What Financial Reform Could Mean for Your Money

The legislation stands little chance of being approved in the Senate, but that doesn't mean some of its provisions won't be enacted through other means.

Financial reform is now being … reformed, and consumers could feel some of the proposed changes almost immediately. So what do the changes mean for your money? Let’s take a closer look, but first, a quick history lesson.

In 2008, in the wake of the economic collapse, Congress passed the most extensive financial reform package since the Great Depression. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was designed to give consumers more power and to keep banks from making the kinds of risky decisions that helped lead to the housing bubble.

Last week, House Republicans voted to undo many of the reforms put in place by Democrats in 2010. On a party-line vote, House Republicans passed the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, or the Financial Choice Act.

The Choice Act faces an uncertain future in the Senate. But Republicans have another path to enact much of what’s in the Choice Act.

The Senate Doesn’t Have to Act for Changes to Be Implemented

This week, the Treasury Department is releasing its own report on reforming financial reform, mandated by an executive order signed in the first few days of Donald Trump’s presidency. Many Choice Act provisions can be accomplished via administrative orders from Treasury, so it’s worth understanding the main tenets of the bill.

In general, Republicans have argued that Dodd-Frank rules have hurt banks, particularly smaller banks, which has reduced competition, ultimately hurting consumers.

“We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream,” Rep. Jeb Hensarling, (R-Texas), the driving force behind the bill, said in a statement.

Critics say the bill would recreate the pre-bubble atmosphere that led to widespread abuse and economic collapse.

“This legislation releases every bloodthirsty, greedy Wall Street super-predator back onto the American people to feast on our misery, like they did pre-Dodd-Frank,” said Rep. Gwen Moore (D-Wisconsin) during floor debate.

The bill repealing Dodd-Frank is more than 600 pages long. Many are devoted to back-end bank rules, such as how often institutions must pass “stress tests” to prove they aren’t at risk. But the bill also includes measures consumers would feel pretty immediately.

Consumer Financial Protection Bureau Weakened

Should the Dodd-Frank repeal efforts succeed, consumers would feel the impact most immediately via changes to the Consumer Financial Protection Bureau.

The law would essentially dismantle the CFPB and reconstitute it with far less power as the Consumer Law Enforcement Agency. Instead of having a single leader, it would have a commission — similar to how the Federal Trade Commission operates. Critically, it would not have a dedicated source of funding. Both steps would make the agency more subject to political whims.

The law also prevents the consumer agency from taking enforcement actions against unfair, deceptive or abusive acts and practices — a catch-all category that generally forbids fraudulent activity — significantly narrowing the agency’s ability to file lawsuits on behalf of consumers.

Public Complaint Database Targeted

The CFPB’s consumer complaint center is perhaps the most public manifestation of financial reform. As of March, 1.1 million complaints had been filed, each one requiring an answer from industry. The database is public, so it serves as a kind of search engine for consumers who want to learn about the background of the financial companies with which they do business. It’s a tool that CFPB employees and other regulators use to find potential patterns of abuse. Banks have complained that responding to every complaint — some are indeed frivolous — is a costly burden. More generally, critics say it’s unfair to publish unverified complaints against companies.

“Is the purpose of the database just to name and shame companies? Or should they have a disclaimer on there that says it’s a fact-free zone, or this is fake news? That’s really what I see happening here,’’ said Rep. Barry Loudermilk (R-Georgia) during hearings on reform that made clear elimination of the database would be a priority.

Single-Agency Regulation Changed

Prior to Dodd-Frank, consumer protection was split among 10 banking regulators. Many, like the Office of the Comptroller of the Currency, were unfamiliar to consumers. In some cases, such as with private student loan issuers or payday lenders, it wasn’t clear if any banking regulator had jurisdiction. The CFPB’s one-stop shopping to get redress — often through the complaint database — made obtaining answers easier. Through its various enforcement efforts, the bureau has returned $12 billion to 29 million consumers. Under the Choice Act, many enforcement responsibilities would be returned to their original regulators.

Payday, Arbitration, Auto Lending Rules Rolled Back

A host of CFPB consumer protection efforts would be dialed back or shut down by the Choice Act.

After years of study, the agency published rules last year to regulate the payday and title loan industries. Those rules would be eliminated. The Choice Act contains a provision that prevents any federal agency from “any rulemaking, enforcement or other authority with respect to payday loans, vehicle title loans or other similar loans.” (See how loans affect your finances by viewing a free credit report snapshot on Credit.com.)

The CFPB also has spent six years working to eliminate binding arbitration agreements that prevent consumers from filing lawsuits against corporations, requiring them to use arbitration for complaints instead. The Choice Act prevents the agency from making rules about arbitration.

The Choice Act also nullifies a 2013 rule that requires third-party auto lenders — sometimes called indirect lenders — to comply with the Equal Credit Opportunity Act. The rule was put in place because CFPB research alleged that some indirect lenders were charging high loan markups to minority groups.

Fiduciary Rule Eliminated

Efforts to undo reform would reach beyond CFBP rules, however. Another provision in the Choice Act would essentially eliminate the fiduciary rule requiring certain financial advisers to act in the interests of their clients. After a decade-long debate, the Labor Department is set to institute the rule this summer. It will take effect in January, and many financial firms are already abiding by it. The Republican legislation would remove the requirement.

“The final rule of the Department of Labor titled ‘Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Retirement Investment Advice’ and related prohibited transaction exemptions published April 8, 2016 … shall have no force or effect,” the legislation says.

Risky Mortgages Made Easier

The Choice Act also makes a wide series of changes to rules governing the way banks issue mortgages. The most obvious would be an easing of “qualified mortgage” rules designed to make sure lenders make good-faith efforts to ensure borrowers have the ability to repay home loans. Qualified mortgages don’t have risky elements such as balloon payments or negative amortization. Banks that offer qualified mortgages are exempt from more stringent ability-to-repay requirements. The Choice Act expands the definition of qualified mortgages, making it easier for banks to issue some mortgages.

Enforcement, So Long as the Industry Isn’t Harmed

Finally, and perhaps most importantly, the Choice Act requires the CFPB replacement to consider the impact of any potential enforcement actions on the financial industry when deciding to pursue action against a misbehaving company.

The new agency must “carry out a cost-benefit analysis of any proposed administrative enforcement action, civil lawsuit or consent order of the Agency; and … assess the impact of such complaint, lawsuit or order on consumer choice, price and access to credit products,” according to the legislation.

This dual role — enforcing consumer protections while also ensuring the safety and soundness of the industry — puts regulators in a tough spot. Suing a bank for mistreating customers can hurt the fortunes of that bank, and other banks that might be employing consumer-unfriendly tactics. That can make siding with consumers a serious challenge.

The CFPB was set up specifically to avoid this dynamic, and set up so that fighting for consumer rights was its main task. The Choice Act eliminates this “on-your-side” structure.

Image: YokobchukOlena

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What Could Happen if Trump Rolls Back The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act has been seen by many as legislation that helped dig the American economy out of the Great Recession by putting strict limitations on banks. Banks had to rein in their high-risk mortgage practices and meet stricter lending requirements.

President Donald Trump has begun the process to roll back parts of the legislation, which could eliminate the restrictions that banks had faced under Dodd-Frank. As recently as Feb. 3, Trump told business executives at the White House, “We expect to be cutting a lot out of Dodd-Frank, because, frankly, I have so many people, friends of mine that have nice businesses that can’t borrow money, they just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank.”

The executive order that Trump signed on Feb. 3 asks for a review of Dodd-Frank. Many of Dodd-Frank’s key provisions can’t be undone without legislation, and Democrats have vowed to do all they can to protect the law; however, with a Republican-controlled Congress, there is a possibility of dismantling the legislation.

Consumers and small business owners could feel the impact of Dodd-Frank’s potential rollback in three key ways.

Relaxed lending standards.

The subprime mortgage lending phenomenon caused a surge in defaults when the housing market crashed about a decade ago. Nearly 9.3 million homeowners experienced a foreclosure, short sold, or received a deed in lieu of foreclosure between 2006 and 2014, according to the National Association of Realtors.

Some legal experts worry that a rollback of Dodd-Frank could expose homeowners to the same lending risks they faced prior to the financial crisis.

“If Dodd-Frank is repealed, homeowners should expect to see a return to the ‘anything goes’ days of the 1990s and early 2000s,” says David Reiss, a law professor at Brooklyn (N.Y.) Law School. “There will likely to be a loosening of credit, but also a return to some predatory practices in some parts of the mortgage market,” he says.

When signed by President Barack Obama in 2010, the Dodd-Frank law created several government agencies, including the Consumer Financial Protection Bureau (CFPB). The CFPB, which was tasked with protecting consumers by regulating complaints, conducting investigations, and filing suits against companies that break the law, created the Ability to Repay and the Qualified Mortgage rules. The rules were meant to ensure that banks and mortgage lenders were only issuing loans to homebuyers who could reasonably afford to repay them.

“These are really rules that require lenders to pay attention to who their borrower is, to make sure their borrower can pay back a loan,” Reiss explains. “It sounds kind of silly to have a rule to tell lenders to make sure borrowers can pay back their loan, but before the financial crisis, it was pretty common.”

One of the popular ways to entice subprime mortgage borrowers before the recession was to offer teaser rates. Teaser rates, Reiss explains, made a mortgage appear affordable in its first six months or 12 months, with low rates and low monthly payments. Once the promotional period was up, the rates and payments would skyrocket.

The subprime mortgages and other loans with higher risk for consumers, which can be profitable to banks, had much higher rates of default, Reiss says.

Dodd-Frank legislators originally reduced and prohibited these exotic terms in order to suppress the turbulent market at the time. Repealing Dodd-Frank and its restrictions will not only bring back lenders’ old habits but return the market to a more volatile state, says Reiss.

While the potential abolishment of Dodd-Frank may be a shame in terms of the loss of consumer protections, there is a bright side, says Paul Hynes, a certified financial planner and CEO of HearthStone, a wealth management firm based in San Diego, Calif. Many lenders have complained that heightened regulations have only increased their costs and made it tougher for consumers to get access to much-needed financing. Since the recession, the homeownership rate in the U.S. has declined by 4.7%, from 68.4% in 2007 to 63.75% in 2016, according to the U.S. Census Bureau.

“The increased cost of compliance with Dodd-Frank may also go away,” Hynes says, “reducing the drag on the economy caused by these costs, and perhaps stimulating economic growth, higher wages, and overall increase in the standard of living for all Americans.”

Possible benefits for small banks and businesses.

The rollback of Dodd-Frank should have a positive impact on small banks that have felt the effect of the regulations much more heavily than their larger Wall Street and corporate counterparts, says John Gugle, a certified financial planner with Alpha Financial Advisors in Charlotte, N.C.

The costs of complying with Dodd-Frank for banks totaled more than $10.4 billion and 73 million hours in paperwork in 2016, according to the American Action Forum, a conservative nonprofit think tank in Washington, D.C.

Small banks, which used to be an engine for loan growth in their communities, have struggled with the costs to comply with Dodd-Frank, says Gugle, a member of the National Association of Personal Financial Advisors (NAPFA) policy committee.

“If you’re a small lender, and having to meet these increasingly rigorous regulations, you don’t have enough money or resources to throw at it,” Reiss says. “So I think the regulatory burden is felt more by the smaller institutions who are just trying to manage to keep the doors open.”

The Dodd-Frank rollback could make it easier for small business owners to qualify for small business loans. Since the recession, lending to small business owners has declined by 17%, according to U.S. Small Business Administration research. While larger banks have focused traditionally on investment and corporate banking, smaller banks have been a primary source of loans to local communities and businesses, and they were hardest hit by the recession.

“For smaller community banks, the increased compliance and regulatory costs have impeded their ability to lend,” Gugle says. “By lowering the regulatory burden, it would make it more cost effective for banks to make loans, but I am careful to point out that small businesses will still need to meet the stringent borrower requirements that banks will impose.”

Another recession? Not likely.

While many financiers and officials have advocated for the repeal of Dodd-Frank, the public is hesitant to remove the restraints on American banks.

In a survey of more than 1,000 people, California-based Personal Capital Advisors Corp. found that 84% were supportive of efforts to protect consumers’ financial rights and concerned about the lack of protections without Dodd-Frank.

Experts agree that a repeal will likely lead to risk-taking by banks, but contend that a recession is not immediately imminent.

If Dodd-Frank is repealed, Hynes, a NAPFA member, says he thinks the U.S. initially will see a “more robust economy, more jobs, and higher economic growth rates.”

“The U.S. economy experienced solid growth, punctuated by occasional, more ‘normal’ recessions, from the end of the Great Depression, about 1940, until 2007 — without massive legislative imposition such as Dodd-Frank,” Hynes says.

The post What Could Happen if Trump Rolls Back The Dodd-Frank Act appeared first on MagnifyMoney.

Is This the End of Mandatory Arbitration?

class-action-lawsuit

Federal regulators moved one big step closer Thursday to banning contract language that prohibits consumers from joining class-action lawsuits against corporations.

The Consumer Financial Protection Bureau today issued a formal Notice of Proposed Rulemaking on the ban, opening a 90-day public comment period that’s sure to attract heavy rhetoric from both sides of the issue.

Consumer groups favor the ban, saying arbitration clauses in standard contracts prevent wronged consumers from having their day in court; industry groups say arbitration is more cost effective than class-action lawsuits. A CFPB field hearing will be held Thursday in New Mexico.

“Signing up for a credit card or opening a bank account can often mean signing away your right to take the company to court if things go wrong,” CFPB Director Richard Cordray said in a statement. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them. Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing.”

The proposed ban has a long legislative and political history. It was initiated by the Dodd-Frank financial reform bill, which instructed the Consumer Financial Protection Bureau to study the issue and make rules after the study as needed. (The CFPB study was released in March 2015.) The bureau then released its first version of the potential rule and convened a commission to study its impact on small business last fall. The group’s report was also made public on Thursday.

Consumer groups were quick to cheer the rule.

“Forced arbitration is a get-out-of-jail-free card that lets banks, payday lenders and debt relief scammers avoid accountability when they violate the law,” said Lauren Saunders, associate director of the National Consumer Law Center. “Forced arbitration and class action bans force consumers into a biased, secretive and lawless forum, preventing either a court or an arbitrator from ordering a lawbreaker to repay all of its victims.”

Stern objections can be expected from industry groups such as the U.S. Chamber of Commerce. In advance of Thursday’s field hearing, the chamber’s Center for Capital Markets Competitiveness wrote the CFPB asking Cordray to address some issues with the rule.

In the letter, signed by David Hirschmann, President and CEO of the center, the group questioned “whether a rule prohibiting class action waivers will have the practical effect of eliminating consumer arbitration from the financial services marketplace.”

It also stated eliminating arbitration would actually make it harder for consumers to obtain redress in situations where claims were small and too infrequent to result in a class-action lawsuit.

“For these claims, consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court,” the letter stated.

Such consumers could potentially file small claims court claims, which can cost considerably less, however.

Here are some reasons the CFPB claims its rule will be good for consumers, per a press release.

A day in court: The proposed rules would allow groups of consumers to obtain relief when companies skirt the law. Most consumers do not even realize when their rights have been violated. Often the harm may be too small to make it practical for a single consumer to pursue an individual dispute, even when the cumulative harm to all affected consumers is significant. The CFPB study found that only around 2% of consumers with credit cards who were surveyed would consult an attorney or otherwise pursue legal action as a means of resolving a small-dollar dispute. With class action lawsuits, consumers have opportunities to obtain relief from the legal system that, in practice, they otherwise would not receive.

Deterrent effect: The proposed rules would incentivize companies to comply with the law to avoid group lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct. When companies know they can be called to account for their misconduct, they are less likely to engage in unlawful practices that can harm consumers. Further, public attention on the practices of one company can affect or influence their business practices and the business practices of other companies more broadly.

Greater transparency: The proposed rules would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit any claims filed and awards issued in arbitration to the CFPB. The Bureau would also collect correspondence from arbitration administrators regarding a company’s nonpayment of arbitration fees and its failure to adhere to the arbitration forum’s standards of conduct. The collection of these materials would enable the CFPB to better understand and monitor arbitration. It would also provide insight into whether companies are abusing arbitration or whether the process itself is fair.

You can read more about the credit laws that are on your side here.

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Image: Pierre Desrosiers

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