The Federal Financial Consumer Protection Agency: A New Era of Protection or More of the Same?

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In 2007 and 2008 Professor Elizabeth Warren proposed a new federal consumer financial protection agency. The aim was to ensure the financial products consumers purchase meet minimum safety standards. That proposal has become part of the Dodd – Frank Wall Street Reform and Consumer Protection Act. This article explores whether the Act will usher in a new era of robust consumer protection. The focus of this article is on consumer protection in the mortgage markets. Its study of the mortgage markets occurs in an environment in which two public policy approaches were embraced and tested in the last three decades: a principle – based approach to regulation and a net societal benefits standard as the threshold for regulatory intervention. Part One of this article explores market outcomes in the 1982 to 2009 era of principles- based regulation. Contrary to the predicted benefit of congruence with the legislative purposes of safe and sound mortgage lending and fairness in lending transactions, this regulatory approach led to a significant increase in offerings of unsafe and unsound lending products, as well as unfair products. The Dodd – Frank Act alters the regulatory structure through the re-embrace of a rules-based standard for mortgage market operations, in the form of mandatory underwriting standards and specified, prescribed conduct. However, experience has demonstrated that a change in regulatory approach can more effectively lead to legislative congruence only if combined with enforcement measures that convince industry members that compliance is wise from a cost-benefit perspective. Industry cost-benefit evaluations, before and after the Dodd-Frank Act, are explored in Part three of this article.Part Two of the article examines outcomes in a regulatory regime that has embraced a net societal benefits threshold for regulatory intervention. The mortgage market experience in the post-1994 period is explored. It reveals that a net societal benefits threshold for regulatory intervention can easily lead to inaction on the part of regulatory agencies. In the long-term, the mortgage markets witnessed the evaporation of the net societal benefits that had led to regulatory inaction in the period prior to 2009. The Dodd – Frank Act reaffirms the legislative goal of fairness in credit market transactions but then, for the first time, expressly embraces a net societal benefits threshold for future regulatory interventions. This calls into question the likelihood that the new Consumer Financial Protection Agency will adequately protect consumers against future abusive lending practices.