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How Will Financial Reform Affect You?

By Mark Riddix

Congress is currently considering implementing a huge financial reform bill. They have spent well over a year debating all of the aspects of financial reform. We all know that one of the main issues being discussed is getting rid of the “Too Big To Fail” moniker that applies to the big banks. While this is an important issue, there are other issues being discussed that will directly impact consumers. These issues involve lowering the costs associated with borrowing and protecting consumers from predatory lending practices. Let’s take a look at a few of the ways in which financial reform will directly affect you:

The End of Liar Loans

The US Senate is proposing that so called “liar loans” be made illegal. Liar loans are “no doc” loans that allow borrowers to obtain a mortgage loan with little to no documentation. These loans often do not verify the information submitted by borrowers. Liar loans only require that borrowers simply state their income. Borrowers would often exaggerate their income, employment history, and their ability to pay back the loan. Liar loans are largely responsible for the mortgage crisis in the United States today because borrowers were able to buy homes that they could not afford.

The End of Usurious Interest Rates

If financial reform passes, credit card companies would not be able to charge extraordinarily high interest rates. The government would place caps on the interest rates that all credit card companies could charge. Individual states would also have the ability to set even lower caps on card companies. As expected, credit card companies are fighting hard against this amendment, because they believe that this bill would directly decrease their profits.

Lower Costs for Products

Financial reform will reduce interchange fees. What are interchange fees, you ask? Interchange fees are the fees that credit card processors charge to store merchants. These fees are factored into the retail price of goods and services. Retailers and customers will benefit from reduced interchange fees. A reduction in interchange fees will allow stores to give customers discounts for paying with cash, check or debit cards. ATM fees would be capped at just 50 cents per transaction. Debit card fees would drop significantly and there would be no minimum purchase limit at retail stores.

A Rise in Banking Costs

Credit card issuers and processors are not going to take financial reform lying down. If banks are going to lose money from interest rate caps and interchange fees, they will look to make the money up elsewhere. One of the ways that this will be done is by increasing transaction costs on banking customers. Banks are going to look to raise revenue by increasing monthly banking fees, check printing fees, statement fees, and servicing fees on bank accounts. The cost of credit is going to get a whole lot higher as well. Credit card issuers and processors are going to increase application fees and annual fees to offset other lost fee income.

What are your feelings on financial reform? Do you think that the current bill being proposed goes far enough? The financial reform is a double-edged sword, because if the government continues to regulate the practices of banks and financial institutions, these same institutions will look to pass the increased cost on to the consumer.

(Photo credit: bjohnsonjewelry)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, Your Financial Playbook.

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  • Olivia

    It’s amazing to me that the government is trying to manage anyone else’s finances.

  • Ave Joe

    The end of sub-excellent credit lending

    Forget sub-prime loans now there will be little to no sub-excellent loans.

  • http://www.pfsdebtrelief.com Stephan

    i like parts of the bill and dislike others. Clearly, reform is needed, and the consumer protection agency is a great start. Limiting interest rates is as well. i know products will become more expensive, but maybe this is the price we have to pay after over a decade of cheap credit which has led us to the great recession. and olivia, they arent trying to manage your finances. They are trying to make sure that you and all of us as americans stop making stupid money mistakes. the credit card reform act was the first step. limiting college access to credit cards and displaying how long a balance would last while paying the minimum are both awsome for the consumer. Hopefully, people will stop only paying the minimum now, since htye will see that they will be in debt for the next 20+ years.

  • Eric Sherwood

    It’s not the government’s job to make sure consumers don’t do stupid things with money. That’s the consumer’s job.

    This bill is absolutely ridiculous. First of all, the US government is that LAST entity that needs to help people manage their money.

    Here’s an idea, if you don’t like the practices of a certain company, why don’t you stop using said company? Why does the government need to come regulate it?

    This is just another attempt to get their hands into my pockets.

  • http://www.icincome.com icIncome

    Is it what the people want? Do they even know what they want?

  • http://allocationsurvey.blogspot.com/ sarenjo

    Will financial reform make you more comfortable with investing in the markets?

    I’m conducting research of how the stock market’s volatility has impacted the asset mix of household investment portfolios over the past two years. The link below will take you to a brief survey. Once you have completed the survey, you will see a graphic of the average investor allocation at 3/31/2010.
    https://www.surveymonkey.com/s/investments1

    Thanks to the 400+ respondents that have completed the survey so far. Some interesting tidbits…

    1. A plurality of respondents report having an above average willingness to take investment risk.

    2. Less than half of respondents were net purchasers of equity over the past year.

    Please note: none of the questions ask for identifying information (e.g., name, social security #s, bank/brokerage accounts #s)

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