Consumers Get a Watchdog Agency
As posted on June 26, 2010 on www.wsj.com
By Jason Zweig and Mary Pilon
The landmark financial-markets legislation expected to be signed into law next week was intended mainly to reduce systemic risk and increase regulation at the corporate level, but it will also alter many aspects of financial life for consumers and individual investors.
Consumer advocates publicly hailed the creation of a watchdog agency intended to monitor the safety of financial products for consumers, while privately expressing concern that many areas remain insufficiently regulated.
Meanwhile, Tim Ryan, president of the Securities Industry and Financial Markets Association, said the law would "have profound effects on the operations and cost structure of most financial-services companies and financial markets."
Here is a rundown of the provisions in the legislation that are likely to affect borrowers, savers and investors.
Consumer-protection agency. The Consumer Financial Protection Bureau, part of the Federal Reserve, will oversee a broad range of retail financial products, including checking accounts, private student loans and mortgages. Auto dealers are exempt from the agency's oversight.
The agency will have the authority to "deal with unfair, abusive and deceptive practices," said Travis Plunkett, legislative director for the Consumer Federation of America. "Suddenly doubling or tripling the interest rates on credit cards, for example, might well qualify as unfair."
The head of the bureau will be appointed by the president and confirmed by the Senate. Consumer advocates say it could take 18 to 24 months to set up the agency.
President Barack Obama trumpeted the new bureau Friday: "Through this agency, we'll combine under one roof the consumer-protection functions that currently are divided among half a dozen different agencies. Now there will be one agency whose sole job will be to look out for you."
Deposit insurance. The temporary increases in coverage put in place by the Federal Deposit Insurance Corp. during the financial crisis will become permanent. Henceforth, up to $250,000 in qualified deposits will be insured.
Mortgages. Lenders now must verify a borrower's ability to repay before any mortgage loan is made. The bill also stamps out prepayment penalties. Brokers will be prevented from receiving bonuses for steering borrowers toward riskier loans. A $1 billion emergency loan fund will be established to help keep people in their homes.
Credit scores. Consumers will get a free credit score when they are denied a credit card or receive a poor mortgage rate. The FICO score, calculated by FICO, formerly known as Fair Isaac Corp., is likely to be the measure that most consumers will see, said Adam Levin, chairman and co-founder of Credit.com.
Credit and debit cards. Retailers can now offer discounts based on different kinds of payment methods—say, lower prices for using cash rather than a debit or credit card. But they can't offer discounts across brands—by distinguishing between MasterCard and Visa cards, for instance. Merchants can refuse to take credit cards for purchases of $10 or under.
Investment advice. The new bill instructs the Securities and Exchange Commission to study whether a "fiduciary" standard—requiring stockbrokers, financial planners and insurance agents to put their clients' interests first—is appropriate. Also subject to further SEC study is the question of whether investors should be freer to initiate proposals to be voted upon at companies' annual shareholder meetings.
Hedge funds with over $150 million in assets will be required to register with the SEC. Investors "will be able to glean a fair amount of information from the disclosures," said David Tittsworth, executive director of the Investment Adviser Association.
—Jilian Mincer contributed to this article.