Dodd-FrankLegal Issues for Bankers

Ann Graham, J.D., M.B.A.Professor of Law, Founding Director Business Law InstituteHamline University School of LawBanking Law Blog: http://lawprofessors.typepad.com/banking/

Consumer Financial

Protection Bureau

Dodd-Frank Dodd-Frank Wall Street Reform & Wall Street Reform &

Consumer Protection Act Consumer Protection Act – signed July 21, 2010– signed July 21, 2010

• 2,319 Pages

Obama Administration Obama Administration Financial Regulatory Financial Regulatory

Reform Plan & Consumer Reform Plan & Consumer Financial ProtectionFinancial Protection

Consumer Regulatory Reform – Consumer Regulatory Reform – A New A New Foundation: Rebuilding Financial Supervision & Foundation: Rebuilding Financial Supervision & RegulationRegulation

(June 17, 2009)(June 17, 2009) Consumer Financial Protection Agency Act of 2009Consumer Financial Protection Agency Act of 2009

(June 30, 2009)(June 30, 2009) 80 Law Professors – Letter to Congress (Sept. 29, 80 Law Professors – Letter to Congress (Sept. 29,

2009)2009) ““Political Horse-Trading” – Spring 2010Political Horse-Trading” – Spring 2010

CFPA: Original PlanCFPA: Original Plan

““Independent”Independent”

Broad Jurisdiction – all consumer laws Broad Jurisdiction – all consumer laws

& all entities& all entities

Sole Rulemaking AuthoritySole Rulemaking Authority

Supervisory & Enforcement AuthoritySupervisory & Enforcement Authority

CFP – Why Do We Need CFP – Why Do We Need It?It?

Elizabeth Warren: Elizabeth Warren: “The credit market is broken”“The credit market is broken”

Subprime crisisSubprime crisis Conflicting missions & incentives for Conflicting missions & incentives for

existing agenciesexisting agencies Track record of existing agenciesTrack record of existing agencies Markets cannot work if information is Markets cannot work if information is

deficientdeficient Good products will not gain market Good products will not gain market

share, drive out bad productsshare, drive out bad products Public welfare argumentPublic welfare argument

Consumer Financial Consumer Financial Protection Bureau – Title Protection Bureau – Title

X Dodd-FrankX Dodd-Frank Independent Bureau – within Federal ReserveIndependent Bureau – within Federal Reserve Elizabeth Warren: Assistant to the President Elizabeth Warren: Assistant to the President

& Special Adviser to the Treasury Secretary & Special Adviser to the Treasury Secretary – Sept. 2010– Sept. 2010

Organizing the CFPB – By July 21, 2011Organizing the CFPB – By July 21, 2011 Who will be Director?Who will be Director? Funding Funding StaffingStaffing Prudential Regulation retained for <$10B tot. Prudential Regulation retained for <$10B tot.

assetsassets

Mission & scope of Mission & scope of authorityauthority

Regulate unregulated institutions & productsRegulate unregulated institutions & products(auto dealers excepted)(auto dealers excepted)

Centralize consumer protection, minimize Centralize consumer protection, minimize inconsistencyinconsistency

Compartmentalization?Compartmentalization?• Safety & soundnessSafety & soundness• Consumer protectionConsumer protection• Complementary or ContradictoryComplementary or Contradictory

• The Financial Stability Oversight Council can The Financial Stability Oversight Council can set aside any CFPB regulation that puts the set aside any CFPB regulation that puts the safety or soundness of the U.S. banking or safety or soundness of the U.S. banking or financial system at risk. financial system at risk.

Effect on Community Effect on Community BanksBanks

““Community Financial Community Financial Institutions” & credit unions Institutions” & credit unions with total assets of $10 with total assets of $10 billion or lessbillion or less

Prudential regulators retain Prudential regulators retain enforcement authority enforcement authority

BUT CFPB regulations will applyBUT CFPB regulations will apply

StaffingStaffing Each agency transfers existing Each agency transfers existing

consumer protection divisionconsumer protection division Assures expertise, minimizes start-Assures expertise, minimizes start-

up timeup time BUT new entities, products, BUT new entities, products,

servicesservices Priorities, staff allocationPriorities, staff allocation Regulation models:Regulation models:

A.A. Examination DrivenExamination DrivenB.B. Complaint DrivenComplaint DrivenC.C. Report DrivenReport Driven

CFPB OfficesCFPB Offices

Office of Fair Lending & Equal Office of Fair Lending & Equal Opportunity. Opportunity.

Office of Financial Education. Office of Financial Education. Office of Service Member Affairs. Office of Service Member Affairs. Office of Financial Protection for Office of Financial Protection for

Older Americans. Older Americans. Consumer Complaint Hotline  Consumer Complaint Hotline  Consumer Advisory BoardConsumer Advisory Board

Clarifying Federal Clarifying Federal PreemptionPreemption

A.A. CFPB sets federal “floor”CFPB sets federal “floor”

B.B. States may be more stringentStates may be more stringent

C.C. State consumer protection laws are State consumer protection laws are

NOT preemptedNOT preempted

D.D. Watters v. WachoviaWatters v. Wachovia (2007) (2007)

E.E. Cuomo v. Clearing HouseCuomo v. Clearing House (2009) (2009)

F.F. State/Federal Balance & Dual Banking State/Federal Balance & Dual Banking

SystemSystem

Weighing Costs & Benefits Weighing Costs & Benefits of Regulationof Regulation

A. A. Regulatory Burden?Regulatory Burden?B. Stifling Innovation?B. Stifling Innovation?C. Interference with Free Market?C. Interference with Free Market?D. Protecting those who cannot protect D. Protecting those who cannot protect themselvesthemselves

E. Standard: “causes or is likely to cause substantial E. Standard: “causes or is likely to cause substantial

injury to consumers which is not reasonably avoidable injury to consumers which is not reasonably avoidable

by consumers & such injury is not outweighed by by consumers & such injury is not outweighed by

countervailing benefits to consumers or to competition”countervailing benefits to consumers or to competition”

F. No Plain VanillaF. No Plain Vanilla

CFPBCFPB Political ReactionPolitical Reaction

Industry ReactionIndustry Reaction ABA, Financial Services RoundtableABA, Financial Services Roundtable

Consumer PerspectiveConsumer Perspective Center for Responsible LendingCenter for Responsible Lending

Large Bank/Small Bank IssuesLarge Bank/Small Bank Issues

Are Disclosures Enough?Are Disclosures Enough?

Plain Vanilla Products?Plain Vanilla Products?

Consumer ProtectionConsumer Protectionand and

Bank ComplianceBank Compliance

Safety & Soundness Safety & Soundness depends on depends on Consumer ProtectionConsumer Protection

State AGs can enforce State AGs can enforce consumer consumer protection lawsprotection laws

Review Policies & Procedures Review Policies & Procedures New Reg Reform Site – Tracks Dodd-New Reg Reform Site – Tracks Dodd-

FrankFrank www.stlouisfed.org/rrr/

Articles available: SSRNArticles available: SSRN

Ann Graham: SSRN Author page Ann Graham: SSRN Author page http://ssrn.com/author=391481 ----------------------------------------------------------------------------------------------------

The Consumer Financial Protection The Consumer Financial Protection Agency: Love It or Hate It, U.S. Agency: Love It or Hate It, U.S. Financial Regulation Needs ItFinancial Regulation Needs It

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