New Consumer Protections in the Dodd-Frank Act
In addition to new incentives for whistleblowers in securities, accounting fraud and bribery allegations, the Dodd-Frank Act includes numerous provisions designed to provide greater protection to consumers. Here are some of the highlights:
New Financial Agency
The new law establishes the Consumer Financial Protection Bureau (CFPB). President Obama recently named Elizabeth Warren, a Harvard professor, to build the agency.
As the name implies, the CFPB is intended to protect consumers from predatory lending practices, "disguised" credit card fees, and other abuses in the financial services industry. In creating this agency, oversight of various types of debts - including mortgages, student loans, credit card charges, and "payday loans" - is finally consolidated under a single roof.
One of the agency’s tasks is to combine and simplify two mortgage disclosure forms into one consolidated document that homeowners will sign. The Dodd-Frank Act gives a July 2012 deadline for the form to be used, although the Treasury Department has stated that it will be ready "well ahead" of that.
Caveat: In a late modification to the law, auto financing transactions were excluded.
Law Increases the Maximum Cash Amount for Each Investor
Similar to the protection offered by the FDIC when a bank fails, the Securities Investor Protection Corporation (SIPC) reimburses investors when a brokerage firm fails and cash or securities are missing.
The Dodd-Frank Act increases the amount of SIPC protection available for cash claims to $250,000 (from $100,000). This brings the protection in line with that provided by the FDIC. The total SIPC protection available for each customer is now $500,000 to replace missing cash and securities.
Supervisory Council
A new 10-member Treasury Department council will assess threats to the country's financial system. It will pinpoint specific companies, or inter-connected entities, that could harm the U.S. economy if they collapse. If appropriate, the council may liquidate a company to prevent catastrophes.
Mortgage Practices
A number of provisions protect consumers from lending practices spotlighted by the recent mortgage crisis. Specifically, the law eliminates prepayment penalties for adjustable rate mortgages, requires lenders to disclose the maximum amount borrowers might pay on adjustable rate mortgages, prohibits approval of so-called "liar mortgages" that don't require documentation of income, and bans bonuses for lenders based on loan types. The latter practice often resulted in borrowers being pushed into homes they couldn’t afford.
Credit Rating Agencies
Because credit rating agencies are paid by the banks that issue the securities they rate, they could be targets of coercion. Under the law, credit rating agencies that recklessly or purposely provide flawed advice may be held liable for investor losses. Such agencies will be required to register with the Securities and Exchange Commission (SEC).
Fiduciary Responsibilities
High professional standards already apply to accredited financial planners who advise clients about financial products and services. In general terms, they must act "in the client's best interests." Pending a six-month study of the issue, the SEC is expected to extend this fiduciary standard to stockbrokers.
Executive Compensation
The pay received by executives and officers of public companies has been a "hot button" issue in recent years. Although shareholders will be permitted to vote on executive compensation packages at least once every three years, the votes aren't legally binding. However, the Federal Reserve will maintain oversight to protect against excessive risk-taking.
Credit Card Limits
The law imposes new limits on fees that banks can charge merchants for accepting debit cards. Furthermore, all types of merchants are allowed to set minimum and maximum transaction amounts, as long as the restrictions apply to all issuers and payment networks. Governments and colleges may also establish maximums for credit payments. This could affect parents who charge tuition in order to garner frequent-flyer rewards.
Credit Scores
If a consumer is denied a loan or otherwise suffers because of a poor credit score, he or she can request a free copy of the score. The score provided must be the score that was used to make the adverse decision.
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