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From Card Fees to Mortgages, a New Day for Consumers

At last, it’s settled.

After months of haggling, the terms of financial reform are set, so long as both houses of Congress vote to accept them in the coming days.

Credit Cards
Gyro Images | AmanaimagesRF | Getty Images
Credit Cards

While elected officials spent much of their time working out the details of regulating complex derivatives and grappling with whether banks ought to make big bets with their own money, they also set a number of new rules that will directly affect consumers.

Investors and those who advocate on their behalf did not get everything they wanted. Stockbrokers and annuity peddlers are still not required to act in their customers’ best interest, for instance. But mortgage shoppers stand to gain under the new rules and millions of people will now have access to a free credit score.

Here is a roundup of some of the biggest consumer issues that members of Congress addressed and where they ended up:

CONSUMER BUREAU The bill would create an independent Consumer Financial Protection Bureau, housed within the Federal Reserve. The bureau is to be headed by a single director appointed by the president and confirmed by the Senate.

The new bureau would write and enforce rules for most banks, mortgage lenders, credit-card and private student loan companies. Smaller banks and credit unions, or those with less than $10 billion in assets, would have to obey the consumer bureau’s rules — but the smaller institutions’ enforcement and supervision would remain with their current regulators, said Travis Plunkett, legislative director for the Consumer Federation of America.

CREDIT SCORES While you still can’t get a free credit score each year with your three free credit reports, you will soon be able to see the score if it has hurt you in some way.

Let’s say a mortgage lender, credit card issuer, insurance company or landlord quotes you a more expensive interest rate or premium price or refuses to rent you an apartment because of problems with your credit score. If that happens, the company or individual would have to give you, for free, the score (probably a FICO score) that led to your troubles.

Keep in mind that nothing is stopping you from asking for the score, even if you like the rate or result of your application. You may be able to get it for free even if the lender, insurer or landlord is not legally required to give it to you.

MORTGAGES The bill offers a number of new protections, many of which are a bit like closing the barn door after all of the animals escaped. Lenders, for instance, will have to check borrowers’ income and assets. Most lenders have learned that lesson by now or have ceased to exist.

Other rules include a ban on prepayment penalties for people with adjustable rate and other more complex types of mortgages. Mortgage brokers and bank employees will no longer be able to earn bonuses based on the type of loan they put you in. That will presumably eliminate any incentive to push high-interest loans on borrowers (who might otherwise qualify for a better deal) to inflate bank profits.

Julia Gordon, senior policy counsel for the Center for Responsible Lending, said there will now be a cap limiting mortgage origination fees to 3 percent of the loan. There are exceptions for required upfront mortgage insurance premiums, say for a Federal Housing Administration loan, and for points that borrowers elect to pay to lower the mortgage interest rate.

CREDIT AND DEBIT CARDS Hate those merchants that won’t let you use your credit card unless you spend more than a certain amount? Well, now they have Congress’s blessing, as long as the minimum is not higher than $10. The Federal Reserve can increase the minimum if it chooses. As for maximums, only the federal government and colleges and universities can limit what people spend. So if you are paying tuition on a credit card and earning a couple of free plane tickets each year, that fun may soon end.

Merchants are also free to offer discounts to people who pay cash instead of using cards, or use debit instead of credit cards. They will not, however, be able to charge one price for people using American Express cards and a lower price for people using Visa and MasterCard credit cards.

Merchants will also not be allowed to give discounts based on which bank issued the debit or credit card you are using. Why would a merchant want to do that? Because the bill gives the Federal Reserve the ability to set a limit on the fees that stores must pay to accept debit cards. The catch here, though, is that only banks with more than $10 billion in assets would be subject to the cap. As a result, merchants may have to pay more to accept debit cards from smaller banks and credit unions than big banks like Bank of America and Chase. And if that were to happen, stores might be tempted to offer discounts to people with big bank debit cards.

Oddly, community bankers and credit unions don’t want to end up earning more money from merchant fees than big banks do, even though it would give them a competitive advantage. Why not? They worry that the big banks will immediately put pressure on Visa and MasterCard to lower merchant fees for all debit cards, not just the big banks’ cards. Thus, the smaller institutions had hoped that the status quo would remain, with everyone continuing to earn fat fees from the merchants forever.

It is not clear what the Fed will do or how the big banks and Visa and MasterCard will react. This could take a few years to play out, or many years if lawsuits start flying. Some merchants may try to play fast and loose with the rules too. Bill Hampel, chief economist of the Credit Union National Association, figures that small retailers might happily accept debit cards with the names of big banks that they recognize and then ask shoppers with cards from no-name institutions to use cash or some other card.

FIDUCIARY DUTY The Securities and Exchange Commission was given the authority to create a new rule for brokers that would require them to put their clients’ interests first. But that won’t happen right away. Consumer advocates wanted the so-called fiduciary standard in the new law, and it appeared in the House’s original proposal.

But ultimately, negotiators compromised and agreed to have the commission first conduct a six-month study of the brokerage industry, looking at, among other things, whether there are any regulatory gaps or overlaps in regulation of brokers and investment advisers. Advisers are already required to put their clients’ interests ahead of their own, while brokers must only recommend investments that are deemed “suitable,” based on factors like their clients’ financial goals and tolerance for risk. “It is now going to be incumbent on Chairman Shapiro to stay on top of this,” said Barbara Roper, director of investor protection at the Consumer Federation of America, “to ensure that this is an unbiased study and that any rules that are proposed are strong and really provide the full fiduciary duty that investors are entitled to.”

But there are no guarantees.

EQUITY INDEXED ANNUITIES These annuities are complex financial products that promise a minimum return on your investment. But they often require you to tie up your money for long periods of time and charge hefty surrender fees if you need to pull out your money early. Unscrupulous salesmen, who collect lucrative commissions, have used deceptive marketing techniques to sell these products to senior citizens, which is why sales of these annuities have been the subject of many lawsuits.

But a provision in the legislation will prevent the S.E.C. from regulating them, a step backward, consumer advocates and the commission have argued, from what is now the case. The S.E.C. had adopted a rule to regulate these annuities as securities, but it had not yet been enacted. Now, the annuities would be treated as insurance products, which means they would be overseen by state insurance regulators.

“That means no securities antifraud authority, no rules against excessive compensation, and no securities regulators to help police the market for these abuses,” Ms. Roper said. “And there are no guarantees that the people who sell them know any more about the securities markets these products are based on than the people who buy them.”

Consumer advocates also said the amendment language is broadly written, which could allow products similar to equity indexed annuities — or those that have characteristics of both investments and insurance — to skirt S.E.C. regulation as well.

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