Implementing Dodd-Frank

by Stuart Shapiro

The Dodd-Frank Act passed Congress amidst much controversy. But under its auspices, agencies are churning out policies to protect consumers and prevent financial meltdowns like the one we had in 2008. Earlier this week the most controversial agency created by Dodd-Frank, the Consumer Financial Protection Bureau, announced a proposal for requiring clearer disclosures by mortgage lenders.

The proposed rule and forms would have benefits for both consumers and industry:

• Simpler than the old forms. Lenders can explain the terms more easily using fewer forms. Consumers, meanwhile, can understand and compare different mortgages more effectively, and compare their estimated and final terms and costs more easily, helping them make the right decisions for themselves and their families.
• Highlight information consumers need. Interest rates, monthly payments, the loan amount, and closing costs are all right there on the first page. Also, the first page explains how the interest rates, payments, and loan amount might change over the life of the loan, including the highest they can go.
• Easier to look out for risks. The forms provide clear warnings about features some consumers may want to avoid, such as adjustable interest rates and payments, prepayment penalties, and loan balances that increase (negative amortization). The proposed rule also contains provisions to make estimates more reliable.
• More time to consider choices. The lender or broker must give the estimate within three business days of applying, and they must receive the closing disclosure at least three business days before closing.

Also this week, the Commodity Futures Trading Commission finalized rules on derivative trading.

The rules, stemming from the Dodd-Frank financial regulatory law, will give regulators more control over the $700 trillion derivatives industry, an opaque business that was blamed for many of the ills of the 2008 crisis. While regulators have spent more than two years retooling the sector, the latest reforms laid crucial building blocks for the remaining aspects of the Wall Street overhaul.

When Governor Romney and his Republican brethren complain about regulations and about Dodd-Frank, remember that it is confusing and misleading mortgage forms and Wall Street derivative trading that they are arguing for.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.