Financial Reform Article Final


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Summary of the overhaul to financial regulations recently signed into law with hyperlinks.

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Financial Reform Article Final

  1. 1. Updating Financial Practices in Accordance with the Financial Reform Law By Michelle Nguyen and Catherine Than August 10, 2010 The overhaul to financial regulation recently signed into law by President Obama may have a noticeable impact on how business is done in the financial sector. While the legislation in its making may have eyed the major players in the financial crisis and the beneficiaries of the tax-funded bailout, the new law will in fact affect almost everyone involved in the financial services industry (big and small banks, savings and loans, thrifts, insurance companies, private equity firms, hedge and mutual funds managers) and their consumers. The financial reform law expands federal regulation with the intention of promoting greater financial stability, reforming excessive risk-taking and protecting everyday consumers of financial products. The legislation will create new regulations and adapt existing ones to improve accountability and transparency in the financial system. Under the law, a wider range of financial products will be overseen, including mortgages, loans, payment cards, credit ratings, securities and derivatives. Although the full details of the new financial reform law will develop over the next couple years, it is important to begin to understand how increasing oversight and consumer protection in the law will affect banks and other lenders in their financial practices. The following summary of major reform themes in the law and their legal significance to business development can be considered. Risk Regulation in the Financial Industry • Allocates Federal authority to take over and break up too large, risky, and/or failing financial companies that threaten the stability of the financial system. • Restricts banks from engaging in proprietary trading, or making speculative bets with their own money, although banks may invest up to 3% of their capital in hedge fund and private equity investment instruments.1 • Requires firms that sell asset- or mortgage-backed securities (not meeting the new risk- reducing standards under the law) to keep at least 5% of the credit risk.2 Consumer Financial Protection • Creates the Bureau of Consumer Financial Protection which will have powers to write and enforce regulations concerning lending and related consumer financial practices for most financial institutions. • Endows state attorneys general with the power to enforce both federal and state consumer protection laws against banks and savings associations. • May impose a duty on personal stockbrokers and swap dealers to act in the best benefit and interest of their clients (the latter when acting as counterparties to a pension plan, endowment, retirement plan, or government entity).3 © 2010 Bickerstaff Heath Delgado Acosta
  2. 2. • Will review the current policy of mandatory arbitration between investors and stockbrokers when conflict arises, potentially limiting or banning the practice if it is deemed unfair.4 • Entitles consumers who have suffered from an unfavorable decision due to their credit rating to access a free credit score and report from their credit rating agency. • Increases the limit on insured individual deposits from $100,000 to $250,000. • Promotes consumer education and fair, equitable, and nondiscriminatory access to bank accounts, credit, and financial information. Mortgage and Lending Practices Reform • Prohibits certain financial incentives to mortgage lenders that would result in high-cost mortgages for consumers. • Mandates that lenders fully document a home buyer’s income, for example by reporting tax records from the IRS, and establish that the home buyer has a “reasonable ability to repay” at the time a mortgage agreement is completed.5 • Requires that lenders disclose the maximum amount the home buyer could pay on a variable or adjustable rate mortgage and give the home buyer at least a six months’ notice before the first interest-rate change.6 Transparency in Financial Business • Requires that most derivatives trading, or financial risk swaps, be processed through public clearinghouses and exchanges. • Requires that securities-rating agencies disclose their methodologies, their use of third parties for due diligence, and their ratings track record. • Imposes rules for executive pay and corporate governance in all publicly-traded companies. The “Say on Pay” clause will give shareholders an advisory vote on how top executives are paid while in office and what payments and benefits executives may receive when they leave the company. Debit and Credit Transactions Reform • Places a cap on the interchange or “swipe” fees that banks can charge retailers for debit card transactions. It will issue rules to ensure that debit card fees are “reasonable and proportional to the processing costs incurred”.7 • Bans debit network “exclusivity” in favor of competition so that an issuer of debit cards or other payment cards may not restrict that electronic debit transactions be processed through a single payment network, or over multiple networks that are affiliated with the same company.8 • Allows retailers to impose a $10 minimum on credit card purchases and give discounts on purchases paid with a non-credit card form of payment. As noted earlier, there is still uncertainty in how the reform clauses will be implemented since bank and market regulators have yet to work out the policies. Financial institutions have an interest to © 2010 Bickerstaff Heath Delgado Acosta
  3. 3. keep up-to-date with relevant provisions in the financial reform law. Businesses in doubt of how the reform law may affect their financial practices are advised to consult specialized legal counsel. For more information, the following sources can be referenced: US Senate Committee on Banking, Houston, and Urban Affairs, “Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act” Lynnette Khalfani-Cox,, “7 Ways Financial Reform Will Impact Your Life” Jennifer Liberto and David Ellis,, “Wall Street reform: What’s in the bill” Christi R. Adams, Martin J. Bishop, Michael C. Lueder and Thomas I. Elkind, Foley and Lardner LLP, “United States: The New Consumer Financial Protection Act” © 2010 Bickerstaff Heath Delgado Acosta
  4. 4. 1 US SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS , BRIEF SUMMARY OF THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 12 (2010), 2 Id. at 14. 3 Id. at 8 and 13. 4 Lynnette Khalfani-Cox, 7 Ways Financial Reform Will Impact Your Life, Posting to Wallet Pop, AOL Money & Finance, July 21, 2010, 5 Id. 6 Id. 7 US SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, supra note 1 at 13. 8 Andrew Johnson, Buried in Reform Law, a Ban on Debit Exclusivity, AMERICAN BANKER, July 28, 2010,