So what’s all the fuss over the new financial reform law? The headline-grabbing law raised quite a furor on Wall Street, but what does it mean for you and me? Here is how the law will affect ordinary folk. The biggest change associated with the new law is the creation of a new federal agency, the Consumer Financial Protection Bureau. The mandate of the Bureau is to create and enforce regulations that will protect consumers of financial products much as the government now regulates safe practices for products such as vehicles and food. Areas of enforcement will include credit and debit cards, mortgages, and student loans.
Financial institutions will be required to clearly state the terms of consumer loans and follow strict guidelines designed to ensure that borrowers get a loan they can afford. Deceptive practices, such as hidden interest rate increases, will be illegal. Surprisingly, one important consumer financial product was left untouched. Car loans will not be regulated by the new agency, so “buyer beware” continues when borrowing for a car.
How you use your credit or debit card might also change. Bank overdraft fees will no longer be automatically assessed on debit card transactions. Instead, banks are required to give their customers a choice of accepting overdraft protection – along with the fee charged when overdrawn – or to allow their debit card to be rejected by the retailer when there are insufficient funds in the buyer’s account.
Also, the fee that credit card companies charge retailers to process customer charges will be limited by the Federal Reserve, which might trickle down to savings for consumers on their purchases. On the flip side, retailers have the option to require a minimum debit card charge of up to ten dollars, and using a credit card to pay college expenses may have limits.
Many of the changes in the law are directed to banks’ financial health, hopefully making your bank stronger and safer. The FDIC insurance limit has now been permanently increased to $250,000. Financial institutions must restrict their investment in hedge funds and private equity products. And banks will have to increase their capital reserves, with no institution allowed to become so large that it represents more than 10% of the banking market. Many of the law’s practical implications have yet to be worked out. So stay tuned for more changes to come.