Historic Financial Reform Moving Through Congress

The bill would allow retailers to offer discounts to customers who pay by cash, check or debit card, rather than by credit card, and would permit merchants to set minimum-purchase amounts for use of cards. So if you pay cash or check for a new TV set or barbecue grill, you might end up paying less than if you used your credit card.

Sen. Dick Durbin, D-Ill., the sponsor of the successful amendment, argued that controls on fees were needed because the biggest credit card firms, which include Visa and MasterCard, control 80 percent of the credit and debit market, allowing them to charge high fees for their services. But bank analysts suggest that if the new rules become law, banks might end up raising the fees they charge for using credit cards, or severely restrict the use of free checking accounts to make up for lost revenue from credit card fees.

The House bill contains no such restrictions on fees, though a new financial protection agency would have the power to regulate credit card practices. The differences will have to be ironed out.

•  Credit scores. If you’ve ever been turned down for a department store credit card or a consumer loan, you quickly learn that the free credit report you’re entitled to receive doesn’t include the all-import credit score, the number, usually between 300 and 850, that lenders use to judge your likelihood to pay back a loan. Right now, getting that score from one of the major credit-reporting bureaus typically costs about $15.

That will change if the Senate gets its way. Its new bill contains a proposal by Sen. Mark Udall, D-Colo., that requires that you get your score for free if it was used to deny you credit, it required you to pay a higher interest rate on a loan, or it prevented you from being hired for a job.

“This I believe will empower consumers, it will increase the financial literacy in our country,” Udall said. “It’s a win-win.”

This measure is also not contained in the House bill.

•  Consumer protection. Both the House and the Senate bills call for creation of a watchdog agency. The Senate’s new consumer financial protection bureau would be housed in the Federal Reserve, but with almost total independence from it. The bureau would take over responsibilities now spread across seven agencies to oversee financial products that are offered to consumers.

It also would limit the ability of mortgage lenders to assess penalties on borrowers who pay off their loans early and prohibit paying brokers and loan officers more to steer borrowers to higher interest rates or certain risky features. Instead, a broker’s commission would be based on the size or number of loans originated.

The House bill, in contrast, proposes an independent consumer protection agency, with more latitude to implement regulations— and it would exempt auto dealers who offer their customers financing. Monday night, the Senate voted for the same exemption, despite President Obama’s opposition. Such an exclusion, he said, was a loophole that could allow dealers to “inflate rates, insert hidden fees into the fine print of paperwork and include expensive add-ons that catch purchasers by surprise.”

• Derivatives. Both bills require derivatives—complex instruments that bet on the future of underlying assets—to be traded and insured through so-called third-party clearinghouses. The intent is to increase transparency for such trades, which contributed so significantly to the mortgage meltdown. But the Senate bill goes further by making it more difficult for companies to be exempt from the new rules. There’s also a Senate bill provision, sponsored by Sen. Blanche Lincoln, D-Ark., that could force big banks to spin off their derivatives trading operations.

The House bill doesn’t have this provision. The Fed, the Federal Deposit Insurance Corporation and the Treasury, as well as the banking industry, have argued against Lincoln’s amendment, and it faces a tough fight.

• The Volcker rule. The Senate bill instructs regulators to study how best to force banks out of trading for their own accounts—so-called proprietary trading—and make them sell their interests in hedge funds and private equity firms. It would also bar any financial institution from acquiring other firms that effectively allow them to grow larger than 10 percent of U.S. financial liabilities.

The House bill was completed in December before Paul Volcker, the former Federal Reserve chairman, offered up his proposal to keep banks from proprietary trades. So none of that language appears in the House bill. However, the House measure does create a financial stability oversight council that can break up a financial institution if it threatens the larger system and would create a $150 billion fund, financed by big financial companies, to unwind failed firms in an orderly way. The intent is to prevent taxpayers from having to pay the tab.

• Fiduciary rules. Consumer advocates, as well as AARP, had hoped to get the Senate bill to tighten regulations for broker-dealers who give investment advice, so that they would have an obligation, just as financial planners do, to tell you about products which best suit your investment goals. Such restrictions appear in the House bill. The language never got to the Senate floor, but advocates are hoping the conference might add it anyway. As it stands, the Senate bill directs the SEC to study the differences between fiduciary standards for investment advisers and broker dealers and make recommendations.

Michael Zielenziger writes on the economy for the AARP Bulletin. He lives in the San Francisco Bay area.