By Mark Huffman

July 16, 2010
After months of debate and compromise, the U.S. Senate has passed the "Dodd-Frank Wall Street Reform and Consumer Protection Act" that supporters say will protect consumers from hidden fees and investment scams and require the financial industry to provide clear information so consumers can make the best financial decisions.

The House has already passed the measure, which will now be signed into law by President Obama.

How will the measure affect consumers? Almost as much as it affects businesses, supporters say.

Consumer protection

It establishes a first-of-its-kind regulator, whose sole job will be consumer financial protection -- cracking down on abusive lending and financial practices including mortgages, credit cards, payday loans and bank accounts. Mortgage reforms include requirements that borrowers provide evidence of their ability to repay mortgages, and prohibitions on compensating lenders for steering consumers into higher-cost loans.

For consumers who are also investors, it seeks to ensure accountable, transparent derivatives trading: Nearly all derivatives will have to be exchange traded and cleared, so trades have enough money backing them and regulators can spot problems before they threaten the entire economy. Commercial banks will be prohibited from trading in some of the riskiest swaps. Supporters say it will strengthen reform by closing the loophole to ban all swaps trading by taxpayer-backed commercial banks.

It adopts the so-called "Volcker Rule," named for the former Federal Reserve chairman who proposed it, It limits banks' ability to speculate with taxpayer-insured deposits, and prohibits financial companies from betting against their clients. Supporters say it closes the loophole to ban all speculation with taxpayer-backed funds.

It begins to tackle "too-big-to-fail," creating a new system to break up, rather than bail out, failing financial firms and make banks pay the bill. It will set strict size and leverage limits, and rebuild the walls between investment and commercial banks.

Wall Street oversight

"This bill sets the wheels in motion to replace the failed deregulatory policies of the 1990s with real oversight of Wall Street," said Carmen Balber, Washington Director for Consumer Watchdog.

AARP said it supports the legislation because it will establish a watchdog that will protect consumers from getting a mortgage or credit card that has hidden fees that cause their bills to skyrocket; ensure Americans get the clear, accurate information they need to shop for mortgages, credit cards and other financial products; and crack down on investment scams targeted at older Americans.

"Over the last three years, older Americans have lost billions of hard earned dollars due to the failure of an outdated and compromised financial regulatory system," said AARP Maryland senior state director Rawle Andrews. "The failures that led to this crisis require bold action to restore responsibility, accountability and consumer confidence in our financial system, and this bill will protect Americans' money and help stabilize our entire economy."

Heather McGhee, Director of Demos' Washington DC office who supported efforts to pass the bill, said the reform will help middle class consumers.

Greater security

"After the new consumer regulator opens its doors, Americans will open a checking account or apply for a loan with greater security because their lender will be accountable to basic standards of fairness and transparency," McGhee said. "Investors will know that their broker-dealers are acting in their interest. Businesses hedging risk will know the real price of the derivatives contracts they buy. And if we have truly independent regulators with the will to stop reckless speculation, those regulators will have the power and tools to do so."

Michael D. Calhoun, president of the Center for Responsible Lending, also hailed Senate passage of the law, saying will help end a nightmare for many American families.

"People will get loans they can afford to repay, and principles of fairness and value in financial products will trump easy money and self-enrichment," Calhoun said. "The new regulatory framework will go far to reduce risky practices and restore common-sense in financial services."