Rulemaking under Dodd-Frank: Putting the "Person" Back into the Consumer Lending Process

This article is the second step in an analysis of the regulatory responses to the 2008 global financial crisis through the lens of critiques from Popes Benedict XVI and Francis. In an earlier article, The Paradox of the Global and the Local in the Financial Crisis of 2008: Applying the Lessons of Caritas in Veritate to the Regulation of Consumer Credit in the United States and the European Union, 26 J.L. & Religion 173 (2010) (see: http://ssrn.com/abstract=1548710), I examined the paradox of the global nature of the crisis and the uniquely local nature of the individual consumer transactions that triggered the crisis – loans to specific individual consumers tied to specific unique, unmovable pieces of residential real estate. In that article, I explored the practical geographical challenges raised by this paradox, and drew on the analysis of Pope Benedict’s 2009 encyclical, Caritas in Veritate to explore whether the scope of the problem demanded the efficiencies of broad-brush, national (or even global) standards governing such activity, or whether the origin of the problem in individual consumer transactions require more differentiated, individualized local responses, or whether some combination of the two approaches might be the most effective way to prevent future global economic meltdowns. In this article, I explore an additional challenge raised by the same paradox – a relational challenge. In structuring a regulatory response to the crisis, what is the proper weight to be given to the interests of the various parties to the relationships created in the consumer lending process: the consumer, the lender, and the entities that acquire interests in the credit transaction between the consumer and lender (the institutions that securitize the loans, assign credit ratings to the securities, and buy the resulting pieces of the securitized loans)? This question lies at the heart of identifying the proper regulatory response to the global financial crisis.The responses to the global financial crisis by Popes Benedict XVI and Francis share an insistence on the centrality of the human person as the appropriate focus of market mechanisms, and a skepticism about the exclusive focus on efficiency as the ultimate goal of economic regulation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) also addresses these concerns. One of Dodd-Frank’s major innovations was the creation of the Consumer Financial Protection Bureau (“CFPB”), a federal agency with the specific mandate of protecting the consumer, thus placing the person at the center of its regulatory deliberations. Further, Dodd-Frank’s consumer credit provisions establish significant new regulatory requirements at every stage of the credit process, putting a giant brake on the consumer credit machine through which the building blocks of individual consumer loans are transformed into securitized credit instruments and effectively rejecting efficiency as the primary measure of consumer credit regulation. However, in practice, there have proven to be substantial limits to Dodd-Frank’s rejection of efficiency, and to the CFPB’s ability to keep the person at the center of consumer credit regulation. The most common challenges to Dodd-Frank’s regulatory measures are that they render the American banking system uncompetitive with respect to other, less-regulated jurisdictions, and that they are inefficient — the very defenses that Benedict and Francis allege contributed to the financial collapse that Dodd-Frank was enacted to address.This Article first summarizes the arguments of Benedict and Francis for a reorientation of economic analysis to recover a focus on the “person” in an economic transaction. These arguments are then put into the context of other, non-religious critiques of the regulatory system in the wake of the global financial collapse. Second, the Article argues that the creation of the CFPB and the regulatory authority bestowed on it by Dodd-Frank could be seen as providing a possible structural mechanism for facilitating such a renewed focus on the person. Next, the article considers the limits to this refocus that are built into this structural mechanism. Finally, it offers a preliminary assessment of how successful the CFPB is likely to be as an unlikely instrument of the Church’s proposals for global financial reform.