent consumers from accepting mortgages, credit card offers, and other financial services and products they don't understand, the law paves the way for a new Office of Financial Education, whose goal will be to improve consumers' financial literacy and empower them with knowledge so they can make better money decisions. Counseling and educational programs are at the heart of the initiative. While attempting to educate consumers isn't anything new, and the government has pushed initiatives to achieve similar results in the past, the point here is that the more educated consumers become, the less likely they are to end up in financial ruin.
• Provides alternatives to payday loans: The law establishes grants for experimental, small-loan programs that could serve as a less expensive alternative to payday loans. Payday loans are short-term, fee-based loans (i.e., advances) offered to help consumers bridge the gap between needing to pay for expenses and receiving their next paycheck.
• Answers your calls with 24/7 hotline: The act creates a toll-free telephone number through which consumers can report unfair or deceptive lending practices and know that their issues are being handled in a timely matter by appropriate government agencies. Complaints can be filed by phone or through a web site that will be created for handling such grievances.
• Protects your savings: The law permanently sets the standard insurance coverage amount of protection offered by the Federal Depository Insurance Corporation (FDIC) at $250,000 per depositor. FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts, and certificates of deposit.
• Changes credit/debit card transactions minimums: Minimum purchase requirements on credit and debit card transactions are now permissible up to $10. While perhaps not popular with consumers who want to use plastic to pay for a $2 bottle of soda, the change helps merchants that possibly pay the same amount in swipe fees to card issuers. Perhaps if you're no longer allowed to charge such small amounts, you'll also think twice before making a purchase. Also, you'll likely be more aware of charges/debits you're transacting and remove some of the shock you otherwise may experience each time you receive your monthly card statement.
• Notifies those with readjusting ARMs and eliminates pre-payment penalties: Consumers with adjustable rate mortgages (ARMs), which are home loans whose interest rates change, often fail to track when those rates are set to readjust. The new financial reform law should help eliminate any surprise increases by requiring homeowners to receive advanced notice prior to a rate change along with an estimate of their new payment amount.
• Banishes taxpayer-funded bailouts: Many U.S. taxpayers were less than happy when the federal government used their tax money to help salvage failing financial firms. Under the new law, financial institutions will be prevented from growing too large. This will help ensure that banks deemed "Too Big to Fail" won't exist and won't be able to majorly impact the economy should they fail. Additionally, if the government wants to "save" any fledgling firm, Wall Street will fund the rescue rather than American taxpayers. Federal regulators will also be empowered to shut down failing financial entities if desirable.

By enacting these sweeping reforms, the federal government is attempting to rescue the economy and the U.S. financial system, provide better oversight on Wall Street, and create real consumer protections. Whether the legislation puts America on the right path toward reform and restoring consumer confidence remains to be seen, but for many consumers, the new provisions are a step in the right direction.

To learn more, click on the summary report issued by the U.S. Senate Committee on Banking, Housing and Urban Affairs or the White House's Wall Street Reform web page.

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