In 2010, Congress passed, and President Obama signed, the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is usually referred to simply as “Dodd-Frank.” It makes some sweeping changes to America’s financial system, as well as the regulation of Wall Street, and consumer credit.
Particularly relevant to consumers, Dodd-Frank imposes some new, and fairly significant, regulations on credit card companies.
Dodd-Frank creates a new federal agency called the Bureau of Consumer Financial Protection, which exists within the Federal Reserve. The mission of this bureau is to handle consumer complaints against financial institutions, regulate consumer financial products (such as credit cards), and to ensure equitable access to consumer credit, among other goals.
One of the major regulations placed on credit card companies by Dodd-Frank is a set of fees meant to pay for an emergency liquidation fund, as well as the costs of enforcing these new regulations. Now, banks that issue credit cards have been bailed out by the taxpayers to the tune of hundreds of billions of dollars. If this bailout had not come, they might well have collapsed, taking the entire U.S. financial system, and the global economy, with them.
One might think that they’d be glad to accept some reasonable fees to help recoup the cost of their bailout, and simply take a small loss. However, many credit card companies have begun passing the costs of these fees onto the consumers, in the form of higher interest rates, and new service fees. So, one unfortunate effect of this law is that many consumers might see increased fees and higher interest rates on their credit cards. While this will certainly have a negative effect on some customers, particularly those viewed as higher-risk, credit card companies will still have to offer competitive rates and fees in order to retain the majority of their customers. However, many rewards programs offered by credit card companies have already been cut, and are unlikely to return anytime soon.
Also, interchange fees that banks charge for debit card purchases must be “reasonable and proportional” to the actual cost that banks incur in processing these transactions. However, this does not apply to debit card issuers (banks) with less than $10 billion in assets, which is the majority of banks in the United States.
Finally, every time a consumer is denied credit, or offered credit on nonprime terms, the institution that rejected them must offer them a free credit report.
As with any major regulatory overhaul, Dodd-Frank was enacted with certain value judgments in mind. Those who sponsored and voted for it presumably believed that one group (consumers and small businesses) needs additional legal and regulatory protection, at the expense of more powerful and moneyed interests (banks and other large financial institutions), which can afford to take a relatively small hit, for the sake of protecting consumers and the economy as a whole.
So, just as in any other case, there are groups who will win, and those who will lose, from this new regulatory scheme. In theory, low-income consumers who have had trouble obtaining credit of any kind should be the winners.
However, the long-term effects of this law remain to be seen. The laws of economics are complicated, and regulations which sound really nice on paper can have serious unforeseen consequences, both good and bad.
Given how divided American politics currently is, it’s likely that Republicans will make every effort to repeal this law in the near future, and that Democrats will fight tooth and nail to keep it in place.
I only hope that the Republicans are mature and humble enough to give this law a fair shot, at least for a few years, and then conduct an honest assessment of its costs and benefits, before mounting a repeal effort. I also hope that, if this laws costs end up outweighing its benefits, its Democratic supporters will be intellectually-honest enough to acknowledge that maybe passing it was a mistake, and that it should be re-examined. Of course, politics being what it is, I’m not holding my breath for either scenario.
As always, if you are a consumer, and have any serious questions about how this law might affect you, you should consult with an attorney who specializes in consumer credit law.
John Richards is a writer for LegalMatch.com and the LegalMatch.com Law Blog. The above article is for general informational purposes only, and should not be construed in any way as legal advice relevant to your particular situation. The only person qualified to give you legal advice is an attorney licensed to practice in your jurisdiction, who has been apprised of all the relevant facts of your situation.
