Debit and Credit Cards-MORTGAGES-CREDIT SCORES-BROKERS AND FIDUCIARY DUTY-NEW CONSUMER AGENCY

Debit and Credit Cards- MORTGAGES-CREDIT SCORES-BROKERS AND FIDUCIARY DUTY -NEW CONSUMER AGENCY-

Finance Bill Affects Consumers

On Friday May 21, 2010, 10:27 am EDT

For consumers trying to figure out what the financial overhaul bill means for them, the legislation the Senate passed Thursday offers some tantalizing possibilities.

Merchants might offer more discounts to people who pay cash. You could get a free credit score every time a lender or landlord penalizes you with a lousy interest rate or rejects your application because your score is not up to snuff. And many mortgage prepayment penalties would go away.

But some of the measures that could have the most impact on consumers are not in the House version of the bill that passed in December. So we will not know which new rules will exist in what form until the two sides haggle in conference and produce a final bill.

One last-minute Senate addition would lower the fees that merchants pay to process many debit card transactions. If banks lose revenue as a result, they could make up for it by adding fees to checking accounts or cutting back on rewards programs. Retailers say that once card costs fall, they will hire more workers and hold the line on prices. There is a fair bit of disagreement about who has the better argument.

It will not be clear until there is a final bill — and perhaps for years afterward — how much money the measures will put in your pocket or whether it will keep it from being picked. But the basic outlines are clear, so here are the areas to watch as a final bill emerges.

DEBIT AND CREDIT CARDS The Senate bill contains an amendment with provisions that could affect how you use your credit card. You have probably encountered those irritating hand-written signs that forbid card use unless you're spending more than $10 or so, even though stores are generally not supposed to do this. The bill would allow such minimums, as long as stores were not setting minimums for, say, Bank of America's card but not Chase's. Merchants would not be allowed to set different credit-card spending minimums for, say, a Visa and MasterCard.

Stores would, however, be able to offer discounts based on what card a customer was using. So someone with an American Express card, which often costs the merchant more than other cards, might pay the full sticker price of an item that costs $100 while Visa and MasterCard holders could get a $1 discount.

The bill specifies that cash discounts are acceptable, as are lower prices for people who use debit cards. They could not, however, charge one price for Visa debit cards from one bank and another for Visa debit cards from a different bank

Why does the bill include this provision? Because it also orders the Federal Reserve to set rules that would lead to lower fees for merchants who accept debit cards. Key to this provision is the fact that merchants would pay those lower fees only to banks with more than $10 billion in assets. Smaller community banks and credit unions would still get the same amount of merchant fee income that they are getting now. That might have led a merchant to accept the less-costly Visa cards while turning away the more expensive ones (or setting minimum purchase amounts for the pricier ones).

You would think that small banks would like having a revenue advantage. They are certain, however, that if the bill passes as is, big banks, which produce a large portion of the revenue for Visa and MasterCard, will pressure the two companies into lowering the fees that merchants would pay to accept the small banks' cards as well. So they are lining up with the big banks to oppose the bill.

Dan O'Malley, the chief executive of PerkStreet Financial, is trying to build an online banking service around giving customers rewards for using their debit cards. Those merchant fees finance his perks, however, and if those fees fall, he's got problems. Most banks would have their own challenges if they were to lose out on a big chunk of fee revenue.

"It becomes a gamble," Mr. O'Malley said. "Monthly checking account fees will come back. And maybe retail prices will come down, but nobody knows."

Indeed, the merchants who have been pushing for lower fees for years argue that the reduction would benefit consumers, since they would then pay lower retail prices.

Somehow I doubt, however, that merchants would throw a parade and immediately cut all prices by half a percentage point on every item on the day this bill goes into effect, if it comes to pass. Maybe prices won't go up as much as they might have otherwise. But it will be hard for merchants to point to the vague idea of less-steep increases and satisfy angry customers who may suddenly be paying $10 a month for a checking account or earning half as many debit card rewards because their bank can't afford to be as generous anymore.

"This is an incredible con job," MasterCard's general counsel, Noah J. Hanft, said. "Under the guise of helping small business, this is just a shrewd and cynical effort that ultimately harms consumers."

That is the case he will make to the Congressional reconciliation committee. The provisions are not in the House bill, and it's not clear if House members will be willing to accept any of them.

MORTGAGES The Senate bill outlines three new changes, many of which echo the House bill.

First, mortgage lenders would face restrictions on when they can charge borrowers a penalty for paying off their loan before the term of the mortgage is up. They wouldn't be able to charge pre-payment penalties at all for mortgages that have balloon payments or for those that allow people to make low enough payments that the mortgage balance rises instead of falls (so-called negative amortization loans), among others. For more standard plain vanilla mortgages, pre-payment penalties would only be allowed in the first three years.

Second, the bill forbids anyone who sets up mortgages for customers from accepting compensation that would vary depending on the loan type. This is intended to protect consumers from some of the shenanigans that went on several years ago, when banks paid mortgage brokers extra money for putting customers in loans with high fees and lousy terms.

Finally, the bill requires banks to consider applicants' income, assets and credit history before making a loan. How quaint, right? It would be funny if it wasn't so pathetic that this even needed to be in here.

CREDIT SCORES In an issue that is not addressed in the House bill, the Senate bill, through an amendment, requires anyone who uses a credit score as a reason for taking an adverse action against a consumer to give the score to that person for free. So if you don't get the best mortgage or credit card interest rate, the lowest insurance premium or the apartment you wanted, you would be able to see the grade that hurt you. This can cost you about $15.

The lender or landlord will have to give you the score they used, which will usually be a FICO credit score. I had hoped that Congress would give consumers free credit scores every year to go along with the three free credit reports they can get, but it didn't happen.

BROKERS AND FIDUCIARY DUTY Senators had no luck inserting an amendment into their bill that would require all brokers to act in clients' best interests. Currently, many of these professionals need only to recommend investments that are merely suitable. The House bill includes the "best interests" requirement, and if it prevails, many more stockbrokers — and insurance salesmen pushing certain kinds of expensive annuities — would have to meet a higher standard.

The House's so-called fiduciary standard has been the subject of debate for a long time, and the insurance industry will fight fiercely in conference to keep it from becoming law.

NEW CONSUMER AGENCY Both bills call for the creation of a consumer financial protection agency. The agency would oversee many consumer loans and work to make the products more transparent.

It's hard to predict exactly how power the agency will ultimately have and how aggressive it will be as it attempts to set new rules. In the very least, however, it will give consumers someplace else to go when things go awry.

Lest we forget, the whole point of this bill is to keep something like what went on in the latter half of the last decade from ever happening again. Perhaps the new cops on the beat will sound the alarms sooner when we inevitably go off the rails again in the years to come.

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