GLOVERSVILLE - It's been nearly two years since the global economic crisis threatened to collapse economies all over the world. The crisis cost billions of dollars in bank bailouts and foreclosures and brought about a deep recession with double-digit unemployment, skittish consumers and hard-to-secure credit for small businesses.
On July 21, President Obama signed into law the financial reform legislation, officially referred to as the Dodd-Frank Wall Street Reform and Consumer Protection Act, the first major change to financial regulations since the Franklin D. Roosevelt administration enacted changes in the 1930s. The law imposes new regulations on the banking, mortgage and stock industries and creates a new federal agency designed to protect investors and consumers from predatory lending practices. These restrictions and protections are intended to prevent or mitigate a recurrence of the 2008 fiscal meltdown.
The federal government gained some power with passage of the legislation. A Financial Stability Council will be formed. The agency will have the power to monitor large financial firms and will recommend actions to the Federal Reserve Bank if one of these firms becomes a threat to the financial system. Federal regulators also will have the ability to take control of or break up financial firms that are found to be a danger to the system, with any such takeovers paid for by the troubled company and separate fees charged to financial firms with more than $50 billion in assets.
The Leader-Herald/Edward J. Hunt
Certified financial planner John Washburn of Wells Fargo Advisors is shown at his office in Johnstown on Wednesday.
For investors in the stock market, there will be a number of changes. Hedge funds and private equity funds are now required to register with the Securities and Exchange Commission as investment advisers, who currently have the "fiduciary duty" to place their clients' financial interests ahead of their own or their company. Additionally, stock brokers - dealers that give investment advice - will be held by the SEC to the same level of fiduciary duty.
Locally, opinions are mixed about what effect the new laws will have on the local financial industry.
"In the short term, I don't see much effect on my business or my customers," said financial planner Donald Stanyon Jr. of Stanyon Financial Services in Gloversville. "In the long term, however, I can see the small investor, the ones investing $5,000 or $10,000, being locked out of the system because the fees involved are becoming prohibitively expensive. I'm afraid that this is not being addressed at all. I don't do that, because I find it important to help everyone that needs it."
"These changes are great for consumers and good for us as financial planners," said John Washburn, certified financial planner of Wells Fargo Advisors in Johnstown. "For the most part, financial businesses will be required to put the client's interest first. We already do that for our customers."
Regulation of banks was increased in the overhaul as well. The so-called "Volcker Rule" mostly prevents large banks from trading with their own capital, being limited to trading in hedge or private-equity funds with no more than 3 percent of the bank's funds. Banks also will be required to spin off divisions that sell their riskiest derivatives into affiliate businesses.
A local community banker doesn't expect a major effect on his bank.
"It is a little too early to tell, because the rules are still being studied," said Gordon E. Coleman, president and chief executive officer of Patriot Federal Bank, a community savings bank with branches in Johnstown and Canajoharie. "What I can glean so far, the majority of the impact will be on the mega-banks, the Bank of Americas, the Citibanks."
As part of the overhaul, savings banks, or thrifts as they are referred to, now will be overseen by Office of the Comptroller of the Currency, which oversees commercial banks now, and the Office of Thrift Supervison will be eliminated, leaving a single oversight body.
"Our goal is to service our community with one- to-four-family mortgages and small-business loans," Coleman said. "We don't yet know what the costs will be to comply with the new regulations, but for the most part, the Dodd-Frank Act will not have a major impact on community banks."
For consumers, the new Consumer Financial Protection Bureau will regulate all mortgage-related businesses, check cashers and payday lenders. For mortgages, lenders now will be required to verify income, credit history and employment status to ensure the borrower can repay the loan. The amount of federal deposit insurance on bank accounts will increase to $250,000. This change will be retroactive to Jan. 1, 2008.
The Associated Press contributed to this report.