The Pendulum of Regulation: Dodd-Frank

The excerpt below is from The Pendulum of Regulation, by Chris Appie, Vice President and Counsel of Compliance Systems, which appears as Chapter 11 of Volume II of The Mortgage Professional's Handbook.


Chris Appie , Vice President & Counsel, Compliance Systems, Inc.

In 2010 Congress passed what many call the most sweeping financial reform bill in the history of the United States: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The massive law (over 2400 pages) is divided into 16 titles of U.S. Code. The legislative intent of the law was “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 practices, and for other purposes.”[1]

The law attempts to accomplish this by modifying rules in vast areas of the financial system, including hedge funds, derivatives, credit default swaps, mortgage brokers, payday lenders, credit rating agencies, the insurance industry, and mortgage backed securities. Interestingly, the law expresses the “Sense of the Congress” that reform will not be complete without addressing Fannie/Freddie, but there are no substantive modifications to those agencies in the Act.

Believing that a major cause of the collapse was too many uncoordinated federal agencies, the law created the Financial Services Oversight Council (FSOC) and charged it with ensuring that threats to the economy are not siloed in multiple agencies and that data is shared, collectively understood by regulators and Congress, and acted upon when necessary. The Council is chaired by the Secretary of the Treasury with membership from the major federal financial agencies (OCC, FDIC, SEC, etc.). In one of its more controversial provisions, Dodd-Frank provides a mechanism to break up large banks or other companies that “would pose a grave threat to the financial stability of the United States”[2] were they to fail. Upon recommendation of the Federal Reserve Board and a 2/3 vote of the council these large companies can be required “to sell or otherwise transfer assets or off-balance-sheet items to unaffiliated entities.”[3] This authority permits the governmental dissolution of companies, regardless of whether the company is a monopoly under the antitrust laws.[4] In cases where banks fail on their own, Dodd-Frank created the Office of Dissolution within the FDIC to wind down under-capitalized banks and created a mechanism to liquidate failed financial firms.

 Dodd-Frank Specifically

Of the 16 titles of federal law created by Dodd-Frank, two specifically deserve special attention for their impact on the mortgage industry: Title XIV, The Mortgage Reform and Anti-Predatory Lending Act, which substantively modified many consumer protection laws, including major changes to TILA and RESPA (which are discussed in detail below) and Title X, The Consumer Financial Protection Act of 2010 which created the Consumer Financial Protection Bureau, or CFPB, and gave it exclusive rulemaking authority for any federal consumer financial law. These enumerated laws include almost any law that requires disclosures to consumers in a mortgage transaction such as TILA, HMDA, HOEPA, RESPA, ECOA, FCRA, etc.

In addition to its wide rulemaking authority for all federal consumer financial laws, the CFPB also has specific supervisory and enforcement power over depository institutions with assets over $10 billion and their affiliates. The CFPB has noted that these “institutions collectively hold more than 80 percent of the banking industry's assets.” [5]

In addition to traditional banks over $10 billion in assets, the CFPB was also given authority to oversee nonbank compliance for entities such as mortgage companies, brokers, servicers, payday lenders, etc., regardless of the size of these entities. Additionally, the CFPB has authority to define by rule other "larger participants" it wishes to pull under its supervisory umbrella.[6]

It is important to note that in the drafting of regulations, supervision of banks and non-bank entities, and the enforcement of consumer financial protection laws, the CFPB has taken a decidedly consumer-focused approach in contrast to the “safety and soundness” approach of other supervising agencies. This approach is evident in the numerous consumer focus groups that the CFPB used in designing the new Loan Estimate and Closing Disclosure documents and the consumer compliance database the CFPB has created. On July 21, 2011, the day the CFPB officially took over enforcement authority for federal consumer finance laws under Dodd-Frank, the Special Advisor to the Secretary of the Treasury, (and now Senator from Massachusetts) Elizabeth Warren sent a letter to the CEO of all banks with assets over $10 billion succinctly stating the vision of the new Bureau:

Focus on Consumers: The CFPB will focus on risks to consumers, and compliance with the Federal consumer financial laws, when it evaluates the policies and practices of a financial institution. We expect that institutions will offer consumer financial products and services in accordance with Federal consumer financial laws, and will maintain effective systems and controls to manage their compliance responsibilities. As we conduct our reviews, we will focus on an institution’s ability to detect, prevent, and correct practices that present a significant risk of violating the law and causing consumer harm.”[7]

Some commentators argue that the CFPB has focused on the consumer to the detriment of the mortgage industry, requiring changes that are impractical or burdensomely expensive with little practical benefit to borrowers, which have the unintended consequence of increasing time to close loans and reducing availability of credit.

Read the rest of Chris Appie's chapter in The Mortgage Professional's Handbook!

About the Author

Chris Appie is Vice President & Counsel at Compliance Systems, Inc. (CSi). Chris earned a B.A. with honors in Political Science from Oakland University and a J.D. from The University of Detroit Mercy School of Law. He is a member of the State Bar of Michigan, including the Business Law and Real Property sections. Chris leverages years of specialization in financial regulatory compliance and close working relationships with CSi’s partners to ensure best-in-class solutions and services. When he’s not busy with work, he’s busy trying to keep his five kids under control in grocery stores and other public places.

 CSi is a provider of best-in-class financial transaction technology and expertise that allows lenders and financial institutions across the United States to compliantly document financial transactions including mortgage, home equity, consumer, and commercial loans as well as deposit and retirement accounts. CSi specializes in analyzing the data around these transactions resulting in documentation that mitigates risks thus allowing institutions to better target resources on activities that help their bottom line.


[1] FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT, PL 111-203, July 21, 2010, 124 Stat 1376

[2] 12 USC 5331(a)(5)

[3] Ibid.

[4]12 USC 5331 et. seq.

[5] "What the Division Does"

[6] 12 USC §§5511-5519

[7] "CFPB Supervision CEO Letter No. 1" (July 21, 2011)