The U.S. Senate passed a sweeping financial reform bill on Thursday, establishing new rules for mortgages as well as imposing new regulations on Wall Street and providing enhanced protections for consumers and investors.

The measure, which was previously approved by the House, is intended to address shortcomings in the nation's financial system that led to or were highlighted by the 2008 fiscal crisis. Among its key provisions are tighter regulations on derivatives trading; a mechanism for winding down large, failing financial firms and the establishment of a consumer financial protection agency with authority over products such as mortgages and credit cards.

New mortgage rules

On mortgages, the bill virtually eliminates so-called "liar loans," requiring documentation of a borrower's income before a mortgage loan can be issued. It also imposes new regulations on mortgage brokers and restricts the practice of paying loan officers more for arranging mortgages with higher interest rates or fees.

It also calls for the development of a simplified mortgage loan disclosure form and establishes a $1 billion fund to provide low-interest loans to help unemployed homeowners with good credit avoid foreclosure, using funds previously designated for the Troubled Asset Relief Fund.

Also for consumers: the bill requires that they be entitled to receive their credit score free of charge once a year; currently, consumers are only entitled to free annual copies of their credit report once a year from the three major credit reporting companies, which currently charge for providing actual credit scores.

Watchdog panel established

Among other major provisions, the bill establishes a watchdog panel designed to detect potential risks to the nation's financial system and address them before they become unmanageable. The bill abolishes the Office of Thrift Supervision, which was widely blamed for failing to curb practices that led to the financial crisis.

The bill also provides for tighter limits on proprietary trading and hedge funds, to prevent financial firms from sloughing off their risk on unwary investors. It also provides for tighter regulation of credit rating agencies, to ensure that the ratings they issue accurately reflect the quality and risk of the financial products they evaluate, and prevent undue influence over those ratings by the companies that issue those products.

Banker's group says reforms are too broad

Edward Yingling, president of the American Bankers Association, criticized the bill for imposing unneeded regulations on smaller banks that had little to do with creating the financial crisis, although saying that the core provisions address needed reforms.

"Its impact will be felt not only by the banking industry itself, but by the millions of consumers and businesses that rely on financial services every day to meet their saving, borrowing and financing needs," Yingling said. "It will also, by extension, have a considerable impact on the broader economy and the capability of traditional banks to provide the credit needed to create jobs and drive economic growth."

At the same time, he said the banking industry has long supported many of the bill's reforms, including the creation of a new systemic regulatory body, a process for ending the concept of too-big-to-fail, better consumer protections, and provisions designed to rein in the shadow banking system.

Rule-writing processs will have major impact

Despite the broad sweep of the bill, much of its impact will depend on the rules regulators must now write to implement its many provisions. That process is expected to take place up to 10 years, with the first rules issued about two years from now. Depending on what form those rules take, the impact of various parts of the bill could be muted or increased.

The bill, which passed on a largely party line vote of 60-39, now goes to President Obama for his signature.

Published on July 16, 2010