I'm from the Government, and I'm Here to Help
Ever hear of the Law of Unintended Consequences? It states that when Congress passes a law to fix one problem, it will create five more. Government, being by and large populated with people that have not had jobs in the industries they regulate, is the poster child for “oh, I didn’t think of that.” With that preamble, here is a recap of the latest financial reform bill, the Dodd/Frank Wall Street Reform and Consumer Protection Act.
Credit Scores: Good: You are entitled, and have been for years, to a free credit report from each of the three credit bureaus every year. You get these at www.annualcreditreport.com. Now, though, if you’re denied for a loan, the denying company has to tell you what your credit scores were.
Bad: Seriously, we still can’t get our scores before we get denied for a loan? What was the point of this change?
Bad: All sorts of things. If you’re self-employed, you better start paying a lot more tax, or you’ll never get a home loan again. Stated income loans are now illegal. Banks are now required, except in narrow circumstances, to retain 5% of the mortgage loans they make, which means there will be less capital to lend and banks will make fewer mortgage loans. It also means that FHA loans will continue to ratchet up their market share, since FHA loans are exempt from these requirements. Eventually, the government will own practically all the mortgage loans in the US. Lending in Utah, where I’m based, as well as every other state, will get increasingly difficult for both brokers and borrowers, with fewer loan options and less competition among lenders.
Mortgage broker regulation: Good: Well, theoretically, if you make it so that loan officers can’t get paid based on the kind of loan they sell or the interest rate on the loan, that should lead to better deals for consumers.
Bad: Except that in the real world, the lenders are the ones that get paid, and they still do. Now, though, instead of the money going to the loan officers, the banks get to keep it. If you think this leads to reduced interest rates, you belong in Congress. Coming January 1, watch for flat-fee pricing from lenders, where the closing costs will be a flat percentage of the loan. A higher percentage than is currently normal, I shouldn’t have to tell you. Lending will consolidate further until only the biggest banks are left. That should make things muuuuch better.
Credit Card regulation: Good: Retailers now cannot require you to buy more than $10 of goods if you want to use your credit card. The Fed gets the power to regulate what percentages banks, but NOT card issuers (Visa, Mastercard) can charge on purchases.
Bad: Retailers already had agreements with Visa and Mastercard requiring them to accept the card for any amount. Now they don’t have to do that. Transaction percentages were already usually below 2%; now they will be wherever the Fed sets them, most likely higher. But because of the threat of the Fed and the loss of control over those fees, banks will respond by chopping out freebies (like free checking) and raising overdraft fees (seen that already, haven’t you?), and bringing back the annual fees for credit cards.
Bad: Financial rules for mortgages, banks, credit cards, car and student loans, and everything else will now be made by unelected bureaucrats in Washington, rather than by Congress, your state representatives, or, Heaven forbid, the companies that actually have to make a living in finance. We get a whole new government bureau for the purpose of promulgating these rules. Because as we were all aware, we don’t have enough of them already, and the ones we do have are doing such a splendid job.
I could go on to discuss such things as the creation of the new Office of Minority and Women Inclusion, which I’m sure you would agree is an integral part of any Wall Street reform, but you get the idea. Overall, the good is that if you are totally ignorant of even the most basic financial concepts, you may continue to be so and it will be less likely that you’ll accidentally do something stupid. The bad is that if you are smart and do your homework, your life just got more complicated and less rewarding. Again. Continuing the trend toward crushing the entire population into a narrow band of mediocrity in the name of “protecting” us, Congress has served up another heaping plate of mystery meat in this bill.