Financial Regulation Lags After Dodd-Frank

It's been a year since Congress passed and President Barack Obama signed into law the most sweeping financial reform since the Great Depression. But as of the Dodd-Frank Act's July 21 anniversary, regulators had completed only 49 of the hundreds of rules mandated by the 2,000-plus page law.

Are you any better off now than before new financial regulations became law? When it was signed into law, Dodd-Frank drew a line in the sand on mortgage abuses, predatory lending, credit information and other vital issues for consumers. But since then, the dozen-plus regulators writing the rules under the new FinReg law have struggled to work out most of the specifics. The law sets more than 240 deadlines for 22 different regulators to write rules, issue recommendations and write reports in the implementation of Dodd-Frank. Most deadlines must be met by only 10 regulators.

"In one sense, everything's different because financial institutions know what's coming, so they're already anticipating and making business changes," says Margaret Tahyar, a partner at Davis Polk & Wardwell, a New York law firm tracking Dodd-Frank for its clients. "In another sense, there's still a great deal of uncertainty."

As for the handful of rules that have been written, here is a closer look at the financial regulations that have been implemented and how they affect you.

A new consumer watchdog

The Dodd-Frank Act created a new federal agency to protect consumers who use a range of financial products. The agency is financed out of the federal budget. FinReg advocates hail that as an important development because the regulator won't be as beholden to the private sector as other agencies that rely on institutions they regulate for their budget.

On July 21, the Consumer Financial Protection Bureau received responsibility for enforcing laws meant to regulate consumer finance in the following areas:

Fair credit. It governs consumers' rights to their credit information and how the data are used or disseminated.

Truth in lending. It requires lenders to clearly disclose costs and fees associated with credit, and it provides a method for resolving disputes.

Mortgage origination. Mortgages were a key cause of the financial crisis because of lax underwriting standards, predatory lending and abusive practices.

Marketing of financial products to prevent deception and abuse.

Previously, seven different agencies -- sometimes seen as too cozy with industry -- oversaw the three dozen laws that Dodd-Frank replaces. Elizabeth Warren -- the White House adviser who as an academic championed the creation of a consumer bureau -- has led the agency in simplifying mortgage disclosures, creating a database of consumer complaints and offering financial education to consumers.

Obama has nominated former Ohio Attorney General Richard Cordray as director of the bureau, setting up a fierce battle with Republicans in Congress who have vowed to block any nominee unless the agency's power is curbed. Obama has the power to appoint Cordray as interim director during a congressional recess, but lawmakers have avoided going into recess.

Under FinReg, unless the bureau has a director, it cannot assume its full rule-writing powers for new financial regulations and must rely on examining the operations of lenders and bringing enforcement actions to curb abusive practices and protect consumers, according to a legal interpretation by inspectors general for the Federal Reserve and Treasury.

One way the bureau is already cracking down is by partnering with state regulators and the military to protect members of the armed service and their families from abuses involving mortgages, student loans and payday lending.

The bureau's website displays samples of simplified mortgage statements and consumer information on topics such as international money transfers and credit scores, and it invites consumers to comment on its proposals involving new financial regulations.

No more meltdowns?

The second major development for consumers under new financial regulations has been the creation of a Financial Stability Oversight Council and a host of new rules that give the council and individual regulators the authority to quickly unwind any large, troubled firm -- whether banking, insurance or nonfinancial -- that threatens to destabilize the financial system as Lehman Brothers and American International Group Inc. did in September 2008.

Some other financial reforms already in place that aim to prevent future crises include the following:

Higher capital requirements for "systemically important" financial companies. The council is charged with defining systemically important.

Changes to the way bank deposits are insured, including larger reserves required of banks. Authority for regulators to liquidate any failing bank within 24 hours.

A ban on proprietary trading by U.S. banks, or investing on their own behalf rather than that of customers.

Financial reforms to increase transparency and oversight of derivatives, or private financial contracts between large institutions based on the price of an underlying asset such as a stock, bond, interest rate or commodity.

Crackdown on mortgage market

Several new financial regulations that cover the mortgage market, the epicenter of the financial crisis, were among the first to undergo rule-making. Mortgage originators now must make sure that a borrower has the ability to repay a loan. They also are prevented from steering homebuyers to more expensive loans or misrepresenting the available loans, a property's appraised value or the consumer's credit history.

"These were abuses that were fundamental to the financial crisis that advocates have been fighting for," says Lisa Donner, executive director of Americans for Financial Reform, a coalition of labor, civil rights and other organizations in Washington, D.C. "Lots of loans were made when the lender knew or should have known that the borrower would have no ability to repay, and they didn't care."

In addition, regulators have approved new rules aimed at ensuring real estate appraisers are independent of other parties in a mortgage transaction.

Better investor protections

The nation might not have had a housing market collapse and recession if not for the billions of dollars in mortgages that were repackaged as securities for investors who relied on the sound credit rating of the company that sliced and diced the loans, Donner says. Dodd-Frank strengthened oversight of credit rating agencies to better protect investors and the financial markets.

One financial reform already implemented by the Securities and Exchange Commission makes credit rating agencies subject to Regulation FD. The rule prohibits companies from selectively disclosing important information about their finances to any outside entity. Previously, credit rating firms were exempt from financial regulation.

The SEC also approved a new whistleblower program to encourage company insiders to report wrongdoing or fraud and has given shareholders more control over executive compensation. And the SEC has beefed up disclosure by issuers of asset-backed securities, requiring them to perform due diligence on the underlying assets and to disclose that analysis. Rules on fees, consumer data

Dodd-Frank called for the Federal Reserve to cap the amount that banks may charge retailers for processing debit card transactions, known as swipe fees.

On June 29, the Fed approved a 21-cent cap per transaction on swipe fees plus an additional 0.05% of the purchase price to cover fraud protection costs. That's far higher than the proposed 12 cents but certainly lower than the current average of 44 cents. The limit takes effect Oct. 1.

For instance, creditors must disclose the credit score used and additional information related to the score if the consumer receives less-than-favorable loan terms as an applicant or existing customer. Consumers who are denied credit because of their score also receive the score and the additional information. The rule was approved July 6 and takes effect July 21.

Most other new financial regulations under Dodd-Frank have yet to be implemented. "It's a big law, but it's a slow-moving train," Donner says.