Strongest Consumer Financial Reform Since FDIC

A new government entity is taking shape that should protect consumers from nasty credit card tactics and other lending problems that have been plaguing the market for years. The Bureau of Consumer Financial Protection will be a watchdog agency targeted at cleaning up the consumer marketplace. It will force companies to create more transparent product disclosures, increase consumer financial literacy, and regulate lending products such as credit cards, mortgages, overdraft fees, payday loans and others.

The Senate voted 60 to 39 in favor of the bank-reform bill. It has already passed in the House and all indications suggest President Barack Obama will sign the bill soon.

Changes won’t happen right away, but soon consumers will see simpler contract language that should let them make wiser financial decisions. According to Ed Mierzwinski of US PIRG, a consumer advocacy group, “It’s a very strong bill. It is no hyperbole to say that this is the strongest consumer financial reform since deposit insurance.”

Because so many consumers were unaware of hidden and illegal fees, they might not notice when these things disappear. However, consumers will notice simple contract language in virtually all financial products. Disclosures will point out both the benefits and costs.

Just how much “dumbing down” will be implemented is not clear. Regulators must find a way to protect the interests of both consumers and lenders while still minimizing paperwork, simplifying language and disclosing more information. Such a combination may be difficult to achieve. If it can be done, consumers will be able to compare apples to apples when considering competing financial products. Documentation will be easier to understand, making decisions easier and smarter.

Economists believe the new bureau will create a healthier financial system for the US by reducing financial risk. Loans will perform better when consumers know what they are getting into from the onset. But with this reduced risk may come higher costs and fewer choices. To revamp the documentation that goes with financial products will cost large sums of money, the cost of which will be passed on to the consumer. Others believe the bill will increase competition, bringing costs down, as consumers can spot the best credit card or mortgage more easily.

Even proponents of the new law admit it will bring up the expenses lenders must put out in connection with financial products. However, these expenses will pale in comparison to late payment fees and high interest charges that will be reduced by the law.

Consumers must remain vigilant, even after changes to financial products are implemented in the next few years. Abuses will still occur and there are some lenders that will always try to find a way to squeeze more money out of consumers. But now, consumers will have a standard to expect when looking at financial products and a government agency to help them if they should fall prey to unscrupulous lenders.