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1.3.5 Aftermath: the Dodd-Frank Act and the Consumer Financial Protection Bureau

As a result of the abuses that led to the foreclosure crisis and the national economic downturn, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),323 the most important change in consumer protection law since the late 1960s, was signed into law on July 21, 2010. It created a new Consumer Financial Protection Bureau (CFPB). The Act and the CFPB represent:

“[A] sea change, or paradigm shift, in the basic underlying theories of consumer protection. This is reflected in the birth of the new Consumer Financial Protection Bureau, and in the shift from the use of pure disclosures under the rational choice theory of economics, to a system based on the more realistic view of consumer decision making as revealed by behavioral economics.”324

The Dodd-Frank Act added many new substantive protections to the Truth in Lending Act (TILA). The emphasis on the substantive approach “relies less on the informed rational consumer to make the right choice based on mandated disclosures and more on the law to provide minimum standards of fair dealing with consumers.”325

The Dodd-Frank consumer protections include:

  • ● Lenders must assess the consumer’s “ability to repay” as a condition to originating all residential mortgage loans;
  • ● Lenders can enjoy a “safe harbor” for creditors who offer “qualified mortgages” that have certain characteristics that are favorable to consumers;
  • ● Mortgage brokers may not steer consumers into unfavorable loans and accept yield spread premiums as compensation;
  • ● Prepayment penalties are limited or banned for certain loans;
  • ● The financing of single premium credit insurance is banned;
  • ● Mandatory arbitration clauses are banned in most dwelling-secured consumer loans; and
  • ● Appraisal independence requirements are imposed in all consumer credit transactions secured by the principal dwelling of the consumer.326

In addition to enacting substantive protections, Congress directed the CFPB to create “a single, integrated disclosure” for use in mortgage origination, combining the existing HUD-1 settlement statement and TILA disclosure form.327 Apparently, Congress was mindful that the TILA disclosures in effect prior to and during the foreclosure crisis did not succeed in adequately informing consumers of the cost and other features of the credit. In 2011, the agency embarked on an extensive project to fulfill the Congressional mandate, including consumer testing. This process included a qualitative study328 that led to the publication of proposed forms, followed by a quantitative study to evaluate the effectiveness of the proposed forms.329 In addition, the CFPB utilized a web-based initiative known as “Know Before You Owe” to directly solicit input on the forms from the general public.330 Despite this enhanced testing process, critics point out that: (1) the CFPB failed to set a benchmark for the required level of comprehension needed to justify the adoption of the proposed disclosures; (2) comprehension in a controlled testing environment does not represent comprehension in a real life situation, for a variety of reasons; (3) the testing focused primarily on the applicants’ ability to replicate information in the disclosure without necessarily showing understanding of the information or of the relative importance of the information; and (4) comprehension does not necessarily lead to improved decision making.331 For a discussion of the TILA/RESPA legal requirements, see NCLC’s Truth In Lending.332

The CFPB actively enforced the laws under its jurisdiction from 2012 to 2017. Between 2012 and 2015 it filed 122 enforcement actions and obtained relief for consumers totaling $11.235 billion.333 The agency commenced another seventy-eight actions during 2016 and 2017.334 But, after President Trump appointed interim Director Mick Mulvaney to run the CFPB in 2017, Mr. Mulvaney announced that the agency would often let the states take the lead in enforcing consumer protection laws, signaling a more passive approach. Instead, the agency will put more resources into educating consumers.335 Since then the Bureau has been substantially less active.

Footnotes

  • 323 {323} Pub. L. No. 111-203, 124 Stat. 1376 (2010).

  • 324 {324} Dee Pridgen, Sea Changes in Consumer Protection: Stronger Agency and Stronger Laws, 13 Wyo. L. Rev. 405, 406 (2013).

  • 325 {325} Id. at 420.

  • 326 {326} See National Consumer Law Center, Truth in Lending Ch. 9 (10th ed. 2019), updated at www.nclc.org/library.

  • 327 {327} Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1098, 124 Stat. 1376 (2010) (codified at 15 U.S.C. § 1604(b)).

    Congress also required the CFPB to conduct cost benefit analyses and to validate proposed disclosures through consumer testing. 12 U.S.C. §§ 5512(b)(2)(A), 5532(b)(3).

  • 328 {328} See Kleimann Commc’n Grp., Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 47–154 (July 9, 2012), available at www.consumerfinance.gov; Patricia A. McCoy, Public Engagement in Rulemaking: The Consumer Financial Protection Bureau’s New Approach, 7 Brook. J. Corp. Fin. & Com. L. 1, 7 (2012) (“[In this phase,] trained interviewers met one-on-one with 92 individual consumers and 22 lenders and mortgage brokers, for a total of 114 participants. Each consumer was asked a series of questions to determine whether the draft forms disclosed information in ways that allowed them to understand different loan features, compare those features, and notice changes in terms and features during the loan process. Our object in designing the questions was to discover what helped consumers understand and use the information, not just what they liked. The interviewers asked lenders and brokers a different set of questions, which included asking them to explain the loans as they would to a customer and identify implementation problems.”).

  • 329 {329} Kleimann Commc’n Grp., Know Before You Owe: Quantitative Study of the Current and Integrated TILA-RESPA Disclosures viii–ix (Nov. 20, 2013), available at www.consumerfinance.gov (the study used in-person, small-group, proctored sessions with 858 participants divided into roughly two equal groups of experienced and inexperienced consumers in twenty locations across the country; using either the current or proposed disclosures, the participants answered a questionnaire containing forty-eight questions in a controlled setting during a sixty-minute period; the questions almost exclusively tested for comprehension and accuracy; participants also were asked to choose between two mortgages when presented with their initial disclosures and justify their choice).

  • 330 {330} Patricia A. McCoy, Public Engagement in Rulemaking: The Consumer Financial Protection Bureau’s New Approach, 7 Brook. J. Corp. Fin. & Com. L. 1, 7–9 (2012).

  • 331 {331} Talia B. Gillis, Putting Disclosure to the Test: Toward Better Evidence-Based Policy, 28 Loy. Consumer L. Rev. 31, 69–87 (2015), available at http://papers.ssrn.com; Lauren E. Willis, Loyola Law School Legal Studies Paper No. 2016-2, The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension 3–4, 7, 32–33, available at http://papers.ssrn.com (forthcoming in Financial Reform: Preventing the Next Crisis (Michael S. Barr, ed. 2016)). See also Debra Pogrund Stark, Jessica M. Choplin, Mark LeBoeuf & Andrew Pizor, Dodd-Frank 2.0: Creating Interactive Home-Loan Disclosures to Enable Shrewd Consumer Decision-Making, 27 Loy. Consumer L. Rev. 95 (2014) (arguing that the new loan estimate needs to be dramatically enhanced to address the lack of financial literacy among consumers, and the cognitive barriers and deceptive mortgage sales practices consumer face; relegation of the APR to the last page is a step backward); Jesse Eisinger, In an Era of Disclosure, an Excess of Sunshine But a Paucity of Rules, N.Y. Times, Feb. 11, 2015 (disclosure can work only when the transaction is simple, not in the case of, for example, a mortgage transaction; otherwise, disclosure can provide a safe harbor for bad practices, it may mislead, and it can devolve into a tool that gives advantage to the well educated over the poor and disadvantaged; quoting Professors Adam Levitin and Ben-Shahar).

  • 332 {332} National Consumer Law Center, Truth in Lending § 5.11.2 (10th ed. 2019), updated at www.nclc.org/library.

  • 333 {333} Christopher L. Peterson, Consumer Financial Protection Bureau Enforcement: An Empirical Review, 90 Tul. L. Rev. 1057, 1076–1078 (2016) (“relief” includes redress, refunds, and canceled debts).

  • 334 {334} A list of these actions may be found on the agency’s website, www.consumerfinance.gov.

  • 335 {335} Rachel Witkowski, AGs, Not CFPB, Should Take Greater Role on Enforcement: Mulvaney, Am. Banker, Feb. 28, 2018.