The Financial Reform Act Explained |

On Wednesday, July 21, 2010, President Obama signed the Wall Street Reform and Consumer Protection Act. He and the Democratic Party have been both applauded and demonized for it.

What does the new law actually do, and why do people love/hate it? It’s a little confusing, so we decided to break it down:

What’s the problem?

The financial crisis cost millions of jobs, wiped out billions in retirement savings, and caused the foreclosure of countless homes. It was brought on by problems in our financial system, including shady ways of investing.

Lawmakers decided that if we don’t put measures in place to monitor and regulate the financial system better, the same type of crisis could happen again.

Both Republicans and Democrats agreed that measures needed to be taken to prevent similar catastrophes.

What are the goals of the act?

Hold Wall Street accountable for everything it does Protect American families from unfair financial practices Close regulatory gaps in the financial system

Instill confidence in the US market and promote growth

What does the the new law claim to do?

Create stronger protections for consumers against unfair credit card practices like raising rates for no reason

Prohibit mortgage brokers from making extra money by selling mortgages they know consumers can’t afford

Give people free access to their credit score so they can stay on top of their finances (if they get denied a loan)

Create a rule that there can be no more taxpayer-funded bailouts; if a company can’t make it, it will have to liquidate

Give shareholders of a company more say on how much their CEO gets paid

Establish a rule that investment brokers must give advice that’s in the best interest of their customers rather than what makes the broker the most money

Prevent financial firms from growing so large that if one fails it will affect the whole financial system

Create a government agency in charge of making sure consumers are protected and lenders are held accountable for their practices

Create a rule so businesses can’t be charged extra fees for debit card processing (above the cost of processing itself). These are called “swipe fees.”

Prohibit banks from owning, investing, or sponsoring their own trading operations for their own profit (unrelated to serving their customers)

How’s it going to happen?

Starting now, the FDIC gets to keep its current insurance coverage for deposits at $250,000. It would have gone back to the old limit of $100,000 in 2013 if not for this new law. That means if your bank fails, you’re insured up to $250,000 for the assets you have in it.

A new Federal Insurance Office will be formed and given authority to seize big, failing companies. A new council called the Financial Services Oversight Council (FSOC) will be formed from existing officials such as the Secretary of the Treasury, Chairman of the Federal Reserve, US Comptroller of the Currency, and others, including one independent member with insurance expertise. They will be able to issue cease and desist orders to big firms they think are “a grave threat to the stability of the United States,” and break them up as a last resort.

The first meeting by the new FInancial Services Oversight Council will be held in 3 months. By 6 months, new rules providing shareholders more of a say on executive pay take effect.

Within a year, consumer protection bureau must be up and running, and the Office of Thrift Supervision will be abolished. In 18 months, new rules restricting proprietary trading will come out. In 2 years, regulators must propose simpler mortgage disclosure forms.

Obama: The bill will “protect consumers and lay the foundation for a stronger and safer financial system, one that is innovative, creative, competitive, and far less prone to panic and collapse.”

What are the arguments against it?

Unsurprisingly, congressional voting on the bill seemed to have more to do with political posturing than working together. 57 Democrats and 3 Republicans voted for it. 38 Republicans and 1 Democrat voted against it. (The Democrat, Russell Feingold, said the bill wasn’t strong enough.).

Those opposed to the act say:

Taxes will go up It will be “devastating” to the derivatives market (types of investment trading that take place outside public scrutiny). Banks will lose profits (and therefore jobs) if they have to reduce their debit card fees

The financial industry in general will be unable to make as much money, and those effects will trickle down

Sources: Washington Post,,, CNBC, Christian Science Monitor, CNN, Bloomberg