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Financial reform: How it affects you

The financial overhaul is about more than exotic derivatives and complex risk assessments. It will change how you interact with the financial system every day.
/ Source: The Associated Press

The financial overhaul is about more than exotic derivatives and complex risk assessments. It will change how you interact with the financial system every day, from swiping your debit card at the store to applying for a mortgage.

That includes new rules governing how we bank, borrow and invest, plus the creation of a new regulator to make sure financial transactions like signing up for a credit card are safer and easier to understand.

The legislation does not go as far as some would have liked. Auto dealers, who make most car loans, won't face oversight by the new consumer bureau. Nor will banks with less than $10 billion in assets, even though they serve most communities in this country.

Here's a piece-by-piece guide to the new rules.

Comsumer Protection
A new Consumer Financial Protection Bureau, to be housed in the Federal Reserve but run independently, will have the power to write consumer protection rules for banks and other financial institutions, like mortgage lenders.

It will also examine and enforce regulations already in place at mortgage lenders and banks that hold more than $10 billion in assets.

The bureau will have the power to ban financial products that it considers unsafe. It could also outlaw anything that might be confusing to consumers, like the fine print on credit cards or mortgages.

In theory, it could also block credit-card companies from charging especially high interest rates. The idea is to bring consumer regulation under one roof, rather than spreading it out among seven different agencies.

"It's hard to be an expert on economics and consumer protection at the same time," says Jeffrey Sovern, a law professor at St. John's University and an expert on consumer law.

Still, the new bureau will cover only half the bank branches in the nation because of the $10 billion asset requirement, according to data from the National Community Reinvestment Coalition, a Washington-based consumer group.

It also may not be as independent as it seems. If federal banking regulators object to new consumer protection rules, they can appeal to a newly created council made up in part of their fellow banking regulators.

Credit and debit cards
Say you walk into a gas station and pick up some soda, candy and gum. The total is $11, but there's a sign at the register saying you can only pay by credit card if the purchase is $20 or more.

Under the new legislation, the minimum can be no more than $10, and only the Federal Reserve can raise it.

The Federal Reserve will also have the power to limit the fees that card issuers can collect on debit-card transactions. But the rule applies only to big banks, not to credit-card issuers such as Visa and MasterCard.

Right now, banks usually charge stores 1 to 2 percent for each swipe — fees that added up to nearly $20 billion last year. Stores and restaurants say lower fees would allow them to cut prices, and to hire more people.

But even if prices do fall at the store, banks might raise fees and rates for their customers. They could also scale back "reward" cards or free checking to make up for the money they're not collecting from stores and restaurants.

Credit scores
Right now, it can be maddeningly difficult to figure out your credit score. While you're entitled to one free credit report a year from each of the three credit reporting agencies under federal law, you almost always have to pay to see your actual score.

Under the overhaul rules, any lender that turns down a borrower — whether it's for a mortgage, a department store credit card or an auto loan — because of his or her credit score has to tell the borrower what that score is, and for free.

Remember all those risky mortgages that borrowers got without ever showing proof of income? The ones that blew up and set off the housing crisis? Under the new rules, lenders will have to verify a borrower's income, credit history and employment status.

On top of that, banks will have to hold on to at least 5 percent of the loans they make instead of selling them to investors. The idea is that they'll take fewer risks when they have skin in the game and aren't slicing, dicing and selling all their loans.

"They don't care about whether they make bad loans if the risk isn't theirs," says Dean Baker, co-director of the Center for Economic Policy and Research, a liberal Washington think-tank. "Now they might have to."

Of course, if the banks are scaling back their risks, that means it could be harder for you to get a mortgage.

Investor protection
Regulators will have the authority to require all financial advisers to act in their clients' best interest. Practically speaking, this means disclosing fees, any disciplinary actions and potential conflicts of interest, such as commissions.

Until now, not all brokers who sell stocks, bonds, annuities and other investments have to make such disclosures. They could steer you into mutual funds or college savings plans that pad their firms' profits or their own commissions, and you might never know.

The Securities and Exchange Commission will study the issue for six months to determine whether average investors are sufficiently protected by the rules already in place or whether something stronger is called for.

So the SEC could still decide not to act at all, meaning investors would still be stuck with a system in which their advisers can put their own financial interests, not the clients', first.