Looking For The Impact of Dodd-Frank On Consumer Financial Services
 (Hint: It’s Closer Than You Think)

With the capacity to absorb information now limited, to at least some extent, by the rules imposed on tweets and status updates, it should come as no surprise that much of the public debate over the Dodd-Frank Wall Street Reform and Consumer Protection Act took place through the exchange of sound bites safe for social media.  These character-limited exchanges suggest the existence of a profound disagreement about the cause of the financial crisis from which the U.S. economy has not yet fully emerged.  But this disagreement is more apparent than real.  Below this raging debate lies a simmering consensus about what went wrong.  And to a large extent, this consensus is reflected in the design of the “Consumer Financial Protect Bureau” to which Dodd-Frank will soon give birth, principally the collection within a single Bureau of the consumer protection responsibilities that to this point have been distributed across a long list of Federal agencies.  But the practical effect of the now enacted solution is that people looking for immediate effects from Dodd-Frank should look somewhere other than the CFPB.

Time constrained observers of the fight over the Dodd-Frank Act could be forgiven for believing that there is no consensus about the extent to which the financial crisis should be labeled a failure of consumer protection or whether the CFPB, had it existed, could have been expected to avoid it.  The staunchest supporters of the Dodd-Frank Act have answered a resounding “yes” to both questions.  Senator Chris Dodd, the Chair of the Senate Banking Committee, and one of the principal architects of the Act, claims, “The economic mess we’re in is rooted in a spectacular failure of consumer protection.”  And, Elizabeth Warren, a long time advocate for the creation of an agency like the CFPB, has argued that such an agency “would have prevented a huge part of this crisis.”  But according David Evans, and many others, “there is no credible evidence that failures in the current system were a significant factor in causing the financial crisis.”

Yet, below the level of the social media exchange, the active participants in these debates appear to have reached very similar conclusions about the proximate cause of the crisis seemingly lurks.  Warren explains it like this:


This crisis started one household at a time.  One lousy mortgage that got sold.  One family at a time.  And then bundled and rebundled and sliced and diced and put into the stream of commerce.


Mark Calabria of the Cato Institute explains the crisis in similar terms, “A housing bubble, driven by easy credit and a mistaken belief that housing prices would rise forever, was the cause of the crisis.”  Even Alan Greenspan appears to agree, “It was the global proliferation of securitized U.S. subprime mortgages that was the immediate trigger of the current crisis.”

This shared conclusion about the source of the problem seems to be well informed.  Congress gave the Federal Reserve the authority to eliminate unfair and abusive practices as far back as 1994.  And as Greenspan points out, the Federal Reserve first issued guidance on subprime loans to institutions under its supervision in 1999.  That guidance warned those institutions of “the increased risk of default associated with subprime loans, … the importance of reliable appraisals for loan collateral, and … the need to obtain credit file documentation for subprime loan applicants.”  But most of the institutions that originated subprime debt were outside the Federal Reserve’s jurisdiction.  Authority to scrutinize those institutions was scattered among other Federal banking agencies, the Federal Trade Commission, and various state agencies.

In short, the failure was one of execution, and this makes the job facing the newly commissioned Bureau considerably harder.  In most respects, the agency created by the Dodd-Frank Bill is not new.  It largely accumulates powers that had been distributed across a host of agencies— FRB, FDIC, FTC, NCUA, OCC, OTS, and HUD.  And the Director of the CFPB is charged with creating a new bureaucracy from the bits severed from their former hosts.  This is not going to be an easy task.  Indeed the difficulty is reflected in the text of the bill.  The bill devotes less than two pages to describing the standards that the Bureau must use to define “unfair” and “abusive” practices.  The provisions that outline the process for creating the new agency consume forty-seven pages.

The practical consequence of this complexity is that the energies of the Director and the CFPB as a whole are likely to be devoted to institution building.  The job will almost certainly not be as complicated as the wave of bureaucratic reshuffling that followed the creation of the Department of Homeland Security.  That effort began in October 2002, and in January 2005, the Government Accounting Office still designated the project as “high risk.”  But that experience confirms that new agencies, even agencies built from components taken from other agencies, do not take shape over night.

This should not be read to suggest that the Dodd-Frank Act will have only a modest affect on the consumer financial business in the U.S.  Dodd-Frank contains a number of provisions, aside from the CFPB, that would be considered significant pieces of legislation—e.g., the systemic risk council, the Volcker Rule, the Durbin payment card provisions, and risk retention requirements for credit securitization.  Many of these provisions have received a considerable degree of public scrutiny.  But as with the CFPB, the effects of these new laws will likely not be felt immediately.  These provisions will be implemented via agency rule making.  And that process will unfold over months and, given the possibility of follow-on litigation to block implementation, possibly years.

But those looking for immediate effects from Dodd-Frank will need to look for provisions of the bill that received less attention.  Of these, the portions of Dodd-Frank that change the division of authority between States and the Federal government with respect to the enforcement of Federal law against Federally chartered financial institutions probably deserve the most attention.  At present, State lawmakers and law enforcers have almost no authority over Federally chartered banks.  That will change once the President adds his signature to the text passed by the House and Senate.  And although it might take the Director of the CFPB years to build out a civil enforcement bureau to pursue consumer protection cases, virtually every State has scores of lawyers devoted to enforcement of consumer protection law.  Dodd-Frank gives those lawyers access to new tools and provides them with new targets.  How States utilize those tools and the targets they choose to pursue may prove to be the most immediate impact of Dodd-Frank.


Executive Bio: Tom Brown is a partner in O’Melveny’s San Francisco office and a member of the Financial Services Practice.  Tom’s practice focuses on competition law and legal issues affecting the financial services industry.

Tom has been litigating cases, including class actions, in the financial services industry for more than a decade.  He was a member of the trial team that handled the defense of the then largest civil antitrust class action in U.S. history for Visa U.S.A. Inc., In re Visa Check/MasterMoney Antitrust Litigation.  He has helped numerous other financial services companies, including Capital One and PayPal, defend against class actions, including an ongoing case challenging the use of PayPal in the eBay marketplace.

Immediately prior to joining O’Melveny, Tom was Vice President, Senior Counsel at Visa U.S.A. Inc.  There he was responsible for managing the aftermath of the settlement in In re Visa Check/MasterMoney Antitrust Litigation, including the dozens of consumer class actions that were filed following the settlement.  He was also deeply involved in the company’s still ongoing transformation from a co-op to a shareholder owned company.

Tom is a recognized authority on consumer payments and antitrust law.  He is currently teaching a course at Boalt Hall on The Law and Policy of Modern Consumer Payments. His piece Keeping Electronic Money Valuable: The Future of Payments and the Role of Public Authorities was recently included as a chapter in the book Moving Money, edited by Robert E. Litan and Martin Neil Baily.  Earlier this year, he co-authored an article, Credit Where Credit Is Due, on the Credit Card Accountability and Disclosure Act of 2009.  Tom is frequently quoted in American Banker, The New York Times, and The Wall Street Journal, among other publications.


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