Financial Reform Brings New Consumer Protections
On July 21, 2010, President Barack Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act.1 The full title of this sweeping legislation suggests its breadth: “An act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services, and for other purposes.” The act, which contains 16 sections or “titles,” touches almost every aspect of the financial services industry2 and is “arguably the most substantial financial regulatory reform legislation since the 1930s.”3
This article summarizes only two sections of the Dodd–Frank Act: Title X — the Consumer Financial Protection Act of 2010 and Title XIV — the Mortgage Reform and Anti-Predatory Lending Act.
Title X — The Consumer Financial Protection Act of 2010
One of the key provisions of Title X of the Dodd–Frank Act, known as the Consumer Financial Protection Act of 2010, is the creation of the Bureau of Consumer Financial Protection. The bureau is to be housed within, but independent of, the Federal Reserve. The director of the bureau will be appointed to a five-year term by the President with the advice and consent of the Senate.
On September 17, 2010, the president named Elizabeth Warren as a White House advisor, as well as advisor to the secretary of the Treasury on consumer issues, and charged Warren with heading the effort to set up the bureau. As provided for in the act, the secretary of the Treasury has set July 21, 2011, as the designated transfer date when, with certain limited exceptions, rule-writing, examination, reporting, and enforcement authorities will be transferred to the bureau from the Federal Reserve and other federal banking agencies.4 Some of these authorities will also be transferred from the U.S. Department of Housing and Urban Development (HUD) and the Federal Trade Commission (FTC).
The act does not transfer authority for the Community Reinvestment Act (CRA) to the bureau; therefore, authority for the CRA will remain with the federal banking agencies.
The bureau will be given authority for the major consumer protection laws, including the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Home Ownership and Equity Protection Act (HOEPA), the Truth in Savings Act, the Fair Credit Reporting Act, and several other consumer protection laws. One notable rulemaking requirement of the Consumer Financial Protection Act is to combine mortgage disclosures under the TILA and RESPA.
Some additional highlights of the bureau’s authority include the following:
- The bureau will have exclusive federal examination and primary enforcement authority for federal consumer protection laws with respect to insured depository institutions and credit unions with total assets over $10 billion and their affiliates. Examination and enforcement authority for those institutions under $10 billion will remain with the federal banking agencies (i.e., the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration).
- In addition, with some limited exceptions concerning the FTC’s jurisdiction, the bureau will have exclusive consumer examination and enforcement authority for certain nonbanks, including any entity in the mortgage chain, companies providing loan modification and foreclosure relief services, large participants in markets for financial products or services, and entities offering private education or payday loans. The authority will cover nonbank institutions whose conduct in providing consumer financial products or services, as perceived by the bureau, poses a risk to consumers.
- The bureau will be required to institute procedures related to consumer complaint responses in coordination with the other federal banking agencies.
- Several offices will be established within the bureau, including a new Office of Fair Lending and Equal Opportunity, an Office of Financial Education, an Office of Service Member Affairs, and an Office of Financial Protection for Older Americans.
- A new Consumer Advisory Board will advise and consult with the bureau on various consumer matters. The bureau will seek experts in consumer protection, financial services, community development, fair lending and civil rights, and consumer financial products or services, as well as representatives of depository institutions that primarily serve underserved communities and representatives of communities that have been significantly impacted by higher-priced mortgage loans. The bureau will also seek representation of the interests of “covered persons”5 and consumers, without regard to party affiliation. No fewer than six members will be appointed on the recommendation of regional Federal Reserve Bank presidents, on a rotating basis.
Title XIV — Mortgage Reform and Anti-Predatory Lending Act6
Title XIV of the Dodd–Frank Act provides new rules for several aspects of mortgage lending and designates that rulemaking authority will ultimately be vested in the bureau. Regulations required under the title must be prescribed in their final form within 18 months of the transfer date and are to take effect no later than 12 months after the date of the issuance of the final regulations.
Some highlights of the Mortgage Reform and Anti-Predatory Lending Act include the following:
- Subtitle A — Residential Mortgage Loan Origination Standards. This subtitle defines the term “mortgage originator” and prohibits mortgage originators from receiving steering incentives. Broad discretionary regulatory authority is granted to the Federal Reserve, and after the transfer date, to the bureau, to “prohibit or condition terms, acts, or practices relating to residential mortgage loans that the Board [the Board of Governors of the Federal Reserve System, later the bureau] finds to be abusive, unfair, deceptive, predatory, necessary, or proper to ensure that responsible, affordable mortgage credit remains available to consumers.”
- Subtitle B — Minimum Standards for Mortgages. Creditors are required to make a good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan according to its terms, as well as all applicable taxes, insurance, and assessments. In addition, a borrower can assert a defense to foreclosure against a creditor or assignee when there is a violation of the anti-steering or the ability to repay provisions.
Prepayment penalties on residential mortgages, when not prohibited altogether, must be phased out after three years. A lender who offers a residential mortgage with a prepayment penalty must also offer a loan without a prepayment penalty. For hybrid adjustable-rate mortgages (ARMs), notices to consumers must include the index and an explanation of how the new interest rate and payment are determined; in addition, the estimated monthly payment and other terms are required to be disclosed prior to six months before the end of an introductory rate period, or if the rate may reset within the first six months of the loan, at loan consummation.
- Subtitle C — High-Cost Mortgages. The act amends HOEPA and expands its coverage by including home purchase loans and open-end credit plans, by lowering the interest rate and point/fee thresholds, and by adding prepayment penalties in the points and fees test. Balloon payments and prepayment penalties for high-cost mortgage loans are prohibited, and certain fees are regulated.
- Subtitle D — Office of Housing Counseling. An Office of Housing Counseling within HUD will be established to perform a wide range of activities, including research, public outreach, and policy development related to both homeownership and rental counseling. Up to $45 million is authorized for financial assistance to HUD-approved counseling agencies and state housing finance agencies for efficient and successful counseling programs. HUD is required to conduct a study of the root causes of foreclosures using empirical data and to establish and maintain a database on foreclosure and defaults that would be collected, aggregated, and made available at the census tract level.
- Subtitle E — Mortgage Servicing. For first lien mortgages on principal dwellings, repayment analysis must include taxes, insurance payments, and “other periodic payments.” TILA is amended to require the creditor to establish escrow accounts for certain first lien mortgages for a minimum of five years, or until sufficient equity is reached (or other specified events occur).
- Subtitle F — Appraisal Activities. The act establishes appraisal requirements for “subprime mortgages” and appraisal independence requirements. Broker price opinions are prohibited from being used as the primary basis to determine the value of property that would secure a residential mortgage loan, in cases in which the property is purchased by a consumer as a principal dwelling.
- Subtitle G — Mortgage Resolution and Modification. HUD is authorized to administer a program to promote the transfer of properties with five or more units that are at risk of foreclosure. The scope of the Protecting Tenants at Foreclosure Act is expanded and extended from 2012 to 2014.
- Subtitle H — Miscellaneous Provisions.
The Emergency Homeowners’ Relief Fund is to be established within HUD with $1 billion for grants and loans to certain delinquent borrowers to pay portions of their mortgages, with $50,000 set as the maximum that a homeowner can receive.
An additional $1 billion is allocated to HUD under the Neighborhood Stabilization Program for assistance to states and local governments for the redevelopment of abandoned and foreclosed properties.
The act authorizes $35 million for fiscal years 2011 and 2012 to establish grants to state and local organizations to provide foreclosure-related legal services to low- and moderate-income homeowners and tenants.
The Dodd–Frank Act is a far-reaching overhaul of the U.S. financial regulatory system. Because of the law’s scope, as time goes on consumers will continue to learn more about its specific implications.
Other Pertinent Provisions
Although consumer protection and mortgage reform are the focus of this article, there are two additional provisions that were outlined in Title III of the act that were not discussed but that may be of interest to community development practitioners and consumer advocates:
- The act requires the establishment of an Office of Minority and Women Inclusion at all federal banking and certain other federal regulatory agencies by January 21, 2011, that will address matters related to diversity in employment and institutional contracts. The offices will coordinate technical assistance to minority-owned and women-owned businesses and seek diversity in the workforce of the regulators.
- Federal deposit insurance for banks, thrifts, and credit unions was permanently increased to $250,000, retroactive to January 1, 2008.