There’s been a lot in the news about the financial regulatory overhaul bill currently working itself out in Congress and, with the bill expected to be signed into law by the Fourth of July, it’s a good time to look at how you’re likely to benefit from the bill’s passage. Here’s a look at how various aspects of the legislation are likely to play out when the financial reform hits the books.
Outlook Good for Consumers
One of the major changes the bill will make is the creation of the Consumer Financial Protection Agency, which would be a unit dedicated to regulating financial products with consumer rights in mind. The necessity for such an organization was made clear when millions of Americans fell victim to the terrors of subprime mortgages during the real estate boom.
In addition to the creation of the CFPA, the bill could benefit ordinary Americans for the following reasons.
- Because the CFPA would be part of the Federal Reserve, it will get funding from the Fed and be able to ask Congress for additional funds, if needed.
- The protections introduced to shield consumers from predatory and/or dangerous financial products can be lifted (by bankers’ petitions) only if such protections can be shown to threaten the larger financial system.
- The CFPA would have the ability to create and enforce rules for various consumer financial products, including mortgages and credit cards.
- One potential downside to watch out for is that auto dealerships likely will not be regulated by the CFPA, which means that consumers can probably not expect any amped-up protections for vehicle-related loans.
Credit Rating Agencies Face New Restrictions
Credit rating agencies were partly responsible for deceptively high credit labels on risky investment products like the securitized pools of subprime mortgages that led to the housing market’s crash in 2007 and touched off the Great Recession. The financial regulation bill would attempt to eliminate such deceptive ratings:
- These agencies will have greater liability for the ratings they give and will be subject to lawsuits if it can be proved that they recklessly ignored or failed to review important information when evaluating a product.
- The Securities and Exchange Commission (SEC) will develop a solution for the conflicts of interest that currently exist and are partly responsible for the incorrect and deceptive ratings of the past.
Essentially, the new regulations should make investments safer for investors by eliminating some of the guesswork and conflicted interests that led to past problems. Such improvements could lead to greater stability overall in financial markets and thus the entire economy.