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The Senate voted Thursday to pass a Wall Street reform bill, which includes major reforms that would significantly benefit African Americans who bore the brunt of the subprime mortgage debacle.
One of the bill’s most important provisions is the Consumer Finance Protection Agency, which must be operational within a year. The agency will be charged with–and held accountable for–ensuring that mortgage lenders are no longer allowed to get away with the dubious and abusive practices that resulted in approximately 55% of African Americans getting subprime loans and other financially debilitating offers, such as adjustable rate mortgages, said Austan Goolsbee, a member of the White House Council of Economic Advisors.
“These practices facilitated an increased homeownership rate and a run up of house prices, but at the same time there was widespread abuse by various financial institutions exploiting people’s lack of understanding of a lot of these so-called financial innovations,” said Goolsbee.
The agency also will be responsible for regulating payday lenders and cash checking operations that charge exorbitant rates for services. Credit card companies will be under the agency’s watch, said Goolsbee, and they will be banned from “sneaky practices” such as allowing consumers to exceed credit limits and then charging $50 for exceeding that limit by fifty cents without a consumer’s prior knowledge and consent to such terms. In addition, teaser rates must stay in effect for a year.
Additionally, the legislation calls for an Office of Financial Education to help consumers make informed decisions by teaching them how to clearly understand not just the terms of a mortgage or other offer of credit, but also their ability to manage them.
The bill has been high on President Barack Obama’s domestic agenda after the passage of healthcare reform.
Goolsbee said that the bill dramatically reduces the probability that taxpayers will have to save the financial system again. “People lost their houses while the banks were saved,” he said. Once the bill goes into effect, the assumption that a financial institution is “too big to fail” because such failure would lead to the collapse of the nation’s economy ceases to exist. If a financial institution gets in trouble, it dies, Goolsbee added; the government is willing to pay the “funeral expenses” to break it up, but won’t save it.
To read a summary of the 2,300-page bill, click here.