The US Congress has passed the stiffest restrictions on banks and Wall Street since the Great Depression, clamping down on lending practices and expanding consumer protections to prevent a repeat of the 2008 meltdown that knocked the economy to its knees.
A year in the making and 22 months after the collapse of Lehman Brothers triggered a worldwide panic in credit and other markets, the bill cleared its final hurdle with a 60-39 Senate vote. It now goes to the White House for President Barack Obama’s signature, expected as early as Wednesday.
The law will give the government new powers to break up companies that threaten the economy, create a new agency to guard consumers in their financial transactions and shine a light into shadow financial markets that escaped the oversight of regulators.
From storefront payday lenders to the biggest banking and investment houses on Wall Street, few players in the financial world are immune to the bill’s reach. Consumer and investor transactions, whether simple debit card swipes or the most complex securities trades, face new safeguards or restrictions.
A powerful council of regulators would be on the lookout for risks across the finance system. Large, failing financial institutions would be liquidated and the costs assessed on their surviving peers. The Federal Reserve is getting new powers while falling under greater congressional scrutiny.
Also see Highlights of the US financial reform legislation.
“I’m about to sign Wall Street reform into law, to protect consumers and lay the foundation for a stronger and safer financial system, one that is innovative, creative, competitive and far less prone to panic and collapse,” Obama said.
“Unless your business model depends on cutting corners or bilking your customers, you have nothing to fear.”
Republicans said the bill is a vast federal overreach that will drive financial-sector jobs overseas. Before the final vote was even cast, House Republican leader John Boehner called for its repeal.
The 2300 page legislation doesn’t offer a quick remedy, however. Rather, it lays down prescriptions for regulators to act. In many cases, the real impact won’t be felt for years.
One of the top regulators who will be charged with implementing the law, Federal Reserve Chairman Ben Bernanke, in a statement, said the Senate vote represents a “far-reaching step toward preventing a replay of the recent financial crisis.”
Named after Christopher Dodd and Barney Frank, the Democratic committee chairmen who steered it to passage, the legislation ends a trend toward looser regulations that peaked in 1999 with the elimination of Depression-era walls separating commercial banking from riskier investment banking.
The Dodd-Frank Act will create a Consumer Financial Protection Bureau empowered to write and enforce regulations covering mortgages, credit cards and other financial products. Lenders face new restrictions on the type of mortgages they write and could not be rewarded for steering borrowers to higher-cost loans.
Borrowers are to be protected from hidden fees and abusive terms, but also will have to provide evidence that they can repay their loans, thus halting the no-document loans that had flooded the markets.
Industry lobbyists fought against a number of restrictions in the bill, ultimately winning some concessions. In the end, the final bill was tougher than they wanted but not as restrictive as they feared.
“The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean,” said Edward Yingling, president and CEO of the American Bankers’ Association.
Republican opponents also criticized the bill for not addressing mortgage financing giants Fannie Mae and Freddie Mac, whose questionable lending helped start a collapse in the housing market.
For all its ambition and reach, the legislation is dotted with exceptions.
Community banks won’t have to be examined by the new consumer bureau and would get a break on higher insurance premiums. Despite calls to end proprietary trading by large banks, the law will let them put up to 3 percent of their capital in hedge funds or private equity funds. Auto dealers won’t be covered by the rules of the consumer bureau.
“It is not a perfect bill, I will be the first to admit that,” Dodd said. “It will take the next economic crisis, as certainly it will come, to determine whether or not the provisions of this bill will actually provide this generation or the next generation of regulators with the tools necessary to minimize the effects of that crisis.”
