After months of debate, Congress has approved the broadest rewrite of the rule book for financial institutions, investors and lenders since the Depression.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a major overhaul of U.S. financial regulations aimed at preventing future crises like the one that dragged the U.S. economy into recession two years ago.
"Broader financial stability is something we all care about," says Greg McBride, senior financial analyst for Bankrate.com. "Nobody wants to go through another event like we went through in 2008 and early 2009. The question is, will this reform prevent another financial catastrophe or (just relieve the symptoms of) the last one? Is it designed to prevent the crash that already happened or is it designed to prevent the next crash?"
While the legislation mostly addresses banks and businesses, individual consumers will be affected directly and indirectly by several key provisions.
Consumer protectionThe biggest news for consumers is the establishment of a new Consumer Financial Protection Bureau within the Federal Reserve to police consumer financial products such as mortgages and credit cards. The new bureau will enforce existing laws and set specific rules on certain financial products, including what interest rates payday lenders can charge and how credit card disclosures must be made.
This is good news for consumers, because it will create an agency that can keep up with the constantly evolving practices of financial firms better than legislators can, says Kathleen Day, a spokeswoman for the Center for Responsible Lending in Durham, N.C.
"This is a living, breathing agency," says Day. "It can see (abuses) as they crop up but before they become pervasive, and stamp them out without having to constantly go back and reinvent the wheel in Congress."
Numerous industries sought exemptions from consumer protection bureau oversight, with auto dealers being the biggest winners. They will continue to be regulated by the Federal Trade Commission.
In another compromise, a fiduciary standard for stock and insurance brokers in the Senate version of the bill was taken out. Instead, the SEC will study the issue and make further recommendations in six months.
An end to bailouts?The rest of the act's provisions focus on regulating the larger financial markets. For many Americans, one of the most troubling aspects of the financial crisis was the government bailout of major financial firms at the center of financial meltdown.
Under the new legislation, instead of being forced to prop up failing nonbank financial institutions like insurance giant AIG in an ad hoc manner, regulators will have the authority to take over and close them in an orderly fashion much as the FDIC does with failing banks now.
"Prior to the passage of this (act), the FDIC and bank regulators had considerable authority to resolve a troubled bank. They can come in, take it over, sell it off. They can do whatever needs to be done to deal with a distressed bank," says Doug Elliott, a fellow at the Brookings Institution in Washington, D.C. "We're widening the resolution authority so that large nonbanks that could threaten the system can be resolved in a similar way by federal regulators."