Volume 13: 3rd Quarter 2010
Financial Reform Legislation Signed into Law
Just What's in those 2,300 Pages?
On July 21, 2010 President Barack Obama signed into law the Dodd-Frank Wall Street and Consumer Protection Act, the most sweeping financial industry reform legislation since the Great Depression. President Obama promoted the bill as designed to prevent future financial crises and insists the reform will foster innovation, not hamper it.
Many critics contend the new law only creates more bureaucracy and ignores the federal government's role in the recent financial crisis, while others deride the bill for not going far enough.
Supporters believe the bill is an important step forward and will lessen the impact of any future economic meltdown.
At more than 2,300 pages, there's a good chance not many people have had the chance to read the new legislation, so what's in the bill and how will it effect consumers?
Some major provisions included in the legislation are the creation of the Bureau of Consumer Financial Protection, the creation of a Financial Services Oversight Council, mortgage reforms, audit of the Federal Reserve Bank, the Volcker Rule and regulation of derivatives. Many of the provisions will not take effect for a year or more while regulators set out the details of the new guidelines.
Bureau of Consumer Financial Protection
A new agency to be created within the Federal Reserve Bank will establish rules overseeing financial products such as mortgages, credit cards, payday loans, bank fees and traditional loans. Existing consumer regulations applicable to financial firms, mortgage businesses and payday and student lenders will be revised to ensure the fine print on financial services is certified, clear and accurate.
Financial Services Oversight Council
Membership for this council will include the heads of federal financial agencies and will monitor risks in the financial system and seize failing banks. It will also set up a process in which a failing bank would be liquidated, without taxpayer bailouts.
Mortgage Reform
Lenders will be required to verify that borrowers are able to repay the loans they issue and will pay fines for irresponsible lending. Borrowers must benefit from refinancing mortgages, and fees cannot be charged for paying off a mortgage early. Banks and other financial companies which bundle mortgages into pooled investment instruments must keep at least five percent of these instruments on their books, intended to serve as an incentive to make solid loans.
Federal Reserve Bank
The General Accounting Office (GAO) will conduct a full audit of the Federal Reserve Bank's emergency lending to banks since 2007. Details should be available on the Federal Reserve website by December 2010.
The Volcker Rule
Named for Paul Volcker, the former chairman of the Federal Reserve, the Volcker Rule restricts banks from engaging in certain types of trading, thus prohibiting banks from using federally insured deposits to trade in speculative investments for monetary gain. Some institutions, such as Goldman Sachs, Bank of America and Morgan Stanley may be able to bypass this rule by shedding their insured deposits or spinning off their proprietary trading portions of the business.
Derivatives
The legislation looks to regulate the trading of derivatives, an investment whose value depends on an underlying asset. The U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission (SEC) are granted the authority to regulate over-the-counter derivatives. Banks would be prohibited from trading certain forms of derivatives and most of the trading will be required to occur on transparent exchanges.
While experts are mixed on how the new law and regulations will work, critics who argue the bill doesn't go far enough believe the Volcker Rule was seriously watered down and wonder why no mention is made to address the problems of Fannie Mae and Freddie Mac, the government-sponsored corporations that were bailed out to the tune of $145 billion in taxpayer funds.
Another concern for critics of the legislation is the lack of detail in many parts of the legislation. Although regulators will have discretion over how the law is put into practice, they must first examine and study the legislation before developing rules.
The question as to whether or not the Dodd-Frank Wall Street Reform and Consumer Protection Act will work won't be answered for years as the new agencies are created and regulators conduct the studies to come up with the new regulatory actions.
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