What financial reform means for you

By Tribune staff report
Posted June 25, 2010 at 4:45 p.m.

As legislators on Capitol Hill trumpet a final agreement on sweeping financial reform, consumers might be wondering, “What’s in it for me?”

They will benefit in a big-picture way from many of the provisions in the bill, likely to be passed by Congress next week. It is meant to provide a more stable financial system, prevent government bailouts of banks and protect investors.

But the biggest change for the average Joe likely will be having the Consumer Financial Protection Bureau watching out for his interests. This new bureau is designed to protect consumers from predatory lending, hidden credit card fees and the like.

“The bill gives consumers a fighting chance,” said Pamela Banks, senior policy counsel for Consumers Union. “The idea of a consumer watchdog was deemed dead on arrival last fall, but that prediction turned out to be completely, blissfully wrong.”

That independently funded agency, to operate as part of the Federal Reserve, will be responsible for many of the specific consumer protections to come. While it’s a component of the 2,000-page bill, the specifics of how it will work and what it will do are not yet clear.

Overall, the legislation hints at changes to the daily lives of the American consumer. Among some of the the anticipated results:

Cash is king. Expect to carry more cash. Retailers are likely to offer discounts for paying with cash, like gasoline service stations once did, said Ed Mierzwinski, director of the Consumer Program at U.S. PIRG. This is not a good-hearted effort to help Americans avoid credit-card debt. With cash, retailers  don’t have to pay behind-the-scenes “interchange” fees  to banks for the ability to accept payment through card networks, such as Visa, MasterCard, American Express and Discover. The legislation offers a break to businesses because it specifically allows retailers to offer discounts to those who pay cash.

Minimum purchase for credit cards. Those often handwritten signs near the cashier that require a minimum purchase for using a credit card often violated the merchant’s agreement with Visa or MasterCard. But now those requirements will be OK, again to help retailers, who hate the interchange fees that  include a fixed cost and a percentage of the purchase price. Those fees can wipe out the profit margin on a smaller purchase, said Brian Dodge, spokesman for the Retail Industry Leaders Association. The legislation allows retailers to require a minimum $10 purchase, while previously credit card companies forbid retailers from purchase minimums. The upshot for consumers? Carry more cash for small purchases or be annoyed that you had to buy more than you wanted to to use your credit card. Worse, you go to an ATM and pay a $2.50 fee to access your own cash.

Maximum credit card amount. According to the legislation, governments and colleges can set maximums for credit card payments. They don’t like paying those interchange fees either, and they add up with large payments for taxes and tuition. That’s bad news for parents who like to put tuition charges on a rewards credit card to rack up cash back, frequent-flier miles or points.

Credit scores. Those  denied credit or are otherwise hurt by their credit score will be entitled to a free copy of that score on the spot. “Now people who are denied credit or employment can get their score immediately,” Mierzwinski said. “They don’t even have to ask for it.” In the befuddling world of credit ratings, credit reports are free once a year from each of three major credit bureaus at AnnualCreditReport.com. But you have to pay for your three-digit credit scores from FICO, the brand of score most lenders use.

Bank fees. Several major banks have announced the death of free checking, at least for those who don’t keep a minimum balance. With the financial-reform bill, banks will see diminished  interchange swipe-fee revenue for debit-card transactions. The reform bill, via an amendment from Sen. Richard Durbin (D-Ill.), would allow the government to regulate those interchange fees specifically for debit cards. That could accelerate the demise of free checking, as banks try to compensate for lost income, said Peter Garuccio, spokesman for the American Bankers Association. Of course, if enough customers demand free checking and competitors offer it, banks will have to look elsewhere to fill that revenue hole. (Read: impose other fees.)

Debit rewards. Look for the extinction of cash-back rewards programs for debit cards. With lower debit-card transaction fees, banks probably won’t be able to offer them, Garuccio said. “There’s just no revenue stream to support them anymore,” he said. Look for a similar fate with little-known rewards checking accounts, which pay a relatively high interest rate in return for promising to swipe your debit card 10 times a month.

Lower retail prices? Retailers argue that because they’ll be paying lower debit-card fees and because their industry is so competitive, they will pass along those savings to consumers. Or maybe consumers won’t see any of it and the money comes out of the banks’ pockets and goes into the pockets of retailers, critics say.

Car loans. Auto dealers successfully lobbied to be mostly exempt from the consumer protection agency. So, consumers still could fall prey to dealers who steer them into lousy car loans. However, the reform bill would allow the Federal Trade Commission, in an expedited way, to develop and enforce new rules to protect consumers from abusive auto-financing deals. In the past, that rulemaking could take a decade before it was implemented, said Susan Weinstock, spokeswoman for the Consumer Federation of America. The advice here is to shop for financing before you enter the showroom and become intoxicated by new-car smell.

Mortgages. The reform bill ends prepayment penalties for mortgages, imposed when you pay off a loan early, like in the case of refinancing. And mortgage lenders must determine whether a borrower can to repay a loan. However, these changes are in practice thanks to the credit crunch.

Fiduciary duty. That’s the fancy term for a financial professional giving you advice and selling you products that are in your best interest, not his. Financial advice-givers have a built-in conflict of interest. Some will disregard what’s best for the investor and push consumers into their  company’s investments or those that give them the best commission. Financial advisers are held to a high “fiduciary” standard to do what’s best for the client, but now stock brokers could be. The bill calls for a six-month study of the issue before the Securities and Exchange Commission can implement the requirement for brokers. “We think that this will finally happen,” Weinstock said.

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  1. Brad June 25, 2010 at 5:47 pm

    More government fiddling with the free market. We pay our bills on time, get free checking, cash back on credit cards (which we don’t carry a balance). Now to “protect” consumers who are poor savers and/or manage their money poorly, good money managers will see their costs go up. Welcome to the nanny state.

  2. Linda June 25, 2010 at 7:02 pm

    Had I known that the interchange fee retailers pay for debit card transactions would lead to the financial crisis, I would have started carrying alot more cash with me!

  3. GW June 25, 2010 at 9:55 pm

    Brad, what does high swipe fees have to do with being a good money manager? The CC compnaies have strongarmed retailers with these high fees. If you read the enite article, you would see it was the CC company’s that were imposing rules on the retailers. The government is saying that retailers have the right to do things like make a minimum purchase amount for credit cards. Your costs were already up. Don’t you think retailers built into those cost into their prices? If I am paying cash, why should I have to support your credit card usage?