Dodd-Frank IX: The Abolition of Predatory Lending?

If President Obama is serious about financial reform going forward then he will appoint Elizabeth Warren to head the new Consumer Financial Protection Bureau. She has consistently been a non-partisan voice of reason throughout this entire crisis, and before.

Aside from this outstanding issue, however, I would argue that the Dodd-Frank approach to abusive and predatory lending is one of the great strengths of the bill, and that this strength has generally been overlooked in the media.

For example, section 1411 requires mortgage lenders to make a good faith determination, and to verify, that a borrower has the ability to repay the mortgage loan. Certain "qualified mortgages" enjoy a safe-harbor from this provision under section 1412 which will operate to encourage plain vanilla loans instead of predatory loans. Section 1413 permits the victim of a predatory loan to raise a violation of section 1411 as a defense (in the nature of recoupment or set off), even against subsequent assignees, and even after the expiration of any statutue of limitations. The amount of the defense included costs and attorney fees. Moreover, section 1416 enhances damages available against predatory lenders in a class action from $500,000 to $1,000,000 and extends the statutue of limitation from one year to three years. Even prior to Dodd-Frank section 130 of the Truth in Lending Act authorized civil remedies, including recovery of twice the finance charge paid, actual damages or a statutory amount. In any event, the apparent expansion of liability to assignees means that the market for securitized predatory home loans is very likely to evaporate.

Even beyond these sections the creation of a Consumer Financial Protection Bureau under sections 1011-1014 is another huge step forward. The Bureau is housed within the Fed and self-funded through the Fed, but insulated from interference from the Fed. This is an innovative and likely effective legal structure. Under section 1031 the Bureau will have power to stop "unfair, deceptive or abusive" consumer credit transactions. Sections 1052-1056 give the Bureau subpoena power, the ability to issue cease and desist orders, the ability to enjoin violations, the power to seek civil penalties of up to $1,000,000 per day (for knowing violations) and the ability to make criminal referrals.

Which brings us back to Elizabeth Warren. It is no doubt true that others may be able to do as good a job as Elizabeth Warren in running this new and powerful agency. But why risk it?

Unless Robert Rubin is literally pulling President Obama's strings, he will appoint Elizabeth Warren. And the Democrats generally should help force the President's hand; after all, they finally surged in polls only after they passed Dodd-Frank. Prior to that they were facing extinction in November largely for their inability to tame Wall Street and their cozy Wall Street connections.