Hope to Prosper

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama today.  Anyone who follows my blog has heard me clamor for years about the need for these types of reforms.  And, although this bill is far from perfect, it is very comprehensive and it addresses most of the critical areas where reform was necessary.  To be honest, I didn’t think most of these provisions would make it past the banking lobby, but they have.

Credit Where Credit is Due

Image by SEIU International

Although I didn’t vote for President Obama and I don’t agree with most of his policies, I applaud his effort to provide these reforms, which I believe are critical to the financial security of our nation.  This is the third major financial reform, following the CARD Act and Overdraft Protection.  I don’t think President Obama gets nearly enough credit for pushing these reforms and the positive impact they will have for America.  

It probably won’t surprise anyone that I’m not a big fan of Barney Frank.  And, I’m happy Chris Dodd is not seeking another term.  In my opinion, the Sub-prime Crisis happened on their watch and they bear responsibility for the sad financial condition our nation is in.  Having said that, I appreciate the hard work they put forth in bringing this reform and I think it is fitting their names are on the bill.  

What this Means for Americans

Consumer Financial Protection Bureau – There is now a single consumer protection agency that will ensure all financial transactions are fair to consumers.  The emphasis of this new agency will be to simplify contracts, so they are clear and understandable.  Hopefully, the fine print and dirty tricks will be eliminated or at least greatly reduced.

Banking Institution Reform- Key elements of the Glass-Steagall Act have been restored which require the separation of deposit and investment banks.  This law also requires the divestiture of hedge funds, beyond a 3% stake.  Most important, failed institutions will now be wound down with shareholders taking the hit, instead of being bailed out with taxpayer money.

Oversight of the Federal Reserve- The way the Fed has been operating in secrecy is a huge problem for America.  What most Americans don’t realize is that the Fed is actually a banking institution and not a true government agency.  Huge sums of treasury money have been flowing from the Treasury to banks through the Fed.  How much is anyone’s guess, since they refuse to open their books.  The reform bill allows the Government Accountability Office (GAO) to audit the Fed, but their powers are limited.

Mortgage Reforms- Everyone knows that sub-prime mortgages were a primary cause of the Financial Crisis.  What most people don’t know is that millions of customers were steered into sub-prime mortgages, even though they qualified for regular funding.  The reason this happened is because brokers were paid yield spread incentives to do so.  From now on, lenders cannot be rewarded for steering borrowers into higher cost loans.  And, consumers will have to prove they can repay their loans.   No document loans are a thing of the past.  

Derivatives Reform- Derivatives will now be traded on a central exchange, which will be monitored by the SEC and CFTC.  Regulators are also given greater enforcement authority to punish parties who use complex derivatives to defraud others.  Finally, a new code of conduct is established for dealers, especially when dealing with pension, endowment and governmental entities.

Continue reading The Benefits of Financial Reform