Consumer Financial Protection Bureau

A big part of the reason behind the financial crash was a lack of sensible practice within the industry. Here's a rundown on the consumer protection provisions in the new financial reform bill. You can read more in this New York Times article. Yahoo News has a good synopsis here.

A new Consumer Financial Protection Bureau will be created, housed in the Federal Reserve. It will consolidate the functions of numerous existing bodies, and its sole responsibility will be to safeguard the interests of consumers. This was a key element championed by consumer groups such as AARP and consumer advocate Elizabeth Warren, Congressional watchdog over TARP funds.

Financial institutions and instruments such as banks, mortgage lenders, credit card and private student loan companies, payday lenders, community banks and credit unions will be subject to new rules and transparency requirements. People can get a copy of their credit report annually by going to AnnualCreditReport.com. Lenders will have to actually check people's income and assets. There can be no prepayment penalties for adjustable rate mortgages and no bonuses can be paid to salespeople based on the interest rate the customer gets. Origination fees will be capped at 3%.

Banks will have to keep a stake in the loans they make. They will not just be able to sell them all off once made, thus giving them an incentive to make sure they are extending good loans to credit worthy customers. Trading in such exotic instruments as derivatives will not be banned, but banks will be able to commit no more than 3% of their assets to them and at least they will all have to be conducted openly will full public disclosure. If banks fail the industry itself will pay the costs rather than a federal bailout fund. (Depositors' money will still be guranteed by the FDIC.)

In addition to the significant credit card reforms already enacted last year sellers will be able to offer customers discounts for paying cash but will not be able to offer discounts for using one credit card over another.

There were setbacks for consumer protection in the agreement. For one thing, auto dealers were excluded. For another, annuities escaped some of the strong scrutiny other instruments will face. But in total, these developments represent a gain for consumers and a bit of a brake for some of the recklessness that led to the latest meltdown.

It is an achievement that never would have happened under the other party and that Obama and the Democrats will tout as the midterms approach.