What Happens if Trump Dismantles the Financial Regulations of the Great Recession? – Business Advice and Resources

What Happens if Trump Dismantles the Financial Regulations of the Great Recession?

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On Feb. 3, 2017, President Donald Trump signed two executive orders that will affect the financial sector. That change will come to consumers is undeniable. But exactly what change is coming is, naturally, up for debate.One of the orders requires the Treasury secretary to review the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 and designed to address some of the shortcomings in the financial system that led to the Great Recession. The other executive action mandates that the Labor Department review its Department of Labor Fiduciary Rule and look at its probable economic impact. As it stands now, the fiduciary rule is supposed to be phased in from April 10, 2017 to Jan. 1, 2018. The rule requires financial professionals who work with retirement plans or provide retirement planning advice to act in a way that's only based on the client's best interests.[See: 13 Money Hacks to Turbocharge Your Investments.]What do these executive orders portend for consumers? Nobody knows, but what follows are some educated guesses – with best-case and worst-case outcomes.How the housing market might be affected. There's potential good news and bad news here, according to Francesco D'Acunto, a finance assistant professor at the University of Maryland. In a study performed by D'Acunto and faculty colleague Alberto Rossi, in the wake of Dodd-Frank, banks decreased mortgage lending to middle class families by about 15 percent in 2014."Title XIV, which regulates the mortgage market, could be in for a full-scale renovation that might ultimately improve the fortunes of potential homebuyers from the middle class," D'Acunto says.So if you've been having trouble getting a mortgage for a house, you may have less trouble – provided you find a reputable lender. Because the downside, according to D'Acunto, is that "such a move risks bringing a return of predatory behavior in lending and mortgage cross-selling, especially by large banks and by non-bank mortgage originators."To avoid that, D'Acunto hopes that Congress intervenes "surgically on Title XIV" and only reduces the regulatory costs imposed by the new Qualified Mortgage classification. Created by the Consumer Financial Protection Bureau, the Qualified Mortgage category of loans includes features designed to make it more likely that a consumer will be able to pay it back.But if they don't intervene with the careful attention to detail D'Acunto advises, then expect "big changes, most of them negative," says David Reiss, a Brooklyn Law School professor whose specialty is in real estate finance.Potential best-case scenario: After being denied a mortgage for some time, you finally get your house.Potential worst-case scenario: Because you were steered to a high-interest loan you can't afford, you lose your house.[See: 10 Ways to Feel Better About Your Money.]How credit cards, auto loans and student loans might be affected. There has been a lot of talk that the CFPB could be a casualty in the executive order that asks the Treasury secretary to review Dodd-Frank. But will it be ripped to shreds or have its power diminished?The latter seems to already be happening. For instance, lawmakers, led by Sen. David Perdue (R-Ga.), are in the midst of trying to repeal a rule that is scheduled to go into effect this fall. The rule, among other things, would mandate prepaid-card companies to disclose detailed information about their fees, make it easier to access account information and would curb a consumer's losses if the cards are lost or stolen.A little weakening might not be so bad, Reiss says. He thinks the CFPB has tightened "the credit box too much, meaning that some people who could manage more credit are not getting access to it."But he also thinks if the CFPB were dismantled, the negatives would far outweigh the positives.Potential best-case scenario: Easier access to loans and more choices. And for some consumers who can now get that car or credit card, their quality of life improves.Potential worst-case scenario: Thanks to that easier access, some consumers end up stuck with high-interest loans with a lot of hidden fees and rue the day they applied for them.[See: 11 Money Moves to Make Before You Turn 40.]How working with your financial advisor might be affected. If the fiduciary rule is shelved, you may want to monitor your financial advisor a little more than you do now."The fiduciary standard requires advisors to act in their client's best interest – advisors are obligated to identify options that are best for their clients, regardless of how that affects the advisor's income from fees and commissions," says Peter Summers, assistant professor of economics at High Point University in High Point, North Carolina.Before that, Summers notes, financial advisors followed the suitability standard."They could recommend options that weren't necessarily the best for their clients, as long as those options were not actually harmful," he says.Summers offers up an example of how these two standards compare."Suppose there are two mutual funds I can recommend to my client," he says. "Both have the same long-run performance, say 10 percent per year. Fund A is one that is actively managed and generates fees of 2 percent per year. That is, 2 percent of my client's account balance for my firm. Fund B is passively managed, and generates much smaller fees, say 0.25 percent – one-quarter of a percentage point. Under the suitability standard, I can recommend fund A to my client without informing her that Fund B is an option. Under the fiduciary standard, I'm obligated to point out that Fund B is her best option." The result of all of this? "The Obama administration estimated that switching to the fiduciary standard would save [U.S. consumers] about $17 billion per year. Of course, that savings for individuals means lower incomes for financial advisors," Summers says.Potential best-case scenario: It's obviously better for you as an investor if financial advisors advise what's best for you and not themselves. And many investment management firms have promised to implement at least some aspects of the fiduciary standard, whether it becomes law or not. For instance, on Jan. 26, Morgan Stanley, one of the biggest American brokerages, announced just that. The way things are going, the market has spoken, and it doesn't seem likely that companies following the fiduciary standard will diminish.Potential worst-case scenario: Some investment firms surely won't follow the fiduciary standard. If you aren't on the ball and don't recognize that your advisor is actually following the suitability standard, you could wind up lining your advisor's pockets – instead of your own.8 Ways to Profit From Donald Trump's Infrastructure Plans.

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