How Financial Reform Will Impact Your Wallet

There’s good news out of Washington that will help you make the most of your money. A major overhaul of federal financial regulations is now all but a done deal. Congress hammered out a bill last week that is due for a final vote, and tobe signed into law by President Obama, perhaps as early as next week.

The bill takes on a wide range of initiatives that impact Wall Street as well as Main Street. I want to share the key new steps that will help protect consumers like you:

There’s a New Watchdog Focused on Your Best Interests
There will now be a federal Consumer Financial Protection Bureau which will have a big say in regulating mortgages, credit card practices, the private student loan industry, as well as overseeing the pay day loan industry. Unfortunately, a hard lobbying effort from the automotive industry exempts the car loan industry from oversight. That’s just one area where you must remain extra vigilant when loan shopping.

It will be Harder to Get into Mortgage Trouble
A series of provisions in the new bill make it mandatory for the mortgage business to permanently clean up its act. For example, lenders must verify your income before granting a loan. No more no-doc or NINJA loans. Sure, they’ve disappeared recently, but you better believe that without this legislation they would have likely crept back into the marketplace when things stabilize a bit more. I say good riddance. The new law will also prevent lenders from steering borrowers into adjustable rate mortgages if the borrowers would be unable to handle the payment if the rate ratchets up. There’s also a provision that makes it illegal for mortgage brokers to receive a commission based on the interest rate of the loan; during the real estate bubble some unscrupulous brokers pushed borrowers into higher rate loans to pocket a bigger commission. I’m also glad to see that lenders will no longer be able to collect a prepayment penalty on adjustable-rate mortgages.

Credit Cards
Credit Cards

Debit Cards: Keep on Eye on How This Plays Out
You probably aren’t aware of this, but when you use a debit card the retailer is charged a fee by the bank to process the transaction. Retailers and banks have been arguing about this fee-typically it is 1 percent of the transaction-for years. Under the new legislation the Federal Reserve must decide once and for all what is a reasonable fee. Retailers say if it is reduced you’ll see lower costs. I’m not so sure. And if the banks are forced to lower the fee, you’ll likely see any rewards programs tied to your debt card reduced or eliminated. One important caveat: the new banking regulations only apply to banks with at least $10 billion in assets.

Cash Could Be King

Retailers are now allowed to offer lower prices if you pay with cash, a check or a debit card. My advice is to now always ask if there is a better price for paying with cash.

Free Credit Score if you aren’t offered a Top Deal
From now on if your credit score is the reason you don’t get the best possible deal-say you are turned down by a landlord, or the rate you are offered on a mortgage is above the rate charged to borrowers with the best credit-you will be entitled to a free copy of your credit report.

Coming up Short on Fiduciary Duty And Equity Indexed Annuities
One area where I wish Congress had stood firmer was the issue of “fiduciary duty.” The idea here was that a financial adviser or broker would have to act in your best interests—that’s what fiduciary is all about—when making investment recommendations to you. Right now the standard is simply one of suitability, which stops far short of requiring the broker/adviser to act in your best interests. Unfortunately, the fiduciary rule got kicked down the road in the new bill. All that is going to happen is that the SEC will study the issue. That’s a lost opportunity for Washington to really do something that protects investors.

It’s also frustrating that the SEC lost its ability to oversee the world of Equity Indexed Annuities. The SEC had already issued a rule—not yet enacted—that would have tagged these investments as securities, thus making them regulated by the SEC. But the new legislation undoes all of that, and like all insurance, it falls onto each state to write and enforce its own rules.

Despite those two glaring omissions, there is plenty to cheer about the new financial overhaul. But I have to say that as positive as all these new consumer-friendly protections are, I don’t want you to let your guard down. Yes, it’s great that the government will have your back. But you better believe that if any part of the financial services industry sees its revenues decline because of any of these new rules it will kick into overdrive to come up with new fees. So stay on your toes, read your statements carefully, and don’t give your banks or lenders any reason to make extra money off of you.