A sweeping financial reform bill has been passed and signed into law by our President and Congress. We’ll break down how the law will protect you, the consumer.
Since taking office in January of 2010, President Barack Obama has been urging Congress to work collaboratively on sweeping new bills that promises to rein change into the financial services system and pave the way for our countries long-term prosperity and growth. The first big piece of legislation that passed was an overhaul of the America’s health care system. Whether or not it was needed or appropriate is a matter of opinion; what the law will actually do for every citizen in this country is fact. By 2014, states will be required to establish public markets that allow for our citizens access to low-cost, adequate health insurance, and each of us will be obliged to do so or face some tax consequence or minor fine.
Despite record high unemployment and a fiscal overseas war on terrorism in countries we’ve been engaged in (and many say losing) for ten years now, at the encouragement of President Obama Congress focused its energies and time in passing a sweeping new financial reform bill. After more than a year in the works, this month both sides of congress approved a version of the new bill that finally made it to the President’s desk just before he ceremoniously signed into law yesterday.
While the bill was being debated, edited, and re-written in Washington by congressional Democrats and Republicans that fought like wild cats and dogs in a highly-publicized center arena, the proposals of the bill were gaining most of the press notoriety. Particularly, the make-up of the bill focused around what would be called the Bureau of Consumer Financial Protection, or BCFP, that would be charged with reigning in shady and coercive financial products and practices offered by banks, creditors, and other financial services that preyed on unwitting consumers. Who will head the BCFP is still unclear; however the goals of the new government agency are very clear (and so too is the need for this kind of regulation).
The Restoring American Financial Stability Act has created this new, independent agency within the Federal Reserve to protect borrowers against abuses in mortgage, credit card and other types of lending. The bill gives new authority to the federal government to seize and wind down large, troubled financial firms to end the possibility that taxpayers would have to pay to bail out those firms, effectively bringing an end to the unpopular bank bailouts of 2008. Further, it sets up a council of federal regulators to identify and assess threats to the financial system. The bill enacts many other protective measures aimed at banks, payday lenders, and yes, even debt settlement companies.
The need for change
To think it would all stem from the American dream was unthought-of. Understanding why the financial reform bill was needed for citizens, individual investors, companies, and our economy requires a brief but interesting history lesson. First of all, consumers who sought credit to purchase goods and services, homes, or cars on or before 2006 found themselves facing few barriers. Credit thrived, especially among consumers who sought to purchase big ticket items like homes. The easy credit was a direct result of long-term interest rates and sub-prime lending. Sub-prime lending could be thought of as “undesirable” lending, because the borrowers at the time think they can afford the payments (remember those low-interest rates I just mentioned?) but really couldn’t, and the lenders thought they could make up the difference but using “adjustable-rate mortgages” – high-dollar mortgages whose rates would adjust to a higher rate later on, which would go on to eventually serve as the gunpowder for the housing bomb. Because home prices were driven up by artificial interest rates, those levels became an unsustainable bubble. What happened next was in the worst recession America has ever experienced, characterized by a crippled housing, credit, jobs, and financial market that has yet to fully recover.
That’s enough lessons for now. The purpose of this article is to introduce what measures in the new financial reform bill apply to you, your credit situation, and what benefits you could soon take advantage of.
In addition to creating the new BCFP to protect consumers from questionable financial practices among banks, the new financial reform bill targets credit card companies and lenders as well. The bill calls for retail companies as well as convenience stores, gas stations, and other providers who use merchant services (a merchant service makes your credit card purchase at the check-out counter happen by being the go-between for the credit card company and the retailer you’re purchasing from and charges a fee for that service to the retailer, called an “interchange” fee) to drop minimum credit card purchase amounts that exceed $10.
Next, if you owe money to a school (your paying your child’s tuition, for example) or to the government (paying off a speeding ticket), the amount of the total you owe can have a cap on it. For example, if you charge $4,000 to your credit card for books and tuition during your child’s first year at college the school may in the future say you can only pay $2,000 on credit; the other $2,000 would be required to be paid in cash. The reason being is the schools and the government brings in millions and billions of dollars each year, resulting in huge interchange fees. This is good news for those that overextend their credit. Think about it: if you only had cash available to pay for goods and services, how much less “stuff” would you buy?
Retailers will also be permitted to offer incentives for customers using debit rather than credit cards. The interchange rates on debit cards sometimes command an industry high 2% of the total charge. The bill could put the Federal Government in charge of these rates, who would be expected to lower those interchange rates significantly. Retailers prefer to pay those lower debit card rates and would incentivize buyers to shun their credit cards, perhaps changing the way consumers choose how and what to buy.
Lastly, debt consolidation and settlement companies could for the first time come under regulation by the Federal Government in an effort to make changes to some of the business practices of the organizations that operate in the so-called “fringe” industry. Settlement companies in particular have come under political and controversial fire for unfair practices relating to charging high up-front fees while producing dubious results. The Debt Settlement Consumer Protection Act that was incorporated into the final bill takes measures and steps to target the dishonest practitioners that plague the settlement industry and create an unfair and contagious image for legitimate firms.
The DSCPA would cap upfront fees at $50. In addition, the only other fees allowed would be contingent fees limited to 10% of savings. So, for example, let’s say a consumer has $30,000 in credit card debt, and if he or she were able to settle that debt for 50% of that amount, the savings would be $15,000 and the total permissible fee would be $1550 (10% of savings, or $1500, and $50 upfront).
When the dust settles, the end result will be to weed out and eliminate companies who do not have the consumer or client’s best interest in mind, paving the way for prosperity between the disenfranchised borrow under heavy debt and the companies that can truly help.
Subscribe
