While the bill is not perfect, it creates, for the first time, an independent agency dedicated to ensuring that consumers’ interests are protected. Homeowners struggling because of job loss, illness, or other hardship will be eligible for help with their mortgage. Mortgages will subject to important new anti-predatory lending protections. And regulators and the public will be newly empowered with data that will allow them to make sure financial institutions are fulfilling their commitments to their communities. The bill also overhauls many other aspects of the financial system, including reforming executive compensation, ending bailouts of too-big-to-fail financial institutions, introducing transparency to the derivatives market, and protecting investors (Americans for Financial Reform summary).
Major components of the bill include:
The Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) will be empowered to rein in the worst abuses of the financial industry and ensure equitable access to credit. It will:
• Have an independent head appointed by the President and approved by the Senate;
• Have dedicated funding from the Federal Reserve’s budget;
• Be able to write rules for all financial service providers;
• Have examination and enforcement authority over large banks and credit unions, all mortgage-related businesses, all payday lenders, all student lenders, and other large non-bank financial service providers.
Importantly, states will retain the ability to pass and enforce stronger consumer protection laws than the federal standards. Unfortunately, the Office of the Comptroller of the Currency will still be able to preempt state laws on a case-by-case basis. Also distressing is that auto dealers, a large credit market that provides financing for many consumers’ second-largest asset, will be exempt from the CFPB’s oversight.
New consumer protections for mortgages
The financial crisis was spurred by waves of defaults on poorly-underwritten loans with predatory terms, such as a low teaser rate that explodes to an often unaffordable rate after several years. The financial reform bill prevents many of these practices by:
• Requiring that lenders ensure a borrower’s ability to repay;
• Prohibiting practices that award lenders for steering borrowers into higher-cost loans, such as yield-spread premiums;
• Prohibiting pre-payment penalties;
• Strengthening borrowers’ abilities to hold lenders accountable if they do not comply with these laws;
• Broadening the definition of high-cost loans to expand consumer protections;
• Requiring that lenders disclose the maximum a borrower could pay on an adjustable-rate mortgage.
Help for struggling homeowners
Many foreclosures today are due to a loss of income due to unemployment, illness, or other hardship. Federal foreclosure prevention programs, such as the Home Affordable Modification Program (HAMP), are generally not well suited to keep families with little to no income in their homes. The financial reform bill allocates $1 billion of emergency relief in the form of low-cost loans to families so they can stay in their homes while they try to stabilize their financial situation.
Enhanced data collection
The collection of data through the Home Mortgage Disclosure Act (HMDA) is critical for enforcing financial institutions’ compliance with fair lending laws, as well as ensuring that they are meeting the credit needs of their communities. The financial reform bill expands the ability of regulators and the public to use data to monitor discriminatory lending practices and detect future problems for mortgage lending and other types of lending. Enhanced data collection includes:
• Collection of loan terms and conditions and borrower age in HMDA data;
• Collection of borrower gender and race of small business borrowers;
• An “early warning system” database of defaults on mortgage loans and foreclosures;
• A database on individual loan records in the HAMP program.
The financial reform bill contains historic advances for all consumers. However, the fight for financial reforms that effectively protect consumers from financial institutions’ tricks and traps does not stop if and when the legislation is passed. The task now falls to the Consumer Financial Protection Bureau and other regulators to translate the broad strokes of the legislation into specific rules and regulations and to consistently and thoroughly enforce those rules. Woodstock Institute will continue to provide input to regulators on the impact of these regulations on low-wealth people and people of color during the rulewriting process, as well as monitor the implementation and enforcement process.