President Barack Obama has proposed overhauling the U.S. regulatory structure to create a consumer-oriented regulator, consolidate existing agencies and set more strict rules for financial companies.
For individuals, the proposal offers greater consumer protection and relief from the hidden fees and confusing disclosure documents that have become commonplace in the market for mortgages, credit cards and other banking products.
Both houses of Congress must approve legislation for the plan to become law and the proposal will likely change along the way.
"There's going to be a big push to get it done before the end of the year," according to David Min, associate director for financial markets policy at the Center for American Progress, a Washington, D.C.-based progressive think tank. "A lot of it depends on how the banking sector does in the next six months."
Officials hope that the financial market meltdown and massive federal bailout will provide the impetus to pass the proposal and help the millions of Americans struggling with credit card debt, burdensome mortgages and a faltering job market.
Simplified forms and disclosuresFor consumers, the most relevant element of the plan is the creation of a Consumer Financial Protection Agency that would set and enforce rules for financial products, such as credit cards and mortgages, to ensure they are reasonable to be offered to the public.
"Consumers cannot compare financial products because the financial products have become too complicated," said Elizabeth Warren in testimony to the House Financial Services Committee. Warren is a Harvard professor and head of the Congressional Oversight Panel reviewing the financial bailout.
"Picture it -- a credit card contract that is two pages long, clear and easy to read, and that has a few well-lit blanks -- the interest rate, the penalty rate, when a penalty will be imposed and how to get the free gift," Warren said.
The Obama proposal calls for one-page summaries of financial products' terms to supplement the multipage, legalistic disclosure documents that most people skim -- if they read them at all.
"This agency will be able to write rules that promote transparency, simplicity and fairness, including standards for standardized, simple, plain-vanilla products that have straightforward pricing," Treasury Secretary Timothy Geithner told the Senate Banking Committee.
Under the plan, consumers could easily compare plain-vanilla products being sold by different institutions. If banks wanted to offer more complex products, they'd have to jump through additional hoops to demonstrate that the customer was appropriate and understood the risks.
Crackdown on hidden fees and high ratesThe new agency would be charged with fighting fraudulent and deceptive financial products in a bid to eliminate hidden fees and exorbitant interest rates on credit cards, mortgages and banking products with credit elements.
"It's quicksand," says Kathleen Keest, senior policy counsel for the Center for Responsible Lending. "You take one step knowingly but the 15 feet you sink down afterward is not your choice."
For instance, some banks sign up customers for overdraft protection without giving them the required disclosures or a contract promising payment, Edmund Mierzwinski, consumer program director of U.S. Public Interest Research Group, told the House Financial Services Committee. Practices like this end up costing Americans $17.5 billion each year for cash advances.
"Consumers unwittingly borrow billions of dollars at astronomical interest rates," said Mierzwinski. "The use of debit cards for small purchases often results in consumers paying more in overdraft fees than the amount of credit extended."
For instance, a $35 fee on a $100 overdraft loan that the customer repays in two weeks equates to a 910 percent annual percentage rate, he said.