Well, so much for today being an off-day.  I just caught the address by Pres. Obama (still looking for the video online- not posted at CNN or White House yet).  The Financial Regulation Bill has passed both houses of Congress and is awaiting Pres. Obama’s signature.  The bill is 2,300 pages long.

 This is a long post, but I broke it into three section, so feel free to go to the section that interests you.  Part 1 is “What Does this Bill Do?; part 2 is “What Does the Bill Not Do?; and part 3 is “The Effect on the Average American.” 

Part 1: What does this bill do? 

1) Creates a council of high-level federal officials led by the Treasury secretary.  They have the ability to seize and shut down financial institutes that are on the verge of collapse.  They also can pass rules to detect and prevent dangers to the financial system.  It is already stated that they will define how much cash banks must have on hand and that they will develop set procedures for the above-mentioned shut-downs.  

2) Creates a “Consumer Financial Protection Bureau” within the Federal Reserve.  They can write and enforce regulations covering mortgages, credit cards, etc.  This protection of consumers from abusive practices is one of the major assets of the bill.  This bureau is to strengthen regulation of hedge funds and credit rating agencies.

3) Includes the Volcker rule.  This restricts banks from investing and trading for their own accounts (which was a serious problem).  Banks can still put up to 3% of their capital in hedge funds or private equity funds.  The Volcker rule also makes an extensive framework for dealing with derivatives.  (As you should know, derivatives were THE major cause of the collapse according to most sources).  In helping to determine the actual value of these derivatives, most derivatives will be “forced” into exchanges.  A middleman is also inserted into the process in hopes of preventing the incestuous inter-connections that also led to the financial collapse.

Part 2: What does the bill not do?

Fannie and Freddie are mostly ignored in the bill.  As you should also know, Fannie and Freddie were part of the reason the financial collapse spread to the housing sector.  Their lending practices were also fundamental in the formation of derivatives that were basically worthless.

The bill does not lay out exactly how the specific directions given in the bill should be carried out.  Regulators have broad goals and no instructions.  Even with the best of intentions, this is a recipe for failure, incompetence, and an ever-expanding government.  A study of the bill by the United States Chamber of Commerce found that at least 316 different regulations and rules would have to be set and enforced (70 federal through CFPB,  11 through FDIC, 30 via the Federal Reserve, and 205 through S.E.C.).

Automobile dealerships are exempt from the restrictions that will apply to other lenders.  Huh?  I guess you can still go and sign a loan to buy a car with $99 down. 


Part 3: The Effect on the Average American

There will be new rules and restrictions on mortgage lenders.  There will be limits to the types of mortgages they can write plus they cannot be rewarded for steering borrowers to higher cost loans.  

As a borrower, you will be protected from hidden fees and abusive terms. 

As a borrower, you will have to provide evidence you can repay your loans!  (Yes, I love this!  I still feel that irresponsible Americans were IN PART responsible for the financial collapse). 

As a borrower, your auto lenders will NOT be affected by this regulation.  Get your auto loans through your bank, not one recommended by the dealership. 

Your community bank (if you use one) is exempt from the harsher oversight of the CPBU and gets a reduction on the insurance required.  This could either result in your local community bank being better or worse, depending upon your view of the legislation.  Keep in mind that you still have a choice!

The Federal Reserve is going to set new pricing for interchange fees charged by debit card issuers.  These changes will trickle down to the customers. 

The hardest to determine is the effect on you, as an average American, via the effects on businesses.  Contrary to popular belief, derivatives aren’t a foreign concept that only affects bankers.  All sectors of the economy use derivatives- most as a way to hedge against the changing prices of raw materials, the changes in gas and oil prices, and changes due to foreign exchange rates.  Even farmers use derivatives to hedge against changes in the value of their crops.  The effect of these changes can only be guessed at.


Sources:

Fox News (2010, July 15). "Congress OKs Wall Street Crackdown in burst of financial regulation unseen since Depression."  Link to article.

Fox News. (2010, July 15). "Congress Sends Obama Sweeping Financial Overhaul Bill."  Link to article.

Herszenhorn, David M. (2010, July 15).  "Congress Passes Financial Regulation Bill."  NY Times.  Link to article.

Liberto, Jennifer. (2010, July 15). "Wall Street Reform: On to Obama."  CNN Money Online.  Link to article.