Inflexible Uncertainty: Regulatory Structure and Mortgage Regulation under Dodd-Frank

Abstract

In enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and creating the Consumer Financial Protection Bureau (“CFPB”), Congress and the Administration have solved two problems while creating at least two others. On the one hand, as intended, consumer protection has a powerful new champion. Additionally, sweeping reforms were enacted at the time that Congress had the political will and the Administration had the political capital to enact them, without taking the time (and suffering the accompanying delay) required to make difficult decisions on things like which specific mortgage products should be prohibited or discouraged and how credit risk retention should work. On the other hand, the result is an all-powerful agency that has little outside accountability, imposing substantial burdens on the mortgage industry that appear disproportionate to the market failures they address, as well as overlapping regulatory provisions that have the potential of over-regulating the market in such a way that the traditional regulatory choice between flexibility and predictability gives way to rigidity without predictability. Both of these phenomena seem poised to have a severe and negative effect on the availability of credit to consumers, in particular the poor and lower middle class.An examination of the power and structure of the CFPB, and of two of the most important regulatory proposals under Dodd-Frank — Qualified Mortgages and the Ability to Repay, and Qualified Residential Mortgages and Credit Risk Retention — illustrate the potential perils of Dodd-Frank’s approach to mortgage regulation for the residential mortgage market and for all but its wealthiest consumers.Although many of the problems arise from the statutory scheme, the CFPB and stakeholders can mitigate the potential for decreased access to credit, by understanding the structural and institutional sources of the problem and resisting the urge to prescribe suffocation as the remedy for potential gaps in regulatory coverage.