Some "Wins" for Consumers in Financial Reform Bill

Consumers will get new protections under the proposed financial reform bill, but lawmakers stopped short of implementing a number of provisions that could have done more to protect consumers. Here’s how the proposed financial reform bill will affect you.

New Consumer ProtectionsConsumers groups lobbied hard to get lawmakers to consolidate oversight of financial products under one roof. While their efforts seemed dead on arrival just a few months ago, lawmakers finally agreed on the creation of a Bureau of Consumer Financial Protection.

The new bureau will have an independent director, with federal funding and rulemaking authority over a broad range of financial products, including consumer mortgages, credit cards and payday loans. It will oversee and enforce regulations on mortgage lenders and banks with more than $10 billion in assets.

The agency will take over responsibility for regulation and oversight that had once been scattered over a number of government agencies. Having oversight under one roof will help regulators make the “fine print” on financial products more clear and easier for consumers to understand -- and (we hope) the new agency will make it faster and easier for consumers to file complaints and resolve disputes.

Watchdog groups called the new protection bureau a “win” for consumers. “The bureau will provide consumers with timely and understandable information they need to make responsible decisions about their financial transactions,” Pamela Banks, senior policy counsel for Consumers Union, said in a statement. “This really is a victory for any consumer who has ever signed a complicated financial agreement, or been trapped in a costly loan.”

While a dedicated consumer-protection agency will help make tracking and following up on consumer complaints less onerous for regulators, the agency will be housed within the Federal Reserve — not exactly known for putting the interests of Main Street first.

Another big drawback: Auto lenders will be exempt from the agency’s oversight. Seeing as cars are the second-largest purchase most Americans make (behind their homes), allowing “Bad credit, no credit, no problem!” pitches to continue without oversight is mistake. The bill does empower the Federal Trade Commission to create and enforce rules to protect consumers from abusive auto-lending, but again the federal track record on consumer protection in this industry thus far hasn’t been so hot.

Tighter Mortgage Lending StandardsThe new bill puts an end to prepayment penalties, and requires lenders to determine whether borrowers can actually afford to repay their loan. Bye, bye (and good riddance) to “no documentation” loans. Lenders will have to go back to underwriting the old-fashioned way -- by verifying a borrower’s assets and income, employment and credit history.

More importantly, mortgage lenders will now be banned from paying broker commissions for steering consumers to higher-interest or inappropriate loans.

Some critics say that these provisions may ultimately hurt consumers with good credit and solid finances, arguing they will lose out on opportunities for riskier, low-cost loans. But these broker incentives helped push countless homebuyers into the very same risky loans that led to the financial crisis in the first place. Again, I say, good riddance.

Free Credit Scores……But not for everybody. (Sorry!) If you get turned down for credit, you’ll be entitled on the spot to a copy of the credit score used to determine your credit-worthiness.

You are already entitled by law to one free credit report each year from each of the Big Three credit-ratings agencies -- or a total of three free credit reports a year -- at Annualcreditreport.com. (Quick tip: Mark your calendar so you remember to request the reports separately once every four months — that way, you can monitor your credit throughout the year to avoid identity theft for free.)

Credit-industry experts argue that the problem with mandating “one free credit score a year” for everybody, as they do with credit reports, is that different lenders use scores from different credit-rating companies — and they all use slightly different formulas for calculating risk. So getting a score from one credit-ratings agency won’t necessarily tell you the score lenders are using to determine whether or not to extend credit.

Still, if credit-reporting companies can be required to supply credit reports for free once a year, it's hard to find a reason to jusitfy not requiring them to supply a free score once a year to give consumers a ballpark idea about where their credit stands. (You can obtain a credit score from MyFico.com, the score most large mortgage lenders use, for $15.95.)