The Skinny on “Fat-Cat” Reform
Just as opinion polls showed public confidence in President Obama at a new low, his signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21st may have given him a well needed boost.
Congressional republicans will argue this of course, but their approval rankings are still lower than their counterparts across the aisle. So who wants to have James Carville and Mary Matlin over for dinner? Count me in!
After 18 months of intense debate and negotiation, the 2300 page bill is very complex and represents the most comprehensive financial overhaul since the Great Depression, tightening lending practices, expanding consumer protections, and placing stiff restrictions on banks and Wall Street.
In most cases, the bill’s provisions don’t offer a quick fix. Instead, it’s been described as a “prescription for regulators to act.” Many argue its real impact won’t be fully realized for years. But with mid-term elections just over three months away, most of us know what that will likely mean in November, particularly for democrats. The question now is will history repeat itself? Only time will tell.
At the bill’s signing, the President praised Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA) for leading the bill through Congress. Hoping to explain highlights of the law in consumer-oriented terms, Obama said it would help “root out the fine print and hidden fees for Americans,” and “provide deeper scrutiny of the sophisticated and complicated financial transactions on Wall Street.”
The legislation gives the government new powers to break up companies that threaten the economy and sheds more light on the financial markets that have previously escaped regulator oversight. “There will be no more tax-funded bailouts... period,” Obama added. Should a large financial institution fail, the new laws provide the ability to “wind it down” without endangering the economy, passing costs on to surviving banks, not to the public.
Comparisons to the Great Depression have been made countless times in the last two plus years. Faced with a spiraling crisis that threatened to bring the US economy to a standstill, that era resulted in the creation of the Federal Deposit Insurance Corporation (FDIC), to protect consumer deposits, as well as the Securities and Exchange Commission to oversee the markets. Both have stood the test of time, thus far at least, and have been credited with helping to pull the country out of that prolonged crisis.
In much the same fashion, the Dodd-Frank Act has established two new federal regulatory agencies, one aimed at Wall Street, the other at Main Street. The first, known as the Financial Stability Oversight Council, is intended to “identify and address systemic risks posed by large, complex companies, products and activities before they threaten the stability of the whole economy.”
The second agency barely survived passage on the Hill, but many of the Act’s supporters have said it will likely prove to have the most direct influence on the lives of average Americans. It will be the focus for the remainder of this discussion.
The formation of the Bureau of Consumer Financial Protection will create a federal ‘watchdog’ of sorts, whose primary responsibility is to protect consumers from unfair, deceptive and abusive financial products and practices.
Having first introduced the proposal for the new agency in June of last year, Obama was ultimately successful in seeing its passage by arguing that a crippling recession was primarily caused by a breakdown in the financial system that cannot be allowed to happen again.
Funded by the Federal Reserve, its mission, in part, is to ensure that people receive clear information needed on loans and other financial products on everything from the types of mortgages people can get to the fees on their credit cards.
On the subject of mortgage reform alone, consumers can expect dramatic changes in how the industry conducts business, and ultimately in how they can expect to be protected. Consider the following provisions:
Mortgage brokers will no longer be able to earn a bonus, called a “yield spread premium,” for encouraging borrowers to accept mortgages with higher interest rates, when they can often qualify for a lower rate.
Lenders will no longer be able to charge prepayment penalties on balloon mortgages, ARMs or Interest-Only loans, and will only be able to charge prepayment penalties on fixed-rate mortgages during the first three years of the loan.
Lenders will be required to verify borrowers’ finances to make sure they can really afford loans they are offered. If it’s an ARM, lenders must certify the borrower can afford the monthly payment even if it adjusts to the highest possible level.
Considering the magnitude of this crisis and how we got here, these should all be steps in the right direction. Again, time will tell.
But the President can’t proclaim mission accomplished too quickly, as he now faces the daunting task of nominating the first person to head the new Bureau. His choice, expected soon, will be a momentous one, because the first Director will have great influence over the agency’s direction and its estimated $500 million budget that doesn’t require Congressional approval.
Given that Senate confirmation is needed, the selection is shaping up to have all the drama of a Supreme Court nomination. As this summer kicked off, most Americans with even a modest political awareness assumed that Elena Kagan would be the controversial senate confirmation leading up to the fall election season. Who knew?
No matter who takes over the helm at the Bureau, it looks like history has at least started to repeat itself, as the creation of both new agencies may prove to have similar impacts on the lives of millions of Americans the way the FDIC and SEC has done for decades. Regardless of whether your favorite color is blue or red come this fall, we should all hope for that.
Chris can be reached at christopherbeagle@hotmail.com.