No more meltdowns?
The second major development for consumers under new financial regulations has been the creation of a Financial Stability Oversight Council and a host of new rules that give the council and individual regulators the authority to quickly unwind any large, troubled firm -- whether banking, insurance or nonfinancial -- that threatens to destabilize the financial system as Lehman Brothers and American International Group Inc. did in September 2008.
Some other financial reforms already in place that aim to prevent future crises include the following:
- Higher capital requirements for "systemically important" financial companies. The council is charged with defining systemically important.
- Changes to the way bank deposits are insured, including larger reserves required of banks.
- Authority for regulators to liquidate any failing bank within 24 hours.
- A ban on proprietary trading by U.S. banks, or investing on their own behalf rather than that of customers.
- Financial reforms to increase transparency and oversight of derivatives, or private financial contracts between large institutions based on the price of an underlying asset such as a stock, bond, interest rate or commodity.
Crackdown on mortgage market
Several new financial regulations that cover the mortgage market, the epicenter of the financial crisis, were among the first to undergo rule-making. Mortgage originators now must make sure that a borrower has the ability to repay a loan. They also are prevented from steering homebuyers to more expensive loans or misrepresenting the available loans, a property's appraised value or the consumer's credit history.
"These were abuses that were fundamental to the financial crisis that advocates have been fighting for," says Lisa Donner, executive director of Americans for Financial Reform, a coalition of labor, civil rights and other organizations in Washington, D.C. "Lots of loans were made when the lender knew or should have known that the borrower would have no ability to repay, and they didn't care."
In addition, regulators have approved new rules aimed at ensuring real estate appraisers are independent of other parties in a mortgage transaction.
Better investor protections
The nation might not have had a housing market collapse and recession if not for the billions of dollars in mortgages that were repackaged as securities for investors who relied on the sound credit rating of the company that sliced and diced the loans, Donner says. Dodd-Frank strengthened oversight of credit rating agencies to better protect investors and the financial markets.
One financial reform already implemented by the Securities and Exchange Commission makes credit rating agencies subject to Regulation FD. The rule prohibits companies from selectively disclosing important information about their finances to any outside entity. Previously, credit rating firms were exempt from financial regulation.
The SEC also approved a new whistleblower program to encourage company insiders to report wrongdoing or fraud and has given shareholders more control over executive compensation. And the SEC has beefed up disclosure by issuers of asset-backed securities, requiring them to perform due diligence on the underlying assets and to disclose that analysis.
Rules on fees, consumer data
Dodd-Frank called for the Federal Reserve to cap the amount that banks may charge retailers for processing debit card transactions, known as swipe fees.
On June 29, the Fed approved a 21-cent cap per transaction on swipe fees plus an additional 0.05 percent of the purchase price to cover fraud protection costs. That's far higher than the proposed 12 cents but certainly lower than the current average of 44 cents. The limit takes effect Oct. 1.
For instance, creditors must disclose the credit score used and additional information related to the score if the consumer receives less-than-favorable loan terms as an applicant or existing customer. Consumers who are denied credit because of their score also receive the score and the additional information. The rule was approved July 6 and takes effect July 21.
Most other new financial regulations under Dodd-Frank have yet to be implemented. "It's a big law, but it's a slow-moving train," Donner says.
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