by Thomas Shellabarger
Policy Advisor, Office of Domestic Social Development
United States Conference of Catholic Bishops
Special article for FAN

On July 21, 2010, the President signed into law the Restoring American Financial Stability Act of 2010. The new law, also known as the Dodd-Frank Act, is the largest financial reform since the Great Depression of the 1930’s. After a long struggle, much of it due to the extreme partisanship that grips Washington, D.C. these days, the final legislation provides new rules for financial institutions and long over do protection for consumers.

Many of the changes required of banks, savings and loans, investment firms, and other financial institutions are designed to protect consumers by restoring accountability and responsibility. The Federal Reserve System (FED) has been given much more authority to act in the interest of the American people.

A new consumer protection agency in the FED, the Bureau for Consumer Financial Protections with an Office of Financial Literacy, is charged with making sure the American public has the information they need when purchasing a mortgage, seeking a credit card, or shopping for other financial products. The Bureau will be in charge of establishing clear rules for banks, mortgage companies, payday lenders and credit card lenders. For the first time, consumers will be protected from hidden fees, prepayment penalties, abusive loan fees, and other deceptive practices.

The Dodd-Frank Act makes new efforts to eliminate tax and regulatory loopholes that have allowed questionable practices in securities and hedge funds or by mortgage brokers and payday lenders to go unnoticed or unregulated. For example, mortgage brokers won't make a higher commission by selling people mortgages that they can't afford. They will have to take into consideration a borrower's ability to repay before giving a home loan. Also, the Act imposes new capital and leverage requirements on financial firms that should limit their size and safety.

Corporate shareholders will now have some say on pay and corporate affairs, although with only a non-binding vote on executive compensation and golden parachutes. Regulators will be encouraged to aggressively pursue financial fraud, conflicts of interest, and manipulation of the system by corporate insiders.

The far-reaching legislation will also have an impact on affordable housing and neighborhood stabilization. In particular, it includes $1 billion in additional funding for the Neighborhood Stabilization Program (NSP) to help revitalize neighborhoods affected by the foreclosure crisis through rehabilitating, redeveloping, and reusing abandoned and foreclosed properties. Another $1 billion will be used to assist unemployed homeowners with reasonable prospects for reemployment who qualify for emergency mortgage relief. The U.S. Department of Housing and Urban Development (HUD) is authorized to develop a Foreclosure Legal Assistance program. And the U.S. Department of Treasury is to conduct a study on reforming the Housing Finance System.

Importantly, low income renters get some protection if their landlord is foreclosed. The bill extends the Protecting Tenants at Foreclosure Act (PTFA) through the end of 2014. PTFA provides renters whose landlords have lost their properties to foreclosure the right to stay in the home for 90 days after the foreclosure or through the term of their lease. Under PTFA, housing choice voucher holders are offered similar protections. Unfortunately these provisions are not self-enforcing and require the tenant to know they have the right under law and demand it.

For advocates of housing and community lending, the Act provides more information by geographic area about borrower characteristics, terms and conditions, and foreclosure status for home lending, and the collection of the race and gender of small business borrowers. Amplifying the data already required by the Home Mortgage Disclosure Act (HMDA) gives neighborhood advocates new information about how banks and other financial institutions treat their communities. They will better understand the extent of business lending to underserved small businesses. And information on foreclosures and mortgage defaults could warn communities to that danger and increase the accountability of the banks serving them.

Since the bill leaves a lot of the fine details to the regulatory process, time will tell if Dodd-Frank will provide greater responsibility, accountability, and transparency to our financial system. The legislation, however, does nothing to address the all the damage done to the housing markets and the neighborhoods they comprise; it does even less for the unemployed and their families. Local communities using these new tools for their own interests must push lawmakers and regulators to pursue reform. And test whether other measures will be required to address and change the behavior that led to this crisis. Wall Street’s influence over Congress, while diminished, still remains resourceful.
 

Thomas Shellabarger holds a bachelor's degree from the University of Michigan and has done graduate work at Florida Atlantic University. He is married and the father of two children.