CHICAGO — As legislators on Capitol Hill trumpet a final agreement on sweeping financial reform, consumers might be wondering, "What's in it for me?"
The agreement comes nearly two years after the American financial system teetered on the verge of collapse. A 20-hour marathon by members of a House-Senate conference committee to complete work on the toughened financial rules culminated at 5:39 a.m. Friday.
Consumers 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, avoid 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 anticipated results:
Cash is king
Expect to carry more cash. Retailers are likely to offer discounts for paying with cash, as gasoline service stations once did, said Ed Mierzwinski, director of the consumer program at U.S. PIRG, the federation of state Public Interest Research Groups. This is not a good-hearted effort to help Americans avoid credit card debt. Retailers like cash because they don't have to pay behind-the-scenes "interchange" fees that merchants pay 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 okay, again to help retailers, who hate the interchange fees because they include both 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; until now, credit card companies forbade 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 just to use your credit card. Worse, you could pay a fee to access your cash at some ATMs.
Maximum credit card payments
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 rewards, frequent flier-miles or rewards points.
Those who are denied credit or 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.
Several major banks already announced the death of free checking, at least for those who don't keep a minimum account 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 — which may lead to new customer fees.
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. That could happen, or maybe consumers don't see any of it and the money simply comes out of the banks' pockets and goes into the pockets of retailers, critics say.
Auto dealers successfully lobbied to escape most regulation by the new consumer protection bureau. So consumers still could fall prey to unscrupulous automobile dealers who steer them into lousy car loans. But 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 rule-making could literally take a decade before it was implemented, said Susan Weinstock, spokesman 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.
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 has the ability to repay a loan. These changes, however, are already in practice, thanks to the credit crunch.
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 own company's investments or those that give them the best commission. Financial advisers are already held to a high "fiduciary" standard to do what's best for the client, but now stock brokers could be as well. 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.
Information from the New York Times was added to this report.