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Wall Street reform: What it means to you

By Jennifer Liberto, senior writer

WASHINGTON (CNNMoney.com) -- Consumers are close to getting their own financial regulator.

What would it mean to them? More disclosures and fewer hidden fees.

The proposal, a signature piece of the Wall Street reform bill that passed the Senate on Thursday, would create a federal agency in charge of setting rules to curb unfair practices in consumer loans and credit cards.

A similar House reform bill passed in December also outlines a consumer protection regulator.

The exact mission of the agency won't be settled until the legislation is enacted, and then until the regulator issues rules and sets its priorities. It would take about a year for the agency's impact to be felt, experts say.

Disclosures: The regulator would have the authority to come up with "model disclosures" to simplify paperwork involved with any kind of financial products.

Firms wouldn't be required to follow the model disclosures, but they'd have an incentive to do so. By adopting the models, they could be exempted from other disclosure rules the agency may issue on the product.

The regulator would be required within its first year to create a model for simplified forms for home mortgages. Consumer advocates believe that banks will start offering the simplified mortgage paperwork, even if they're not required to do so.

"The plus for consumers is that you get the information you need in one place, in a sensible format you can understand," said Gail Hillebrand, a senior attorney with Consumers Union. "The plus for companies is the consumer financial protection agency tells you how to do it, and if you do it that way, you know you haven't broken the law."

Pre-payment penalty fees: The consumer agency would have to devise a way to crack down on penalty fees consumers often face when they pay off mortgages early.

More common on subprime loans, pre-payment fees are charged when a loan is repaid or refinanced in the first three to five years. The penalty can run 5% of the loan or several months of interest payments. Consumers often agree to risk the fee, because it allows them to lock in a comparatively lower subprime rate.

The banking industry says the penalties allow them to guarantee investors a return, while helping risky borrowers. However, consumer advocates say the penalties can trap subprime borrowers into bad loans, especially as they get their credit in order and qualify for better loans.

Congress would order the consumer regulator to ban the fees in subprime mortgages and phase them out with traditional mortgages.

Auto loans: One fight still pending after the Senate vote is whether the consumer regulator would have the authority to ensure that all auto loans are fair.

A Republican push to exempt auto dealers from the consumer regulator's work did not succeed. But the issue is very much alive since the House bill would protect dealers from new regulations. The conflict between the two bills will be worked out in coming weeks.

If auto dealers remain part of the agency's jurisdiction, the regulator, as an example, could write a new federal rule reinforcing state rules that prevent what are called "yo-yo loans."

In a yo-yo loan, a dealer lets a customer buy a car and drive it off the lot before a loan is approved, only to call him back a few days or even weeks later and say that the bank had turned down his loan application. The car owner then faces a new, pricier loan.

"Yo-yo loans are illegal but nobody's policing it," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety. "It's up to state officials, but ask your state attorney general how many times he's brought a case against an auto dealer."

Overdraft fees: The regulator could also crack down on overdraft protection fees that banks charge consumers when they spend more than they have in their accounts.

Consumers often complain that they were not aware of the huge overdraft protection fees until it's too late -- after they have been charged, say, $35 for being slightly overdrawn.

The Federal Reserve recently prohibited banks from automatically enrolling customers in overdraft protection programs. Now consumers get to opt in.

Lawmakers had wanted to go further and drafted bills that would have limited the number of overdraft fees that banks can charge each month. Those bills stalled.

If the consumer regulator gets approved, the new agency could step in for Congress and create new rules limiting the number of times consumers get hit with overdraft fees.

"Basically it would be doing what the Fed had started to do recently, but had neglected to do over past ten years," Kathleen Day, spokeswoman for the Center for Responsible Lending.  To top of page

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