What the Financial Reform Law May Mean to You
The new “Dodd-Frank Wall Street Reform and Consumer Protection Act” financial reform bill recently signed into law contains several elements that are designed to help you as a consumer including the creation of a new consumer protection agency; new access to your personal credit score and federal help for private student loans; and increased supervision over mortgage lenders, car loan lenders, and federally-insured banks. It is the most significant piece of legislation to affect our country’s financial institutions since the 1930s. Although the law will take 1-2 years to fully enact, some of the provisions are effective immediately. Here’s an overview of the most significant portions of the new law that could affect you:
Home Mortgage Loans
The new financial reform law contains several provisions that are aimed at increasing consumers’ awareness of, and ability to repay, the loan they take on to purchase a home. For example,
- Mortgage brokers will no longer have a financial incentive to “sell” high interest-rate and/or exotic home mortgages to home buyers. Prior to the new law brokers were able to collect commissions and/or bonuses for approving buyers for more expensive loans than they may have been able to afford, particularly when the adjustable rate reset to a higher rate.
- As a home buyer you will not be able to pay a portion of closing costs for your mortgage and take out a second loan to finance the remainder due. Buyers will either have to pay the entire amount due at closing or finance 100% of their closing costs as part of the mortgage.
- You will no longer be able to get a “no-doc” or “low-doc” loan to buy a home. Prior to this new law, home buyers were more easily able to get a loan that did not require providing a lender with proof of your income, employment, or even ability to repay the loan. Mortgage lenders are now required to retain at least a 5% interest in the loans that they originate. From now on if you are applying for a mortgage to buy a home you will have to provide information and documentation to prove that you have the assets and income necessary to be able to repay the mortgage loan. Learn more about how to shop for a mortgage.
- If you get an adjustable-rate mortgage (ARM) you will be able to prepay your loan (pay it off early) with no penalty. If you take out a 30-year fixed rate mortgage you would have a prepayment penalty only if you want to pay the loan off entirely within the first three years.
- Before you are approved for a home loan your lender will have to determine that you can financially afford all of the costs associated with your mortgage – that means the principal repayment as well as interest, taxes and insurance. In addition, if you get an adjustable-rate mortgage (ARM), you will have to be able to demonstrate that you can afford a higher monthly mortgage payment if and when the interest rate rises.
Credit Cards, Debit Cards, and Loans
The new law contains several provisions that will affect your ability to obtain and use credit in the future.
If your application for a loan is turned down – or if you are offered a loan with a higher interest rate - because the bank or lender decides that your credit score is not high enough for their standards, you will be able to get a free copy of your credit score. Your credit score is a number based on your credit history (how you have or have not managed credit well in the past) that lenders use to determine if you are likely to repay your loan and how to determine the amount of money (interest) you should have to pay for a loan or financing.
Although you are already permitted by law to get a free copy of your credit report annually, you have to order a copy of credit score separately for a fee from one of the three major credit bureaus or through Myfico.com. While most lenders use the Fico score as their tool to determine if a loan applicant is a good risk (meaning that the borrower will make consistent monthly repayments on time in full according to the terms of the loan), lenders have their choice of which credit score to use and some lenders have developed their own proprietary method of calculating a credit score depending on the type of loan or credit the applicant is requesting (i.e. a mortgage versus a credit card or line of credit). Knowing your credit score is important because it will give you an idea of whether or not you are likely to be viewed by potential lenders as a good “risk” for repaying a loan. Once you know your score you can work on improving it by paying your bills on time, correcting errors on your credit report, and keeping your total credit card debt low relative to your credit limits.
- Colleges will now be able to set a maximum amount they will allow people to charge for tuition costs on their credit cards, and they have the option to refuse accepting credit card payments for tuition altogether. If you normally charge your tuition to a credit card, contact your college’s finance department to learn if you can continue doing so or if their policy on accepting credit card payments has changed.
- Stores will be able to provide customers with discounts for paying with cash, check, or debit card. Prior to the new law, discounts for not paying by credit card were not allowed. In addition stores can now set minimum (up to $10) and maximum limits on credit card transactions. That’s important to know because you may need to keep at least a small amount of cash in your wallet or pocketbook more frequently if you are used to only using credit cards for purchases and transactions.
- The federal government retook control of subsidized student lending in 2009 and under the ”Dodd-Frank” law the private student loan industry (loans that are not subsidized by the federal government that are made by banks and other financial institutions to students and their parents) will also come under the supervision of the newly-created Consumer Financial Protection Bureau. Student borrowers will now have one place to access easy-to-understand information about private loan options to ensure that they understand the long-term financial implications of taking on debt to attend college and/or graduate school.
New Federal Protections
The new law creates new federal bureaus and offices to ensure that consumers are more fully protected as investors, credit users, and borrowers. It also strengthens existing agencies and increases federal insurance amounts.
- The new law creates a new entity, the Consumer Financial Protection Bureau. The bureau was created to provide individuals with a federal “watchdog” to protect consumers against unfair and/or predatory lending practices. The bureau will centralize federal oversight of consumer financial products including credit cards, private loans, and mortgages. It will contain an Office of Financial Literacy and provide individuals with easier, faster access to file complaints with the federal government about unfair lending practices.
- An Office of Investor Advocate will be established within the U.S. Securities and Exchange Commission (SEC); its function will be to advocate for and protect the rights of individual investors.
- The Federal Trade Commission (FTC) will have expanded authority to “protect consumers from unfair and abusive auto financing transactions.” Learn more about buying your first car.
- Bank accounts at institutions insured by the Federal Deposit Insurance Corporation (FDIC) will now have a permanent, higher insurance limit. Prior to 2008 the insurance limit on any account within an FDIC-insured bank or institution was $100,000 and the limit was only temporarily increased to $250,000. That limit was set to expire on January 1, 2014 and the former, lower amount would be reinstated. Now all accounts in FDIC-insured institutions are insured for up to $250,000.
- The Federal Deposit Insurance Corporation (FDIC) will have expanded authority over member banks and financial institutions. The FDIC will require that banks have enough capital on hand so that they do not into federal conservatorship if the value of their investments drops during a major market downturn. The FDIC has taken over nearly 250 banks that have become insolvent (not had enough cash on hand to meet its financial obligations) since 2008. In addition FDIC-insured banks’ investing choices will be limited to help ensure that they do not lose money through risky investing practices. For example FDIC-insured banks and financial institutions will be restricted from investing in hedge funds, private equity funds and have limits placed on proprietary trading of their stock.