Financial Overhaul and You! Mortgages, Debit Cards and More

Financial overhaul and you: Mortgages, debit cards and more ...

By Sandra Block,, USA TODAY

You're not a bank president and you wouldn't know a derivative if someone served you one for dinner. No matter. There are several provisions in the financial overhaul bill that could affect you, especially if you plan to buy a home.

"Consumers have been pounded by the financial crisis, not just from job losses, but from punishing credit card fees and skyrocketing interest rates," said Pamela Banks, senior policy counsel for Consumers Union. "The bill gives consumers a fighting chance."

Here's a rundown of consumer measures in the bill that's headed to the House and Senate for final votes:

Mortgages

• Lenders would no longer be allowed to pay mortgage brokers a commission based on the interest rate for a home loan. Critics have charged that this fee, known as the yield spread premium, encourages mortgage brokers to steer borrowers into risky loans with high interest rates. The law would bar brokers from receiving any compensation tied to the terms of the loan, other than the principal amount. The yield spread premium "is sort of a secret deal between the lender and the broker" that often ends up hurting the consumer, says Ruth Susswein, deputy director for Consumer Action.

The National Association of Mortgage Brokers opposed the provision, arguing that it would prohibit low-cost financing, a popular option for home buyers and refinancers.

The provision would prevent borrowers from paying a portion of their closing costs upfront and rolling the rest into the loan in the form of a higher interest rate. Under the bill, loan originators will be required to collect all of their fees upfront or roll the entire amount into the loan, says Jim Pair, president of the NAMB.

• Prepayment penalties would be limited or prohibited, depending on the type of loan. Lenders won't be allowed to impose any prepayment penalties on certain types of risky loans, such as loans with a large balloon payment. For 30-year, fixed-rate loans, penalties would be limited to the first three years of the loan.

• Lenders would be required to determine that borrowers can afford the monthly mortgage payments, along with insurance, taxes and assessments. For adjustable-rate mortgages, lenders would have to ensure that borrowers can afford the highest rate under the terms of the loan.

This may sound like something lenders are supposed to do, but during the housing boom, many lenders were cavalier about borrowers' ability to repay loans. Stated income, "no-doc" and "liar loans," which allowed just about anyone with a heartbeat to buy a house, were rampant. The credit crunch led lenders to tighten their standards, so in some respects, "Many of these reforms are going to be locking the barn door after the horse is gone," says Keith Gumbinger, vice president of HSH Associates.

Still, lenders have short memories, and without the legislation, there's no guarantee they won't loosen their standards when the real estate market recovers, Gumbinger says. Real estate markets "burn down every 15 or 20 years or so, and the market doesn't seem to learn from past mistakes," he says.

Credit scores

Consumers who are turned down for a loan would be entitled to receive a copy of the credit score that the lender used to make that decision. Consumers would also be entitled to a free credit score if they were offered a loan at a rate that's higher than the one provided to borrowers with excellent credit. You'd have the right to a credit score any time it results in an "adverse action," which could include everything from a job rejection to a higher insurance rate.

However, you won't get a free credit score when you order your free credit reports. Since 2005, all consumers have had the right to a free annual credit report from all three credit bureaus through www.annualcreditreport.com. But the only way to get a credit score is to buy one from one of the credit bureaus or through www.myfico.com.

Mandating free annual credit scores is impractical because lenders and others use many different types of credit scores, says Mark Greene, chief executive of FICO, developer of the widely used FICO score.

For example, some credit scores are tailored for use by credit card issuers, while another is designed for mortgages, he says. "The way out of these woods is to say that the score used in making a lending decision is the score to be provided," he says.

Credit and debit cards

The bill includes a provision aimed at reducing some "interchange fees" — fees banks charge retailers when consumers pay with debit cards. Here's how you could be affected:

• The Federal Reserve Board would be required to determine what constitutes "reasonable and proportional fees" for debit card transactions, which currently run about 1% of the transaction. The National Retail Federation says lower fees could lead to lower prices for consumers, but other analysts doubt consumers will notice much of a change.

Banks have warned that if interchange fees are reduced, they may have to eliminate debit card rewards programs and increase other fees to make up for the lost revenue.

Debit cards issued by banks and credit unions with less than $10 billion in deposits are exempt from the rule. Prepaid debit cards used by government agencies to issue unemployment and other benefits are also excluded.

• Retailers would be allowed to offer consumers a discount for using cash, a check, or a debit card instead of a credit card. However, lawmakers removed a proposal that would have allowed retailers to give consumers a discount for using a card brand that charges a lower fee than a competing brand.

• Retailers would also be allowed to require a minimum purchase before they'll accept a debit or credit card. Currently, retailers are typically prohibited under card associations' rules to set minimums. So if you're used to using your credit card for everything, including a $2 cup of coffee, you may need to start carrying cash.

Consumer loans

A new agency, the Consumer Financial Protection Bureau, would have the authority to regulate mortgages, credit cards, payday lenders, check-cashing companies and lenders that provide private student loans. However, auto dealers' financing and insurance arms would be exempt from the agency's jurisdiction.

The auto industry argued that auto dealers aren't banks and didn't play any role in the financial meltdown. The National Automobile Dealers Association also contended that the additional bureaucracy would drive up the price of auto loans.

Consumer groups maintained that placing auto dealers under the consumer agency's jurisdiction would protect consumers from abusive lending practices by unscrupulous dealers. In addition, exempting auto dealerships' finance departments from regulation could give them an unfair advantage over credit unions and small banks, according to the Cambridge Winter Center for Financial Institutions Policy.