The world is a slightly safer place for consumers since the American economy unraveled. In the wake of the financial crisis, regulators and lawmakers got tough on some of the worst actors at the root of the recession and wrote a pile of checks to stimulate the economy.
After all the fiscal spending and regulatory maneuvering, Americans won a handful of potentially lasting consumer protections. Here’s a look at what’s changed since Wall Street came apart at the seams.
Though the Dodd-Frank Wall Street Reform and Consumer Protection Act focused more on ways to prevent the worst of the Wall Street excesses, consumers did score some wins in the wake of the financial crisis. The results have been mixed.
The crowning achievement of Dodd-Frank as far as consumers go was the creation of the Consumer Financial Protection Bureau.
“It is the biggest consumer victory since deposit insurance in the wake of the last time the banks wrecked the economy with their reckless practices,” says Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group.
Many rules from the Dodd-Frank Act have yet to be implemented or written. The act called for about 250 new regulations, and many deadlines have been missed. Regulators have struggled with funding constraints, legal challenges, and opposition from Congress and the financial industry.
“There are about 120 rules to come. We’re less than halfway through it. If the second half is as voluminous, we’ll be working on it in 2017 with a new president,” says John Alan James, executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York.
In an attempt to avoid that ignominious end to the legislation, President Barack Obama met with regulators in August to press them to speed up the process.
The Durbin Amendment, part of the Dodd-Frank Act, set caps on the interchange fees that big banks can charge to merchants when a customer swipes a debit card. Banks with more than $10 billion in assets saw their fee revenue from debit card purchases cut in half.
“Durbin lowered debit card swipe fees that force cash customers without credit or debit cards to pay more at the store or more at the pump,” Mierzwinski says. “Stores embed the swipe fees — used to pay for the rewards of affluent customers — into the cost of all products because Visa and MasterCard rules make it difficult to offer cash discounts or impose card surcharges, which are illegal in some states.”
Though the cap on fees has helped some merchants, small merchants now pay higher interchange fees, according to an April report from the Federal Reserve Bank of Richmond. That’s because retailers who deal mainly in small-denomination transactions were able to pay lower fees for small purchases prior to the rule. However, card networks now have eliminated the discounts for small purchases, forcing merchants to pay the maximum for all transactions, except those on cards from smaller banks. The cap is 21 cents plus 0.05 percent of the transaction value, according to the Richmond Fed.
Another unintended consequence of the rule has been the threat of higher bank fees for consumers. In the face of diminishing revenue from the drop in fee income, many banks have curtailed perks such as free checking. In 2012, ratings agency Standard and Poor’s estimated the fee revenue lost annually by banks as a result of Durbin to be $6.5 billion to $7 billion.
“There are some consequences that have hurt consumers. Within Dodd-Frank, the Durbin Amendment started the impetus for banks to have to increase fees on banking accounts,” says Richard Hunt , president and CEO of the Consumer Bankers Association.
About 600 banks are large enough to qualify for the restriction on swipe fees. More than 10,000 banks are exempt, according to a 2012 report from the Kansas City Federal Reserve Bank.
American Recovery and Reinvestment Act of 2009
The American Recovery and Reinvestment Act threw a lot of money at the big economic problems bedeviling the country during the financial crisis. In order to jump-start the economy and help consumers and businesses, the federal government handed out $288 billion in tax cuts and benefits, $224 billion to entitlement programs, and $275 billion in contract grant and loan awards.
Overall, the stimulus seems to have been a success. At least in the short term, the act has had and will continue to have positive macroeconomic effects, according to the Congressional Budget Office. Though the CBO can only estimate the impact, it reported that in 2012, the act raised real gross domestic product in 2012 by between 0.1 percent and 0.8 percent and increased the number of people employed in 2012 by 200,000 to 1.1 million.
Though it was only a small part of the stimulus, the first-time homebuyer tax credit could be considered a triumph for consumers. It helped people who were in a position to buy a home, and it helped the moribund housing market, which in turn helped economic growth.
“People did respond to the tax credit and if one looks at the data, what one sees is that the home prices began to stabilize once the tax credit went into effect. Ever since, there has been some movement in home prices. It essentially stopped the bleeding in the housing market and then, of course, in the past couple of years, we have had some recovery,” says Lawrence Yun, chief economist for the National Association of Realtors.
Not everyone is willing to pin today’s recovering housing market on the first-time homebuyer tax credit. In 2011, Austan Goolsbee, former chairman of the president’s Council of Economic Advisers, told MSNBC he believes the tax credit was a mistake, Politico reported.
Consumer Financial Protection Bureau
The fact that the little guy often gets the short end of the stick in financial deals with businesses and corporations led to the establishment of the Consumer Financial Protection Bureau in the Dodd-Frank Act.
The bureau started operations in July 2011 and since then has issued a set of rules pertaining to mortgages. It also had some high-profile success in suing abusive credit card companies.
The bureau has another feather in its cap. “It is the only federal regulator that has completed all of its rules on time,” Mierzwinski says, referring to the Dodd-Frank mandated timelines for researching and writing rules for consumer protection.
The mortgage and housing industry played a big part in the developments that lead up to the financial crisis. Throughout the recovery, consumers have suffered as a result of bad mortgage lending practices and the securitization processes that enabled them. Securitization refers to the process that turns an asset, in this case an individual mortgage, into an investment, according to the Securities Industry and Financial Markets Association.
Lenders could write a risky loan and then sell it, effectively divesting themselves of all risks associated with the loan. That loan would then be pooled with other loans of varying quality to make a mortgage-backed security.
New rules from the CFPB set some boundaries around the metrics that lenders can use to qualify borrowers for loans. Loans that fall within the boundaries will be qualified mortgages and will not be subject to a rule from Dodd-Frank, known as the 5 percent risk retention rule. The risk retention rule requires that lenders hang on to 5 percent of the credit risk from loans made into securities. The Federal Deposit Insurance Corp. is currently working on implementing the risk retention rule and is revising the definition of a qualified mortgage to match the rule written by the CFPB.
The CFPB rules also offer homeowners a way to avoid foreclosure in the future. The agency has laid out requirements for appraisals and the way that lenders value properties in addition to rules on mortgage servicing.
Joe Parsons, senior loan officer at PFS Funding, a mortgage banker in Dublin, Calif., says the end result could make it more difficult for a borrower to get a loan and it could be more expensive.
“They have raised the cost of mortgages, raised the cost of appraisals and stretched out the time it takes to get a mortgage,” he says.
But, the CFPB has a broad mandate over consumer protection. It also has recovered $85 million for consumers victimized by credit card companies, specifically three subsidiaries of American Express. Between 2003 and 2012, consumers were deceived about bonus-point programs, charged unlawful late fees, discriminated against on the basis of age and were misled about debt collection, according to the CFPB. American Express Centurion Bank and American Express Bank, FSB, also failed to report customer disputes to credit bureaus.
“The second thing that they did in their case is they sent the money directly back to consumers. Consumers did not have to fill out forms. They did not have to jump through hoops as the (Office of the Comptroller of the Currency) used to make them do in the rare occasions when the OCC issued a penalty against a bank,” Mierzwinski says.