Thoughts On The Federal Reform Bill (2010)

As most of you are probably aware, President Obama signed yet another historic reform bill not long ago, this time focusing on the financial system instead of healthcare. So, while many of you may know that there are provisions in place that will limit banks and other financial institutions in an effort to keep them from failing in the future, many of you don’t know that there are pages and pages and pages of stuff that might just keep you up at night. Here’s a rundown of what’s in the bill and how it might affect you.

Thoughts On The Federal Reform Bill (2010)

Consumer Oversight Committee

This one simply astounds me. It’s as if the federal government truly believes that none of us are able to make sound financial decisions for ourselves. While there is no doubt that many are not, I’m not convinced that creating yet another large, red tape laden, bureaucratic oversight committee is actually going to help. The idea behind this committee is to appoint a few folks to govern lenders who offer payday advance loans, mortgage lenders, and student lenders along with some other lenders in an attempt to curb predatory lending and consumer abuse. What this really means in plain English is that payday lenders will most likely disappear and getting loans of any sort is going to get a whole lot tougher, especially if your credit is marginal or worse or if you have no credit history.

Financial Distress Early Warning System

So, this committee is supposed to be made up of a bunch of really smart financial people who can predict the next financial meltdown before it happens. In plain English, the creation of this committee is to give the federal government more authority when it comes to dealing with large financial institutions that aren’t banks. These guys aren’t regulated by the Office of the Comptroller of the Currency (OCC) (unlike banks) and have pretty much been left to their own devices until now. But, thanks to the current financial situation, the government figured out that these companies are a lot more at risk of destabilizing the financial system than a few rogue banks. The committee can now identify potentially troubled companies and order them to sell off assets in an attempt to thwart the next meltdown.

Tighter Restrictions on Banks

While it’s true that banks make money by lending money to the likes of you or me, this isn’t the only way they do it. Banks very frequently engage in a little stock market dabbling in order to make some extra cash on the side. While this bill won’t ban it outright, it will restrict it to 3% or less of the bank’s capital.

What this means for us? A higher cost for credit and less return on investments in savings accounts and CDs. Long gone are the days of free checking accounts and savings interest rates of more than 1%. In some cases, savings accounts may not accrue any interest at all.

Sweeping Mortgage Reform

So, we are all extremely aware that the housing bubble burst was the precipitating factor to our current financial instability, right? Well, the new reform bill is written in such a way to fix just that. Liar loans and 100% financing are a thing of the past. Banks and other mortgage lenders are now required to scrutinize a borrower’s ability to repay a mortgage loan. Credit history, income, and a host of other things will all have to be verified and meet stricter criteria before a mortgage loan will be made.

What this means for us? Fewer people will be able to own their own homes than ever before. Of course, it should go without saying that not everyone with a pulse should be able to get a home loan, but there are many different lifestyles out there and a bunch of well qualified, responsible people will be left unable to get a mortgage thanks to the knee-jerk reaction on this one.

Of course there are other provisions in this bill that will affect you and me in the short and long term future, but the details of such are being held close. Only time will tell what else will manifest over the next few years. On a side note, what I did find interesting was the lack of any language dealing with the current river of funds being pumped into Fannie Mae and Freddie Mac. Once again, the federal government is taking the position of “We know what’s best for you…and it’s not what we’re doing…” Apparently, it’s okay to keep pumping cash into a dead horse, or two dead horses, but not give the average American consumer the ability to get credit when and where they need it. I wonder how they think we’re going to be able to pay for all of the higher taxes that will come along with all this reform.

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