The Washington Post
By: Tomoeh Murakami Tse
June 26, 2010
The massive financial overhaul approved by key lawmakers early Friday was hailed by many reform advocates as offering landmark protections for consumers, even as others expressed disappointment at key omissions and wondered whether big business would exploit the bill's loopholes.
Although praising the establishment of a consumer protection agency, advocates chafed at an exemption granted to auto dealers as well as a provision that would put oversight of controversial annuities out of the reach of the Securities and Exchange Commission.
Some measures, such as stricter standards for brokers who give investment advice to individual investors, could go into effect only after a study is conducted. This frustrates some consumer activists who say it leaves the door open for continued influence from lobbyists for large financial companies.
"It's not everything we could have hoped for, but this is a big deal," said Barbara Roper, director of investor protection for the Consumer Federation of America. "There are battles that we lost, but we won the war."
The bill heads to a vote before the full Senate and House. Lawmakers have vowed to deliver it to President Obama before the July 4 holiday.
Consumer advocates pointed to new rules set forth in the bill. For example, it would require lenders, insurance agents, credit card companies and others to provide free credit scores to consumers who get turned down for a loan or are quoted a higher interest rate because of less-than-stellar credit histories.
The bill also would prohibit prepayment penalties for homeowners with adjustable-rate and other complex mortgages, which advocates say have unfairly trapped homeowners in unfavorable loans. Another provision aims to reduce incentives to create risky loans by banning bonuses to bankers and mortgage brokers based on the type of loan they sell to consumers. So-called liar loans, which helped fuel the housing bubble by putting families in homes they could not afford, would also be prohibited.
The provision receiving the most accolades from consumer activists was the establishment of an independent consumer protection bureau -- to be housed within the Federal Reserve -- with its own budget and a director appointed by the president and confirmed by the Senate.
"Finally, we're going to have this cop on the beat, that's going to have some teeth, that's going to be able to rein in abusive lending and deceptive products and services," said Susan Weinstock, financial reform campaign director at the Consumer Federation of America. "It's going to oversee . . . all sorts of things that tripped up consumers."
The consumer protection bureau would bring under one roof the oversight of a range of consumer financial products, including mortgages, credit cards, student loans and payday loans.
But it would not cover auto loans. Car dealers won an exemption after arguing that creating rules on top of existing requirements governing auto financing would drive up costs, limit vehicle financing options and prevent some consumers from getting loans.
Consumer activists who had been calling for a unified set of rules for the auto loan market -- for community banks, credit unions, auto dealers and others -- characterized the exemption as a major failing in the bill.
"Here we have an industry that came to taxpayers desperate for help, and the American taxpayers saved this industry's hide," said Douglas Heller, executive director of Consumer Watchdog. "Yet, they thank us by using their lobbying might to exclude them from oversight."
Instead, the bill leaves auto dealers who sell or broker loans under the Federal Trade Commission, which has been given powers to act more quickly to write rules to protect consumers from abusive practices, consumer groups said.
Heller also cautioned that, although the establishment of a federal agency dedicated to consumer protection would be a major step forward, its effectiveness would remain to be seen.
"This bill sets the parameters. How the agency wields its authority will matter," he said. "What we know is the banking industry isn't packing up and going home. They're going to begin their agency lobbying tomorrow to weaken implementation."
Consumer advocates and the financial industry will closely follow how a rule for brokers is implemented.
The Senate bill unveiled in November included a requirement for stock brokers and insurance agents to act in the best interest of their clients. This measure was hailed by advocates as the single most important item for Main Street investors in the 1,000-plus page legislation.
Investment advisers are legally and ethically bound to operate under this requirement, known as the fiduciary standard. But brokers operate under what critics have described as a lesser standard, one that requires brokers to have "reasonable grounds" to think that a product they are recommending is "suitable" for the customer. Typically, brokers do not have to make as many disclosures about conflicts of interest, fees and past infractions as investment advisers.
The fiduciary requirement for brokers faced heavy lobbying from the outset, and as recently as a few days ago, advocates feared the rule would be stricken or heavily watered down.
In the end, key House and Senate lawmakers negotiated a compromise that grants the SEC power to impose the fiduciary standard for brokers who offer advice to retail investors, once the agency completes a six-month review of the brokerage industry.
"Six months is a small price to pay after we've been waiting for two decades," said Roper of the Consumer Federation of America, which has been a leading proponent of the fiduciary standard. "This is Stage One. We will absolutely be staying on top of this."
Roper also said she welcomes new powers granted to regulators to limit agreements between investors and brokers that have long required disputes be heard by arbitrators and not the courts.
But a big disappointment in the bill, Roper said, is a last-minute measure that precludes the SEC from regulating a complex type of annuity, frequently sold to senior citizens, that guarantees a minimum return. It often ties up their money for years and charges substantial penalties for early withdrawals.
Just who regulates these hybrid products has been a subject of intense debate, with the SEC proposing to regulate them as securities and the insurance industry fighting against that. Consumer advocates had favored the approach, saying it would strengthen investor protections.
The reform bill would make state insurance regulators the overseers of the annuities, as insurance products.
Another key provision, governing the swipe fees charged by banks on credit and debit card transactions, could affect consumers when they shop. Under the bill, merchants would be allowed to have a set minimum transaction amount, as long as it didn't exceed $10.
Retailers would be free to offer discounts to people who pay with cash instead of their credit cards, which would benefit the merchants by reducing the amount of fees paid to credit card companies.