If you ever buy gas with a credit card, employ a financial adviser to make investment choices, borrow from a bank or pay hidden fees on your home mortgage, the most sweeping regulatory overhaul of Wall Street since the Great Depression is sure to affect you.
The financial reform measure, which passed the Senate on Thursday by a vote of 59 to 39, is designed to curtail risk in the financial sector, offer consumers new protections against abusive practices, prevent financial companies from becoming “too big to fail,” and force the trading of complex instruments known as derivatives to take place out in the open, rather than hidden in the shadows.
Despite extensive lobbying by financiers and corporate lobbyists to limit the bill’s scope, consumer advocates hailed the Senate measure as historic. “It’s a turning point in our economic history,” said Heather Booth, executive director of Americans for Financial Reform, a coalition of progressive advocacy groups.
“It ensures the financial system operates to support needs of working families, promotes business growth and economic mobility rather than the interests of the speculators who view the economy as a huge casino,” Booth said.
Opponents, primarily Republicans, disagree. The Obama administration is using the financial crisis as pretext to “expand the cost and size and reach of government,” said Sen. Minority Leader Mitch McConnell, R-Ky. “It punished Main Street for the sins of Wall Street.”
Senate passage of the measure marks the second significant legislative victory for the Obama administration after health care reform. Obama pledged to empower government regulators to build more transparency and accountability into the American marketplace.
A law by July 4?
The Senate bill must now be reconciled, however, with a similar bill passed by the House of Representatives in December, before the president can sign it into law. And both advocates and opponents of the bill urged that the negotiations process, to be led by Rep. Barney Frank, D-Mass., be open to public scrutiny. Frank says he hopes to have negotiations completed and the bill on Obama’s desk before July 4.
“The battle now moves to conference where the big banks will look to weaken or kill the bill behind closed doors,” Booth said. “We cannot and will not allow this to happen. And we need to fight the big bank interests to strengthen the bill in conference.”
In some significant ways, the Senate bill, which passed with the support of four Republicans, offers stronger protections than does the House bill. That may reflect fundamental shifts in the national mood and increasing anger among the public toward events of the past few months: Goldman Sachs, the giant investment bank, was indicted on fraud charges by the Securities and Exchange Commission; former Federal Reserve Chairman Paul Volcker urged banks to be stripped of their power to make “proprietary” trades that don’t benefit their clients; the euro collapsed after Greece faced fiscal insolvency; and the stock market dropped 10 percent this month.
Consumer advocates say the legislation will provide more effective protections for Americans. “If we didn’t get the whole pie, we certainly got three-quarters,” said Mary Wallace, a senior legislative representative for AARP.
As House and Senate conferees gear up to negotiate final legislation, here are some key areas to watch:
- Credit cards. An amendment to the Senate bill permits the Federal Reserve to impose rules ensuring that credit card companies don’t charge more than is reasonable to process debit and credit card charges. Right now, Visa and MasterCard issuers often charge retailers 1 or 2 percent of the bill, far more than it actually costs them to carry out the electronic transfers.
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.