Consumer Financial Protection Post Dodd-Frank: Solutions to Protect Consumers Against Wrongful Foreclosure Practices and Predatory Subprime Auto Lending
| Autor | Christopher K. Seide |
| Cargo | JD candidate at Chapman University School of Law, Bachelor's Degree in Social Ecology from University of California, Irvine |
| Páginas | 219-254 |
C
ONSUMER
F
INANCIAL
P
ROTECTION
P
OST
D
ODD
-F
RANK
:
S
OLUTIONS TO
P
ROTECT
C
ONSUMERS
A
GAINST
W
RONGFUL
F
ORECLOSURE
P
RACTICES AND
P
REDATORY
S
UBPRIME
A
UTO
L
ENDING
C
HRISTOPHER
K.
S
EIDE
*
I. Introduction ............................................................ ........................................... .......... 220
II. Overview of the Largest Financial Crisis since the Great Depression ... 223
A. A Timeline of Critical Events Leading to the 2008 Financial Crisis .. 223
1. Early Causes of the Crisis: Deregulation and Soaring Interest
Rates .............................................................. ........................................... ................. 223
2. The Unraveling of the U.S. Economy .......................................... ................... 225
B. Key Predatory Mortgage Lending Practices as a Major Cause of the
Financial Crisis ................................................... ................................................... 233
III. Dodd-Frank Wall Street Reform and Consumer Protection Act .............. 235
A. Overview and Key Provisions Related to Predatory Mortgage
Lending ............................ ......................................................................................... 235
B. New Substantive Consumer Protection Requirements Related to
Mortgage Lending ..................... ................................................................ ..................... 236
1. Dodd-Frank Act Substantive Amendments to the Truth in Lending Act
and the Real Estate Settlement Procedures Act ....................................... 237
2. Dodd-Frank Act Substantive Amendments to the Home Ownership
and Equity Protection Act ................................ ............................................ ..... 240
3. New Structural Changes to the Regulation and Enforcement of
Consumer Financial Protections via Implementation of the Dodd-
Frank Act Consumer Watchdog .......................................................... ............ 241
IV. Current Predatory Practices that Continue to Threaten Economic
Recovery and Consumer Safety in the Financial Marketplace ................. 243
A. Consumer Fraud and Abuse Relating to the Mortgage Foreclosure and
Home Loan Modification Process ................................................................... 245
B. Auto Lending—The New Subprime Money Maker for Wall Street ... 249
V. Solutions to Amending the Dodd-Frank Act to Better Protect
Consumers ........................... ........................................... ........................................... ... 251
A. Possible Solutions ......................... ........................................... ............................ 251
1. A Possible Solution to Wrongful Foreclosures/Loan Modifications 251
2. A Possible Solution to Prevent Future Problems Similar to Subprime
Auto Lending .......................................... ........................................... ..................... 252
B. Alternative Solutions .......................................................... ................................. 252
1. Solution #1—Provide Bailouts to Consumers while Stabilizing the
Economy ............................................... ................................................................... 253
220 U.P.R. Business Law Journal Vol. 3
2. Solution #2—Bring All Consumer Financing Arrangements under the
Umbrella of the CFPB ..................... ........................................... .......................... 253
VI. Conclusion..................................................................................................................... 254
I. I
NTRODUCTION
The financial crisis of 2008 was the most severe economic crisis to
affect the United States since the Great Depression in 1929.
1
Once United
States (“U.S.”) government officials and policymakers saw the financial
markets begin to collapse, they attempted to avert the economic crisis.
2
However, despite the injection of larg e monetary stimulus packages into the
U.S economy in early 2008, the financial crisis was not avoided.
3
As concerns
about financial losses stemming from toxic assets
4
led t o issues surrounding
the solvency and funding of major financial institutions, t he financial crisis
continued to dig its roots into our everyday lives.
5
Economists, financial experts, policymakers and governmental leaders
disagree as to the fundamental causes of the financial crisis. Benjamin S.
Bernanke, Chairman of the Federal Reserve, argued that lax regulation and
the overall regulatory failures of the Federal Reserve caused the housing
bubble and the financial crisis to occur.
6
However, Lloyd Blankfein, Goldman
Sachs CEO, blamed Congress, pointing to federal laws and policies that led to
housing and credit bubbles, an unbalanced trade d eficit, and low interest
* JD candida te at Chapman University School of Law, Bachelor’s Degree in Social Ecology
from University of California, Irvine. The a uthor would like to thank Professor Marisa S.
Cianciarulo for her proofreading, suggestions, a nd dedicated support in continuously helping
to improve this a rticle. He would also like to thank Profess or Timothy A. Canova for his
guidance in the substantive organization of this article.
1
Benjamin S. Bernanke, Remarks at the Economic Club of Minnesota 2011-2012 Speaker
Series (Sept. 8, 2011), http://www.bloomberg.com/news/ 2011-09-08/crisis-recovery
-is-much-less-robust-than-hoped-bernanke-says-full-t ext.html.
2
Id.
3
Id.
4
Definition of Toxic Assets: “An asset that becomes illiqui d when its secondary market
disappears. Toxic a ssets cannot be sold, as they are often guara nteed to lose money. The
term ‘toxi c asset’ was coined i n the financi al crisis of 2008, in regards to mortgage-backed
securities, collateralized debt obligations and credit default swaps, al l of which could not be
sold after t hey exposed their holders to massive losses”. Toxic Asset Definition, I
NVESTOPEDIA
,
http://www.investopedia.com/terms/t/toxic-assets.asp#axzz1 uZs9wLQt (last visited May
05, 2012).
5
Nikola Spatafora, World Economic Outlook: Crisis and Recovery, in T
HE
G
LOBAL
F
INANCIAL
C
RISIS
2009:
P
REPARING FOR THE
F
UTURE
(2009).
6
Catherine Ra mpell, Lax Oversight Caused Crisis, Berna nke Says, N.Y.
T
IMES
(Jan. 3, 201 0),
http://www.nytimes.com/2010/01/04/business/economy/04fe d.html.
No. 2 Consumer Financial Protection Post Dodd-Frank 221
rates.
7
In support of his contention, Mr. Blankfein noted that the Federal
Reserve had the power to stop the issuance of subprime mortgages by
creating and implementing responsible mortgage lending standards but
failed to do so.
8
His contention i s also supported by the following fact:
between 2000 and 2006, t he Federal Reserve only referred three cases of
predatory lending to the Department of Justice.
9
This indicates that
enforcement against predatory subprime lending by governmental
regulators was practically non-existent.
10
Others believe that large financial
institutions significantly contributed to the onset of the crisis by using
collateralized debt obligations
11
(“CDO’s”) to turn pools of subprime
mortgages
12
into toxic assets, ultimately creating the need for financial
rescue bailouts
13
by the U.S. government.
14
Additional factors cited as helping
7
Patrice Hill, CEO’s trade blame with Congress over financial cris is, T
HE
W
ASHINGTON
T
IMES
(Jan. 14, 2010), http://www.washingtontimes.com/news/ 2010/jan/14/ceos-trade-blame-w
ith-congress-over-finance-crisis/?page=all.
8
Phil Angelides et al., Financial Crisis Inquiry Commission, in T
HE
F
INANCIAL
C
RISIS
I
NQUIRY
R
EPORT XVII
(2011), http://fcic-static.law.stanford.edu/cdn_media/ fcic-reports/fcic_final_r
eport_full.pdf (stating that in response to out of control subprime lending in the late 1990’s,
the Federal Reserve pas sed rules that only affected 1% of lenders dealing in subprime loans.
In 2006, the Federal Reserve only issued voluntary guidance rules and did not address any
wide scale mandatory rules related to predatory lending until 2008).
9
Phil Angelides: The Fi nancial Crisis Inquiry Report (3/3/11), T
HE
C
OMMONWEALTH
C
LUB OF
C
ALIFORNIA
R
ADIO
P
ROGRAM
(Mar. 14, 2011), http://www.apple.com/itunes/podcast . Also
available at http://www.youtube.com/watch?v=Vpn87fyKFNk (la st visited May 5, 2011).
10
Id.
11
Definition of collateralized debt oblig ation: “an investment-grade security backed by a
pool of bonds, loans and other assets. CDO’s do not specialize in one type of de bt but are
often non-mortgage loans or bonds”.Collaterized Debt Obligation Definition, I
NVESTOPEDIA
,
http://www.investopedia.com/terms/c/cdo.asp#axzz1uZs 9wLQt (last visited May 05,
2012).
12
Definition of Subprime Mortgage: “a type of mortgage that is normally made out to
borrowers with lower credit ratings. As a result of the borrower's lowered credit rating, a
conventional mortgage is not offered because the lender views the borrower as having a
larger-than-average risk of defaulting on the loan. Lending institutions often charge interest
on subprime mor tgages at a rate that is higher than a conventional mor tgage in order to
compensate themselves for carrying more risk.” Subprime M ortgage Definition, I
NVESTOPEDIA
,
http://www.investopedia.com/terms/s/
subprime_mortgage.asp#axzz1uZs9wLQ
T
(last visited May 6, 2012).
13
Definition of bailout: “a situation in which a bus iness, individual or government offers
money to a failing business in order to pr event the consequences that arise from a business's
downfall. Bailouts can take the form of loans, bonds, stocks or cash . They may or may not
require reimbursement.” Bailout Definition, I
NVESTOPEDIA
, http://www.investopedia.com/
terms/b/bailout.asp#axzz1uZs9wLQt (last visited May 06, 2012).
14
Adam Davidson, How W all Street Made The Mortgage Crisi s Worse, N
ATIONAL
P
UBLIC
R
ADIO
(Aug. 27, 2010), http://www.npr.org/blogs/money/2010/08/26/129454 550/inside-the-sa
usage-factory-how-wall-street-made-the-financial-crisis-worse .
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