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With U.S. consumers still feeling the sting of the global financial crisis, consumer advocacy groups are claiming that they snagged a win with the financial reform measure approved last month by a joint House-Senate congressional committee.
The bill next goes to U.S. President Barack Obama, who is expected to sign the measure into law.
"It's historic legislation," Michael Calhoun, president of the Center for Responsible Lending, told ABC News. "It's a big win for consumers."
The financial reform bill is a sweeping measure, and was designed to address many of the problems that led to the financial crisis. So it's much more than just a consumer-protection proposal. But the regulations that do address consumers will strengthen – or will even create – an array of consumer protections, and will lead to oversight of such businesses as payday lenders, credit-card companies, check cashers and pawnbrokers.
The consumer-related measures include:
- A consumer financial protection bureau housed at the U.S. Federal Reserve, to prevent misleading and deceptive practices.
- Tighter mortgage regulation with no more pre-payment penalties and easier loan negotiations, to prevent pre-crisis manipulation tactics.
- More transparency with credit scores, allowing consumers free access to their scores if they are denied a loan or offered a high interest rate.
- A ban on banks and brokers earning bonuses on the types of loans they sell, which encouraged inappropriate sales of higher-risk loans.
- Minimum amounts on debit and credit card transactions, reducing the related fees that storeowners pay – which in turn could reduce prices for shoppers.
Advocates are optimistic about the steps taken for consumers, especially the creation of a financial watchdog.
But, as with any drastic overhaul, compromises were made and consumers will not gauge the full effectiveness until the changes are implemented. The new agency does have power limits, and its ability to prevent risk can only be measured after it's created. And some analysts are concerned the new rules are too limiting, and will hinder growth and limit consumers' access to credit.
"By dramatically cutting back loans to consumers and small business, financial institutions have hampered the ability of the economy to fully bounce back from the most severe recession since the Great Depression," Bernard Baumohl of the Economic Outlook Group told The Wall Street Journal.
This prompted last week's installment of the Money Morning Question of the Week: Do you think the financial reform bill adequately addresses the needs of consumers? Will it achieve its stated goal of increasing consumer protection, or will the financial-services industry find loopholes? As a consumer, do you feel more confident in the reformed financial sector or are you skeptical of the bill's success?
Here is a sampling of what we received from readers, who doubt that the financial reform bill will truly be a "reform."
Hardly a "Reform" At All
No! The "financial reform bill" does not address the biggest causes of the financial meltdown.
First, the 'too big to fail ' is a joke. These banks and brokerages have just been made even bigger. No one seems to care about the macro picture, just the micro picture, touching a little here, a little there, a lot nowhere at all, leaving loopholes all over. Granted, everything cannot be done at once on a large scale without destroying the global economy. There is only so much 'austerity' citizens can take before we are stepping over dead people in the street for lack of housing and adequate healthcare among other necessities, while the corporate, banking, and government elite continue to give themselves raises for paper shuffling. The widening of the financial disparity between rich and poor continues unabated.
How long do these people think this will go on before all hell breaks loose and blood truly does run in the streets?
– Doug H.
Don't Rely on Bill's Protection
At 2,300 pages, I am sure that the financial reform bill addresses something adequately, but somehow, I suspect that the consumer is once again going to get the shaft. It's not that there weren't some good intentions among those who wrote this monstrosity, but the banks and other large corporations were heavily involved with the actual phrasing of many parts, and will likewise actively and aggressively interact with whatever agencies are established to write and enforce the actual regulations. The means by which they take advantage of us may change somewhat, but I suspect that the only way to really protect ourselves will be much like it has always been – don't get too deep into their system.
For me, I am debt-free, and intend to stay that way, even if I have to cut back even further on my lifestyle to do so. I use a couple of credit cards, but they are paid off in full every month. I still get three to five offers per week for new credit cards, but I just shred them. Our lifestyle is very low-key, but we sleep well at night.
– Gordon F.
Dropped the Ball
Really, the biggest thing that they should have done was to reinstate the law that kept the banking and gambling parts of financial institutions separated (Glass-Steagall Act I think). Soon after that law was repealed the troubles started. Everybody knew it was a mistake and they didn't fix it with this new legislation.
– Don S.
A Lot of Talk, But Little Action
For Congressional "financial consumer protection" legislation to actually protect consumers, it would need to regulate the gross disparity between interest paid to consumers who loan money to banks (called "savings accounts"), typically less than 1% per year, and the interest rate paid by consumers to credit card providers which can exceed 28% a year — it is sometimes cheaper to borrow money from Mafia loan sharks than from your "friendly banker!"
Usury is allowed because credit card providers pay millions of dollars each year to elected officials to make sure that they can continue overcharging on these "loans."
A few examples: From 2007-2008 (the last election cycle for which the Federal Election Commission has full financial records), Sen. Christopher J. Dodd, D-CT, the Chairman of the Senate Banking Committee with oversight authority over the financial sector, was paid $5 million by that sector; his friend Sen. Charles E. Schumer, D-NY, was paid about $4.75 million. Poor Rep. Barney Frank, D-MA, was paid only $1.75 million. They don't work for us, they work for the people who are stuffing their pockets with cash and it shows in this legislation, which is long on rhetoric, but short on reality!
– Peter B.
Laws never stopped crooks before. What makes Congress think more laws will stop illegal activity?
Smoke & Mirrors
Washington is up to its usual smoke and mirrors. Now that enough of the senators have balked on the present form of the bill they have decided to use the taxpayers' money (i.e., Troubled Asset Relief Program) to fund their game. I wish there was a way that we could speed up the arrival of November 10. It seems that is the only way we can start over (I hope we have enough sense to question each candidate enough to understand his or her intent).
I know the usual candidate paints a picture to be elected; maybe this time we can convince them to just vote to turn off some of the free hand outs and if that is a one-term deal, so be it.
– Joseph W.
Citizens Are Too Trusting
If you were a judge and your best friend was caught embezzling, what sentence would you give him, so you could still look his kids in the eye? That's what we have here. The mentality on the Hill is that people are looked upon as cash machines. When people ask for anything like a simple raise in minimum wage, they are considered lazy. Those people are patriotic and trusted their country. What they've been given for that trust over the last three years is way worse than a kick in the teeth. We've impoverished their grandchildren and yoked them to a plow while being goaded by fat cats who have a special "in" with the country that these honest people were actually making with their ingenuity and sweat. How much sweat and ingenuity does it take to hand an envelope full of money to someone on the Hill?
There is a mob in control and I hope there comes a day when the honest trusting citizens see it for what it is. Maybe this charade of a reform will help.
[Editor's Note: Thanks to all who responded to last week's installment of the Question of the Week feature regarding consumer protection and financial reform. Be sure to answer next week's question: Are new retailer-created discounts and promotions grabbing your attention? Will they induce you to spend more? Do you think there are incredible opportunities for shoppers right now, or are stores trying to push sales that consumers simply can't afford? Lastly, if these measures aren't working, is there something that retailers could do that would induce you to buy? What would that be?
Send your answers to firstname.lastname@example.org!
Is there a topic you want to see covered as a Question of the Week feature? Then let us know by e-mailing Money Morning at email@example.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.
Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]
News and Related Story Links:
- ABC News:
Top 6 Changes That Financial Reform Brings To Consumers
- The Atlantic:
Consumers Win With New Financial Reform Bill
- The Wall Street Journal:
Economists React to Financial Overhaul
- Money Morning News Archive:
Glass-Steagall Act Stories
- Money Morning:
Money Morning Mailbag: Wall Street Expects Money to Arbitrate Financial Reform
- Money Morning News Archive:
Question of the Week Feature