The Senate moved quickly Thursday evening to pass its version of a financial reform bill that gives the federal government more oversight in the financial sector. Now, the two houses of Congress will work to merge the different language in the House and Senate bills (the House passed its version of reform in December.) Both bills establish a new consumer financial protection agency to serve as a government watchdog that enforces rules to protect people from predatory practices. There's no telling how long it will be until a final bill reaches the president's desk, but until then, here is what we know about how the bill will affect consumers going forward.
Adds certainty to the markets. Generally, the stock market doesn't react well to uncertainty. Although changes will still be made to the final bill, there is hope that investors now have a better idea of how Congress wants to reform the financial system. "The markets hate uncertainty," says Richard Barrington, personal finance expert at MoneyRates.com. "From Greece to the Gulf of Mexico, there's a lot of bad things going on right now. Hopefully, this will reduce one of those elements of uncertainty in the markets."
Many of the bill's provisions could significantly affect the way big banks and other financial services companies do business. Says Jeff Tjornehoj, Lipper's research manager for the United States and Canada: "I think the fear out there, particularly on Wall Street, is that this is going to impact the ability of the financial services industry to do what they've been doing."
Regulating risk. It looks as though the federal government is going to be given greater authority to regulate risks in the marketplace—and a lot of that responsibility may fall on the Federal Reserve. The problem is, Barrington says, regulators were supposed to be doing this in the first place. He argues that federal regulators theoretically had oversight powers before the financial crisis occurred. "Like a lot of things, it depends on the implementation," he says. "Does this make consumers safer? It remains to be seen."
During the House-Senate conference, one of the biggest differences in the two bills—whether or not a liquidation fund should be created to safely wind down distressed banks—will be debated. The House bill contains a provision that requires $150 billion to be raised from financial services companies and placed in a fund, to avoid a repeat of devastating bank failures. It remains to be seen how this money will be raised, but any added costs to be banks could hit consumers. "If we make things more expensive for banks to operate, they're likely to pass those costs along to consumers," Tjornehoj says.
Regulation of debit card fees. Consumers may be forced to rethink the way they pay for some purchases because a provision in the bill allows federal regulators to investigate interchange fees—what banks charge retailers to process the transaction—associated with debit cards. It's going to be a battle over who gets a bigger share of the fees. Barrington believes retailers may win the battle, and that could potentially change the way consumers use their debit cards.
The goal is to limit how much profit the banks make in these transactions, and while that seems to be a noble goal, it may backfire for consumers. "If it squeezes banks too much, it could limit the availability of where you can use your debit card in the long run," Barrington says. "If it's not attractive to the bank, then inevitably you'll find fewer places where you can use your debit card." The reason it's become so easy for consumers to use a debit card is that until now, it's been a profitable for banks to invest in and expand that network, Barrington says.
Tightening mortgage standards. Part of the role of the new consumer protection agency will be to investigate how loans are given to consumers and what reforms need to be made. "This would make credit tougher to get, but I would argue that could be a good thing," Barrington says. "Too much credit got a lot of people and the system in trouble."
The new agency is meant to protect individuals who were being taken advantage of and signing up for mortgages that they couldn't afford. "The mortgage crisis was caused by lenders not paying any attention to whether or not a mortgage was affordable for the consumer," says Lauren Saunders, managing partner at the National Consumer Law Center. "They made their money on the front end, and they didn't care. Hopefully, that's all going to change."
Fannie Mae and Freddie Mac escape regulation. One of the biggest stories from the passage of financial reform may not be what's in the bill, but what didn't make it. Some senators, most notably Richard Shelby, a Republican from Alabama, have complained that financial reform isn't comprehensive enough unless it includes government-sponsored enterprises like Fannie Mae and Freddie Mac, which received bailout money and are still effectively owned by the government. "Here you have for-profit entities that have an incentive to make profit, but knowing that if they make mistakes the government will be there to bail them out," Barrington says. "That's a raw deal for taxpayers."