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Financial regulatory reform puts new pressures on consumer credit

After months of deliberation, Congress approved sweeping reforms for the financial services industry. While the legislation has been signed by the president, it will be some time before the industry actually feels or understands the full impact of the new law. The measure takes a broad brush to changes in the industry, leaving the details up to the financial regulators, who will be tasked with writing the implementing rules over the next several years. 

The new law, also called the Dodd-Frank Act, will change the way many large and small financial institutions operate, likely placing downward pressure on the availability of consumer credit. At the center of the measure is the creation of a new regulatory body, called the Bureau of Consumer Financial Protection (CFPB). The CFPB will have the authority to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products, with the ability to place restrictions on the type of financial products and services offered to consumers. It is expected that the CFPB will first address lending products and practices in the mortgage industry.  The bill also requires the Federal Reserve Board to write new rules limiting the interchange fees for debit cards. The provision allows merchants to offer discounts for using a particular type of payment and would prohibit discrimination based upon a network or issuer. In considering an appropriate interchange fee, the Federal Reserve may take into account the cost of fraud but is not required to do so.

Specific to large financial institutions, the Dodd-Frank Act imposes a number of new compliance requirements. The law places stricter risk-based capital requirements on financial institutions, with a maximum 15-to-1 leverage ratio for systemically important firms. Bank holding companies also have new leverage requirements to put them on par with banks, with exemptions for bank holding companies that have consolidated assets of less than $15 billion.

The Dodd-Frank Act now moves to the regulatory agencies, which will be writing the implementing rules over the next several years. 


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