WASHINGTON -- Congressional negotiators struck a deal Friday on the toughest financial regulations since the Great Depression, aiming to rein in Wall Street excess and tighten rules on everything from simple debit card swipes to the most complex securities.
House and Senate bargainers approved the deal after an all-night meeting, giving President Barack Obama a fresh campaign-season triumph after his health care overhaul. Democrats hope lawmakers can pass the legislation and ship it to Obama for his signature by July 4, capping a burst of action prompted by the worst recession in seven decades.
Leaving the White House for an economic summit, Obama said the package would "help prevent another financial crisis like the one that we're still recovering from."
The legislation was not without its critics. Republicans complained that it ignored their efforts to impose tighter restrictions on Fannie Mae and Freddie Mac, the mortgage giants who have benefited from huge federal bailouts and whose questionable lending helped trigger the housing and economic meltdowns.
"Democrats have crafted a bill that fails to address the origins of the crisis and will not prevent a replay of events in the future," said Rep. Tom Price, R-Ga., a member of the House
GOP leadership. He said the measure would hinder economic growth and hurt consumers by limiting their access to credit.
The overhaul is about more than exotic derivatives and complex risk assessments. It would change how you interact with the financial system every day, from swiping your debit card at the store to applying for a mortgage. Here's a guide to the proposed rules:
A new Consumer Financial Protection Bureau, to be housed in the Federal Reserve but run independently, would have the power to write consumer protection rules for banks and other financial institutions, such as mortgage lenders.
It also would examine and enforce regulations already in place at mortgage lenders and banks that hold more than $10 billion in assets.
The bureau would have the power to ban financial products that it considers unsafe. It also could outlaw anything that might be confusing to consumers, such as the fine print on credit cards or mortgages.
In theory, it also could block credit card companies from charging especially high interest rates. The idea is to bring consumer regulation under one roof, rather than spreading it out among seven different agencies.
"It's hard to be an expert on economics and consumer protection at the same time," said Jeffrey Sovern, a law professor at St. John's University and an expert on consumer law.
Still, the new bureau would cover only half the bank branches in the nation because of the $10 billion asset requirement, according to data from the National Community Reinvestment Coalition, a Washington-based consumer group.
It also may not be as independent as it seems. If federal banking regulators object to new consumer protection rules, they can appeal to a newly created council made up in part of their fellow banking regulators.
Credit, debit cards
Say you walk into a gas station and pick up some soda, candy and gum. The total is $11, but there's a sign at the register saying you can pay by credit card only if the purchase is $20 or more. Under the new legislation, the minimum could be no more than $10, and only the Federal Reserve can raise it.
The Federal Reserve also would have the power to limit the fees that card issuers can collect on debit-card transactions. But the rule would apply only to big banks, not to credit-card issuers such as Visa and MasterCard. Right now, banks usually charge stores 1 percent to 2 percent for each swipe, fees that added up to nearly $20 billion last year. Stores and restaurants say lower fees would allow them to cut prices and to hire more people.
But even if prices do fall at stores, banks might raise fees and rates for their customers. They also could scale back "reward" cards or free checking to make up for the money they're not collecting from stores and restaurants.
Right now, it can be maddeningly difficult to figure out your credit score. While you're entitled to one free credit report a year from each of the three credit reporting agencies under federal law, you almost always have to pay to see your actual score.
Under the overhaul rules, any lender that turns down a borrower -- whether it's for a mortgage, a department store credit card or an auto loan -- because of his credit score would have to tell the borrower what that score is, and for free.
Remember all those risky mortgages that borrowers got without ever showing proof of income? The ones that blew up and set off the housing crisis? Under the new rules, lenders would have to verify a borrower's income, credit history and employment status.
On top of that, banks would have to hold on to at least 5 percent of the loans they make instead of selling them to investors. The idea is that they'd take fewer risks when they have skin in the game and aren't slicing, dicing and selling all their loans. "They don't care about whether they make bad loans if the risk isn't theirs," said Dean Baker, co-director of the Center for Economic Policy and Research, a liberal Washington think-tank. "Now they might have to."
Regulators would have the authority to require all financial advisers to act in their clients' best interest. Practically speaking, this means disclosing fees, any disciplinary actions and potential conflicts of interest, such as commissions.
Until now, not all brokers who sell stocks, bonds, annuities and other investments have to make such disclosures. They could steer you into mutual funds or college savings plans that pad their firms' profits or their own commissions, and you might never know.
The Securities and Exchange Commission will study the issue for six months to determine whether average investors are protected by the rules already in place or whether something stronger is called for. So the SEC still could decide not to act at all, meaning investors still would be stuck with a system in which their advisers can put their own financial interests, not the clients', first.