Consumers will be significantly affected by the financial reform agreement that was hammered out between House and Senate lawmakers last night. Described by some as the biggest financial reform since the Great Depression, the bill, if passed, would overhaul many of the rules that govern relationships between financial institutions and consumers.
"It's historic legislation," says Michael Calhoun, president of the Washington-based Center for Responsible Lending. "It's a big win for consumers."
The agreement reached by congressional negotiators during the night represents a compromise between a bill that passed the House last December and the version proposed by the Senate earlier this summer. Votes by the House and Senate are expected next week.
What do the reforms really mean for consumers? All the details have not yet been released, but here are some of the big changes identified by consumer advocates and political experts so far:
New Consumer Protection Agency
A Bureau of Consumer Financial Protection, an independent regulator housed within the Federal Reserve, would consolidate oversight of a wide variety of financial products, including mortgages, credit cards and payday loans. Responsibility for these areas is currently scattered across a variety of government agencies, and experts say that creating a single supervisor will help make financial products easier to understand and not take unfair advantage of borrowers.
"The creation of this consumer bureau is really important," says Ellen Bloom, director of Federal Policy at Consumers Union. "Consumers have suffered plenty during this financial crisis and now they have an entity that's watching out for them."
Free Credit Scores
If you get turned down for a loan because of your credit score, or are offered an interest rate you deem too high, you would have the right to see the score your lender is working with, for free. Consumers Union's Bloom says consumers may currently see their report, but don't have access to their score. She adds this provision will help consumers understand whether their lenders' concerns are legitimate.
Why does it matter? "Credit scores tell you how much you should be paying for a loan," says CRL's Calhoun. "It's creates transparency."
Stricter Mortgage Practices
A hodge podge of state regulations on mortgages will be brought under a national yardstick.
Among the changes: consumers with adjustable-rate mortgages and other complicated mortgage products would no longer have to pay pre-payment penalties if they want to pay off their mortgage early. Consumers currently pay penalties that make it more expensive – and sometimes impossible – for them to switch out of their loans if they feel they have been given a bad deal. Consumers say current practices stifle competition and give lenders an incentive to sell unfair ARMs.
In addition, the bill will prohibit brokers and bankers from earning bonuses based on the type of loan they sell, which would reduce the incentive to write higher-risk loans.
"That's huge," says Calhoun. "This is one of the biggest reforms. It's a return to the kind of mortgage lending we had 20 years ago,before all this garbage started," he says.
New Debit Card Rules
Merchants have complained for years that Visa and MasterCard's rules about debit cards put them at a disadvantage. The reform would address many of these complaints, giving store owners a victory over card issuers, and to some extent over consumers.
Store owners would be allowed to set minimums on credit card transactions – up to $10 -- which they are currently not allowed to do. For consumers, this likely means no more $1.50 packs of gum, which can cost the vendor more than $2 in swipe fees.
"Consumers may feel some sympathy on this issue, but if you take away their ability to use their cards anywhere, anytime, they're not going to be happy," says Gerri Detweiler, a credit advisor at Credit.com.
The bill would also allow the Federal Reserve to make sure that card issuers are charging "reasonable and proportional" fees, which is likely to bring down costs to store owners, and potentially could also reduce prices for consumers.
Tougher Auto Financing Rules
Some lawmakers had hoped to put auto lenders under the eye of the Bureau of Consumer Financial Protection, but the agreement leaves them under the Federal Trade Commission. However, the FTC has been given more powers to "develop and enforce new rules to protect consumers from unfair and abusive auto financing transactions," according to the Consumers Union.
Wall Street Reforms
A range of other, intricate financial regulations are meant to reform some of Wall Street's aggressive business practices with the aim of preventing a repeat of the financial crisis.
One of the biggest changes involves the creation of an Office of Credit Ratings, which is meant to supervise rating agencies such as Moody's and Standard and Poor's, and prevent conflicts of interest that may sway credit ratings issued to companies. The bill also allows investors to sue credit agencies, according to the Consumers Union.
The credit rating agencies attracted criticism during the crisis, for allegedly assigning positive ratings to risky investments.
Other big reforms involve stricter regulation of how CEOs are paid and forcing derivatives to be traded on public exchanges. Lax practices in those areas are widely blamed for the financial debacle of the past three years.
In that regard, experts say, even archane trading rules will have a direct effect on consumers.
"All of us are harmed immensely when we have a financial crisis," says Doug Elliott, an economics fellow at the Brookings Institution. If banks had been adequately regulated before the crisis, many Americans who are unemployed today would still have jobs. This bill, he says, can't prevent future crises since financial systems are just as fallible as the humans who run them. However, the bill, if passed, "will make crises less frequent, and less substantive when they do happen."