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New Financial Regulations in the Wall Street Reform Law

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Updated: The media are calling the new Wall Street Reform Law, recently signed by President Obama, the most significant reform of the financial industry since the Great Depression. It looks to tighten the reins on a industry that helped cause the recent recession by requiring the Federal Reserve to create and enforce regulations on the financial industry. The law, whose formal name is the Restoring American Financial Stability Act of 2010 (H.R.4173), is designed to protect consumers, corporations, and the economy as a whole.

Here are the major provisions contained within the law.

The Consumer Financial Protection Bureau will exist inside the Federal Reserve. This organization will advise the Federal Reserve on issues such as changes to credit card statements and contracts, in order to help consumers understand the terms of their agreements. The result should be that credit cards and other financial products become more simplified. In addition, as more states take out payday lenders, I expect this agency to do the same on a federal level.

Enhanced free credit products will now be available. While consumers can currently obtain three annual free credit reports, one from each reporting agency, the government will now require these companies to offer free credit scores as well. While this is a positive move, I expect the availability of these scores will encourage companies to develop a new secret formula for making lending decisions.

The agency will likely limit credit card interchange fees to what is reasonable based on the cost of providing the service. As Smithee mentioned in May, swipe fees make a lot of money for certain companies involved with every use of a credit or debit card, and there is a general thought that these fees are currently uncompetitive.

Borrowers will need to document their income before qualifying for loans. Call them liar loans, no-documentation loans, or alt-a loans, these mortgages offer higher rates to individuals who for whatever reason can’t support their income with proper documentation like tax returns or pay stubs. It will be more difficult for certain consumers to obtain financing with this law in place.

Financial regulators will have a larger role in looking for systemic risk with banks and other financial institutions that are too big too fail. Large financial companies will have the same opportunity as large banks to unwind slowly in a controlled crash. The FDIC’s role will expand beyond pure banking institutions. Large institutions may also be forced to split into several smaller companies to better manage risk to the entire financial system.

The Government Accountability Office will be able to audit the Federal Reserve two years after the Fed takes emergency actions. I assume this two year buffer will allow the effect of the Fed’s actions to echo throughout the markets without immediate interruption.

Executive compensation will be regulated, in all publicly-traded companies, not just in the financial industry. There is not a lot of teeth to this regulation, as it provides for shareholders to have a non-binding advisory role. The problem with this is major shareholders are often executives, board members, and institutional funds that are usually willing to advise the company to spend the money. In addition, the shareholders’ decisions can be ignored by the company.

The bigger part of this part of the law is the encouragement for industries to self-regulate executive pay. I don’t expect much will change in executive compensation as a result of this law; in fact, it might encourage more corporations to become or remain privately-owned companies.

What do you think of the new financial regulation? Does it go too far or not far enough? Will it save or kill the financial industry? Will the new law be enforced?

Read the text of H.R.4173.

Published or updated July 21, 2010.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 16 comments… read them below or add one }

avatar 1 Anonymous

Great piece.
It seems that it’s all really just a cat and mouse game between large financial institutions and the consumer. They prey on the desperate, gullible and those who refuse to read the fine print. Then something like this comes along to put a finger in the damn, meanwhile another crack begins to flow elsewhere. As long as there are people willing to make stupid decisions at the costs of their own financial worth, there will always be well crafted legal robberies.

From my understanding, this bill has some positive aspects, while it doesn’t do much to prevent future mistakes from repeating themselves. It does nothing to address the mess that Fannie and Freddie have become.

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avatar 2 Anonymous

I don’t think that giving consumers free access to credit scores will make the lenders or credit bureaus develop a new secret formula. They really have no reason to hide the credit score from consumers. We can get the credit score now for realitvly low cost or via various free services so I don’t see a big difference.

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avatar 3 Anonymous

Treasury secretary Tim Geithner said this is the most significant reform of the financial industry since the Great Depression. As expected, the mainstream media is merely taking his quote at face value.

I guess “reform” is in the eye of the beholder.

This bill only serves to further expand a bloated Federal government – as if it hasn’t become big enough already – adding even more worthless bureaucrats to the pig trough (as if the ones we had before did a good job of oversight).

It imposes additional government regulations that will only add more misery to the private business sector.

When this bill becomes law next week, we will have further tied the hands of business and ceded still more of our personal liberties over to Big Government. A government that has yet to show it can do anything better than the private sector.

By the way, in addition to what you highlighted, the Washington Times reports the bill will also:

1. “Make it easier for unions, environmental groups and other activist organizations that hold shares to put their representatives on the boards of directors of every corporation in the United States.”

2. “Impose costly new burdens on airlines, utilities and other non-financial businesses that were victims rather than villains in the crisis, simply because they use financial derivatives to hedge their businesses against risks such as fluctuations in oil prices, interest rates and currencies.”

3. “Create more than 20 “offices of minority and women inclusion” at the Treasury, Federal Reserve and other government agencies, to ensure they employ more women and minorities and grant more federal contracts to more women- and minority-owned businesses. The agencies also would apply “fair employment tests” to the banks and other financial institutions they regulate, though their hiring and contracting practices had little or nothing to do with the 2008 financial crisis.”

What the bill doesn’t do is fix the problems with Fannie Mae and Freddie Mac, or remove from power those who mandated those institutions to loosen their standards so that more people could get home loans, regardless of their ability to pay (guys like Barney Frank).

Well, at least Big Government is making out.

Full story here:


Len Penzo dot Com

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avatar 4 Anonymous

Government regulation fails, and the only cure is further regulation.

Think about the ludicrousness of government bureaucrats requiring borrowers to document their income before applying for loans. Any self-interested lender would require the borrowers to do so anyway, without the mandate.
So why don’t lenders make the borrowers disclose everything now? Because there’s no incentive for doing so. So the mortgage company we own watched a bunch of borrowers default – big deal, we’ll just apply for TARP funds. As for the prudent lenders whose customers didn’t default, they get no taxpayer assistance. Suckers. Couple that irrational scenario with the Community Reinvestment Act, whereby lenders are REQUIRED to lend money to borrowers who’ll be over the heads the moment they sign the contract, and the risk/reward balance will never reach equilibrium.

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avatar 5 Anonymous

I think it is a mistake to effectively ban stated income loans. The fact that they were abused does not mean they should be completely eliminated. A lot of borrowers are going to have a very hard time getting mortgage financing because they legitimately cannot document their income (the self-employed for instance). We already have mortgage fraud laws on the books, why don’t we just enforce those better?

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avatar 6 Anonymous

The “regulation fails so the only solution is more regulaton?” argument cracks me up. YES, something screwed up, fix it! A comparabe arguement would be “a paint job looks miserable, an you think more paint is the solution?”

Now the argument that new does not equal better is one I can get behind. Unfortunately modern political discourse can’t squeeze that arguement into a sound byte.

And your right that a self invested lender would require documentation. That’s why small banks and credit unions suffered much more from the recession than the subprime disaster, unlike the bailed out banks who have profited during the recession. The big guys were not self invested, the little guys were. FinReg makes the big guys remain invested by preventing total bundling after the loan is made.

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avatar 7 Anonymous

Amen, in theory. The system is set up (or at least was set up, before Congress granted the unaccountable Fed even greater powers yesterday) to reward large lenders at the expense of small ones. The new requirements for every financial firm, regardless of size (e.g., dictating the makeup of each lender’s board) will serve only to cripple the honest but modestly sized neighborhood firms in favor of the monoliths.

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avatar 8 Anonymous

I see it as a huge overreach of government power and they will simply continue to grab power until they can regulate every single aspect of our lives (or whatever aspects they haven’t already grabbed).

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avatar 9 Anonymous

We received letter from our Representative Barbara Lee on the day FinReg passed through the Senate, stating that there is nothing her office will be able to help us. Clearly, FinReg means nothing to her. What a joke about rebuilding the integrity of our financial system and protect American general public!

We filed complaints against Wells Fargo ‘s appraisal and mortgage loan fraud with Office of Comptroller of Currency, Barbara Lee, Dianne Feinstein, Barbara Boxer and Harry Reid in 2006. In 2006, with overwhelming evidence, we were told that Wells Fargo did not commit appraisal and mortgage fraud against us.

We spent 10 months from June, 2006 to March, 2007, trying to convince everyone that Wells Fargo made the mortgage loan to us based on hugely inflated appraisal. No one cared or bother to listen.

In March, 2007, after clearly indifference from Wells Fargo and our regulatory agencies, we filed the lawsuit against Wells Fargo and continued to follow up with OCC and senators. After we filed the lawsuit, OCC and all senators told us that they can’t make any comments on our complaints since it is in litigation.

The irony is that should Senators made sure OCC do its regulatory job, we don’t even need to file lawsuit. On top of it, should OCC take action upon our alerts two years before the housing crisis, how many homes could have been saved. How many wrongful foreclosure could have been prevented?

All our senators voted for FinReg, but none of them cared about homeowners beig defrauded by Wells Fargo and have no intention to protect homeowners like us or future victims or hold Wells Fargo accountable for defrauding homeowners.

Wells Fargo committed prosecutable crime against us. We lost our home. Something is wrong with this picture. Here are the facts.

1. it is illegal for Wells Fargo to make mortgage loan to us based on hugely inflated appraisal.

Fact: – Wells Fargo’s fraudulent appraisal valued our home at $718,000
– Wells Fargo’s own review appraisal valued our home at $475,000
– Nevada Attorney General’s office suspended the appraiser’s license for committing appraisal fraud on our home.
– Nevada Appraiser Licensing Board mandated the appraiser to complete appraisal fraud course before regaining his real estate appraiser license.
– Nevada Revised Statue NRS 205.372 states that it’s category C felony to make mortgage loans based on fraudulent appraisal.
– Cases of Attorney General’s indictments against attorneys, loan brokers for teaming up make fraudulent loans to defraud homeowners.

2. it is illegal for Wells Fargo to wrongfully foreclose our home based on fraudulent appraisal and mortgage loan.

You can find all the facts on our website.

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avatar 10 Anonymous

Is there a contest for “Most Disjointed Comment Of The Month”? Because that means I’ve only got 10 days to outdo Donna.

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avatar 11 Anonymous

The barebone bottomline issues are:

1. No lender shall make loans based on inflated appraisals.
2. Wells Fargo shall follow the underwriting standards.
3. Wells Fargo shall provide customer service after negligence and fraud is committed

Homeowners got fraudulent mortgage loans from Wells Fargo is equivlent to anyone purchases a broken camera from Target. Reputable Target would offer to exchange or refund the purchase. In my case, Wells Fargo offered to rescind the loan contract and help us to recover our financial losses if we can prove appraisal fraud. Clearly, we did prove that Wells Fargo made us the loan based on hugely inflated appraisal.

By the way, there is no contest. It is the reality how Wells Fargo defrauded us and maybe millions of others. Proof:

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avatar 12 Anonymous

I concur. There is no contest.

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avatar 13 Anonymous

“Borrowers will need to document their income before qualifying for loans.” This is common sense and makes a lit of sense to me. Seems like the reason a lot of Americans are in debt is because they get “pre-approved” for stuff they can’t actually afford. This rule would cut back a lot on this and save people from making bad decisions.

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avatar 14 Anonymous

I agree with Jenna. However, in any business transaction, responsiblity and liability shall hold both parties accountable. I deeply feel that homeowners like us were held at a much higher standards than Wells Fargo. In our specific situation, we put $152,000 downpayment, and applied the loan from Wells Fargo.

Wells Fargo granted us the loan based on its underwriting standards. Wells Fargo owes us or all homeowners the fidiciary duty to make sure that it won’t make loans based on hugely inflated appraisals. Not you, not me, not any homeowners can influence Wells Fargo to change its underwriting standards in order to qualify for its loans! Wells Fargo has the sole authority.

On top of it, what about “after sale” customer service which Wells Fargo promotes so much. Wells Fargo had its own appraisal review, made us promises and knew that it made us a loan based on hugely inflated appraisal. Wells Fargo still foreclosed our home. I doubt that we are the only victims, If we don’t hold Wells Fargo accountable, I can be sure that we will not be the last appraisal and loan fraud victims.

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avatar 15 Anonymous

Wells Fargo worked out a mortgage for you with a monthly payment of $x. What does that have to do with the appraisal? If Wells Fargo appraised your house at $2 billion, with correspondingly enormous monthly payments, is it their fault if you agree to the the payments then quit after a few months because you can no longer afford them?

I don’t mean to be iconoclastic or nasty here, but is anything the fault of the buyer? What if Wells Fargo had underappraised your house, and required you to pay only a few bucks a month? Would you be OK with it if they then raised your payments a few months later, or should they just shut up and honor the agreement they signed?

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avatar 16 Anonymous

I can only deal with the reality that Wells Fargo’s appraisal inflated my home value by $243,000 based on Wells Fargo’s own appraisal review.

Appraisal is a crucial process of Wells Fargo’s underwriting process in granting loans to any homeowners. Put it this way, Wells Fargo gets and reviews appraisal report before granting us the loan is like drug company does drug test before releasing drug products to the market. It’s part of quality and safety control, which protects consumers, investors and anyone who related to our loan products.

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