Obama: Reform Ends Era of ‘Bad Loans’ That Fueled Crisis

Wall Street Reform was signed into law today by President Obama, promising an end to taxpayer-funded bailouts and a new consumer financial protection agency that will protect Americans from abusive practices in the credit card and mortgage industries.

The financial crisis of 2008 prompted calls for sweeping reform, but Obama and Democrats fought Republican opposition through heated debates, negotiations and relentless lobbying.

The opposition’s chief argument: the reform is too heavy-handed, punishing the banks and non-financial institution that had little or no involvement in the crisis.

They also argue that reform should have included a massive overhaul of mortgage financing giants Fannie Mae and Freddie Mac, which have siphoned $145 billion in bailouts thus far.

But Obama stood firm on the need to hold all institutions accountable in his speech today before signing the financial regulatory overhaul into law.

”This reform will help foster innovation, not hamper it.  It is designed to make sure that everybody follows the same set of rules, so that firms compete on price and quality, not on tricks and not on traps,” Obama said.

The president said the reform laws will stop “the bad loans that fueled a debt-based bubble.”

“It demands accountability and responsibility from everyone,” Obama said. “It provides certainty to everybody, from bankers to farmers to business owners to consumers.  And unless your business model depends on cutting corners or bilking your customers, you’ve got nothing to fear from reform.”

Here are the highlights of the financial reform bill:

Consumer Financial Protection Bureau
The new entity will be mostly autonomous but housed with the Federal Reserve. It will have the authority to write rules to protect consumers from predatory, abusive or deceptive practices by banks and non-banks that offer consumer financial services or products, including mortgages, credit cards and payday loans. The financing arms of auto dealerships will be exempt.

The bureau will have the authority to examine and enforce regulations for banks and credit unions with assets of more than $10 billion; all mortgage-related businesses; and large non-bank financial companies, such as large payday lenders, debt collectors, and consumer reporting agencies. Banks with assets of $10 billion or less will be examined by the appropriate bank regulator.

Financial Oversight Council
The council will consist of mostly existing regulators and will monitor systemic risk and recommendations to the Federal Reserve. The Fed will be able to create stricter rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity with the goal of heading off institutions that are “too big to fail,” and which could cause a domino effect in the economy.

Dismantling Authority
Federal regulators will have the power to seize and dismantle faltering financial firms deemed to have a ripple effect and pull down other major firms. Liquidation would be overseen by the Federal Deposit Insurance Corporation, which already oversees bank failures. Taxpayers might have to pay upfront costs, but the FDIC would have the power to recover break-up costs by levying fees on financial firms with more than $50 billion in assets. Creditors of the failing firms will receive bankruptcy-like treatment.

Proprietary Trading Restrictions
Insured banks will have new limits on trading in financial markets with their own funds. Banks will only be able to invest small percentages of their capital in hedge and private equity instruments. The trading of swaps or derivatives will be regulated for the first time. Swaps are agreements between parties based on the outcome of underlying financial instruments. The unregulated trading of credit default swaps led to massive losses based on the performance of faltering subprime mortgage-backed securities.

Mortgage Reform
Reform provisions effectively ends the once popular ‘no doc” or liar loans that were prevalent during the housing bubble build-up. New minimum underwriting standards will be set related to loan-to-value and the ability to repay on the stated rate of the loan, including the first five years of a variable rate loan.  Lender incentives, or kickbacks, known as “yield spread premiums,” will be banned. Those incentives encouraged loan brokers to steer consumers into riskier, high-interest mortgages even if customers qualified for lower-cost loans.

“Swipe Fee” Regulation
For the first time, the fees that MasterCard and Visa payment networks charge merchants per debit card transactions will be regulated. The Federal Reserve will determine if interchange fees are “reasonable and proportional” to the costs of a transaction.

Free Credit Scores
Consumers denied a loan or credit card, or turned down for a job because of credit history, will be able to get a free credit score, in addition to a free credit report already required by law since 2003.