Understanding the Dodd-Frank Act

JUL 22, 2010

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The financial reform law was signed into law yesterday by President Obama and is now known as the Dodd-Frank Act. The law is primarily focused on reducing the risk of a future banking system failure. Most of the measures are banking and securities system structural changes that the average consumer will not be directly affected by in their daily lives.

However, the new Consumer Financial Protection Bureau, to be housed in the Federal Reserve, is expected to have powers that will be immediately felt by the average person. The new government agencys mission is dedicated to combating consumer abuses by lenders, banks, creditors and even retailers in the marketplace.

Here are three of the big changes that you can expect regarding credit:

Long before this regulation was passed, under existing federal law, you could get a copy (but only once per year) of each of your credit reports from the three major credit bureaus by going to the government-mandated site: Annualcreditreport.com. That was never the case with credit scores which are not free nor are credit report and credit score monitoring.  Credit monitoring products, such as those found on CreditReport.com, CreditScore.com, and other web sites offer an economical way for consumers and small businesses, who rely and need access to credit, for staying on top of any changes to their 3 credit scores and 3 credit reports. This is critical since new information enters credit reports frequently and credit scores might change negatively at some inopportune time; e.g., right before buying a home, a car, applying for a small business loan, a credit card, or a school loan, etc.

1) Credit Reports and Scores

Now, however, under the Dodd-Frank Act, if certain types of creditors turn down your application for credit because of your credit score, that company is required to tell you what your credit score is, for free. However, we advise people to know their credit score and monitor it before they find themselves in these situations.

Under the new rules, lenders must verify a borrowers credit history, income, and employment status, so that loans are not made to people that cannot afford them. Banks will also be required to hold on to at least 5% of the loans they make instead of selling them to investors. More risk to the banks should provide motivation to the banks to take more precaution or suffer the consequences of losses on bad loans. The downside is that mortgages will become more expensive as both fees will increase to process them and loans will take longer to get because the increased underwriting requirements . Basically more people at the bank will have to examine your loan before it is approved and then additional reviews will occur before you get your money. For example, Fannie Mae, the nations largest provider of funding for banks to make mortgages requires a credit check right before closing a new home loan. The home of your dreams could be jeopardized by one trip to the department store in which you open an account to buy some furniture.

2) Mortgages

If you ever had lacked the cash for a small purchase and wanted to use your debit and credit card, retailers have put up large minimum charge requirements in order for you to use your card. Under the new law, debit and credit card minimums imposed by retailers now cannot exceed $10. Only the Federal Reserve can raise that limit,

3) Credit and Debit cards

Also, the Fed will have the power to limit interchange fees on debit-card transactions. (Interchange fees are the fees that card issuers, Visa and MasterCard collect from merchants as a percentage of each transaction.). However, the rule applies only to banks, not to Visa and MasterCard. Banks usually charge stores 1% to 2% for each transaction. Retailers say that lower fees could allow them to cut prices and bring on more workers and even eliminate those frustrating situations when youre in cab and they wont take a credit card. Lower fees would encourage more retailers to accept credit cards.

The downside here is that the banks threaten to raise other fees on consumers if another bank revenue stream is eliminated (this time in the form of interchange fees). This might lead to introducing fees in other areas higher interest rates and fees on bank products and services, reduced or suspended loyalty/frequent buyer programs and possibly the disappearance of services that heretofore were free; e.g., checking or savings accounts.