Even before Congress unveils a consumer-protection agency, new state and federal laws are ushering in the most sweeping changes in consumer finance since the 1960s.

Eye on Consumers

Tightened rules at the federal and state level. Click to enlarge graphic.

On July 1, Arizona will force changes on the state's 595 payday-loan stores—outfits that make high-interest loans against future paychecks—that could effectively put them out of business. Wisconsin banned small loans backed by car titles that led many people to lose their vehicles. Arkansas, Maine and New York joined other states in putting curbs on tax preparers who offer costly loans against expected tax refunds.

The federal government, meanwhile, is for the first time requiring that lenders verify a borrower's income and assets before issuing a home loan. It has also slapped broad new rules on credit-card issuers, limiting their ability to boost interest rates and charge certain fees.

"It's a pace of regulatory output we've never seen before in the consumer area," says Richard Hackett, who teaches consumer-finance law at Boston University's Morin Center for Banking and Financial Law.


It will write and enforce rules on the structuring and marketing of loans as well as other financial products sold by banks, credit unions, credit-card issuers and even neighborhood check-cashing outfits.

Comparing the Bills

See key parts of the Senate bill and where it differs from the House version.

Financial Regulatory Overhaul

See a timeline of the legislation's progress.

But states, in most cases, would retain the power to write laws that are more restrictive than any new federal ones. In the case of payday lending, for instance, states could maintain limits on the number of consecutive loans a borrower is allowed.

The proposed agency has drawn sharp criticism over the past year, including a campaign by the U.S. Chamber of Commerce and other industry groups to kill it.

Rep. Jeb Hensarling (R., Texas), a member of the House-Senate conference committee negotiating the final bill, called the new regulator a "consumer credit rationing agency" that would "take choices away from consumers and choke desperately needed credit out of our economy."

Senate Banking Committee Chairman Christopher Dodd (D., Conn.), a leading proponent, said the agency would "watch out for the average citizen in our country when they are abused by a financial market place that takes advantage of them on home mortgages and credit cards."

Before the recent economic downturn, lawmakers and regulators generally pushed lenders to expand consumer access to credit. Fewer restrictions allowed more Americans to access mortgages, credit cards and other loans. The combination of loose lending policies and loose regulation fed a nationwide debt boom, which began to unravel with the financial crisis.

The reversing trend is spurring concerns about consumer access to credit.

"You'll see better practices and stronger products," says Scott Talbott of the Financial Services Roundtable, a group that represents large financial firms. "There could be some downsides as well. We've seen an increase in the cost of credit and a decrease in the availability of credit."

J.P. Morgan Chase, for instance, will no longer offer credit cards to about 15% of its customers, chief executive Jamie Dimon said in a letter to shareholders this spring. "This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client's risk profile changes," he said.

The litany of changes may also lead to consumer confusion, with cardholders receiving lengthy fine-print disclosures in the mail that they may never read. Some consumers, such as Ryan Schroeter, see the rules limiting their options. Mr. Schroeter, a technology consultant in Bloomfield Hills, Mich., says he fears new regulations ultimately might prevent him from getting the kind of adjustable-rate mortgage he studied and understood.

"At the end of the day, people need to accept responsibility for what they sign up for," he says. "The government is overstepping and being very paternalistic in dictating what options are available to me."

The new wave of consumer-finance regulation reflects a shift among policy makers aiming to shield consumers from another economic crisis. Back in the 1960s, consumer advocates called for greater disclosure to borrowers, leading to so-called truth-in-lending laws. That set of rules is now giving way to outright bans on many longstanding industry practices.

For many years, Arizona capped most payday loans at a 36% annual interest rate, one of 16 states to implement some kind of limit on loan rates. But in 2000, the payday loan industry persuaded lawmakers to write an exemption in the law that expires this year. The measure allowed lenders to charge almost $18 for each $100 borrowed. In a payday loan transaction, the consumer writes a post-dated check to the lender to be cashed on payday. A two-week loan at that cost amounts to an annual implied interest rate of more than 450%.

"Many of their customers are repeat customers because they can't afford to pay off the loans in a single pay period," says Democratic State Sen. Debbie McCune Davis, a leading critic of the industry.

Despite industry efforts to preserve the rate exemption, the 36% limit will go into effect on July 1. Under a 36% annualized cap, a lender would be allowed to charge less than $2 for a two-week $100 loan—an amount that would be unprofitable to most payday stores.

Lee Miller, a lobbyist for the industry in Arizona, sees borrowers falling into a different problem. "There probably won't be too many places for payday loan customers to go as an alternative, other than to just simply fill the gap by bouncing checks," he says.

Congress took action on payday lending in one key area: In 2006, it turned its attention to soldiers who were being targeted for high-cost, short-term borrowing, such as payday loans and car-title loans, around military bases. At the Pentagon's urging, Congress banned the sale of those products to military personnel and instituted a 36% interest rate cap.

That was the start of a wave of new federal regulation to protect consumers. Gift cards, for instance, which frequently expired before consumers could use them, now cannot expire for at least five years or incur dormancy fees unless there's been a full year of inactivity, while home-equity lines of credit will receive clearer, standardized disclosures with bans on surprise changes to interest rates.

Facing frequent public complaints about overdraft fees for bank accounts, regulators mandated that banks receive permission from consumers before charging a fee for overdrawing with an ATM or debit card.

Mortgages, the main trigger of the financial crisis, are in the final stages of a broad overhaul designed to block a recurrence of the worst practices of the housing boom.

As the credit crisis began, Federal Reserve officials had acknowledged some of the abuses in subprime lending, including no-documentation loans and brokers pushing borrowers into risky mortgages, and started writing new rules for the industry just as pressure picked up from Congress.

It banned prepayment penalties on most subprime mortgages, allowing borrowers to refinance or exit risky loans more easily. The Fed required, for the first time, that lenders verify a borrower's income and assets before issuing a loan. And it proposed rules to ban entirely a form of payments to mortgage brokers that encouraged brokers to guide consumers into higher-priced loans.

For Sarah Nash, a nurse in the Atlanta suburbs, the loose lending policies that fueled the housing boom allowed her to build a mountain of debt in real estate. With no money down, she bought three properties, priced at $120,000 to $200,000 each, with adjustable-rate loans backed by little more than her annual salary of $60,000. She had planned to rent them out.

All three homes went into foreclosure by 2007 when she couldn't rent them to cover the costs or resell them anywhere close to their appraised values.

Today, even if banks were to loosen their standards again, Ms. Nash would be required to prove her ability to cover the cost of the mortgages before receiving loans. With her credit score ruined, leading to the closure of her credit-card accounts, Ms. Nash says the regulatory changes came too late for her.

Still, she says she accepts responsibility for her decisions. "I consider myself a very smart person and I did some very dumb things," she says. "I just have to live with it."

Financial Players

House and Senate lawmakers began a "conference" on June 10 aimed at reconciling differences between financial regulation bills that have passed both chambers. If they can agree on a single bill, they can bring that measure to a vote in the House and then the Senate and that can be sent to the White House for enactment. Here are some key players to watch.

Write to Sudeep Reddy at sudeep.reddy@wsj.com