VII. CONSUMER AND INVESTOR PROTECTION and Investor Protection.pdfVII. CONSUMER AND INVESTOR PROTECTION Dodd-Frank contains provisions designed to protect consumers of financial services

-187- House of Representatives Approves Historic Revision of Financial Services Regulation July 2, 2010

VII. CONSUMER AND INVESTOR PROTECTION

Dodd-Frank contains provisions designed to protect consumers of financial services from abuses and to

protect securities investors and whistleblowers. Dodd-Frank also contains provisions designed to expand

the range of financial services made available to low-income and moderate-income individuals and other

Americans ―who are not fully incorporated into the financial mainstream.‖

A. CONSUMER FINANCIAL PROTECTION ACT OF 2010

Title X of Dodd-Frank, dubbed the ―Consumer Financial Protection Act of 2010‖ or ―CFPA,‖ creates a new

consumer financial services regulator, the Bureau of Consumer Financial Protection (the ―Bureau‖), that

will take on most of the consumer financial services regulatory responsibilities now given to the federal

banking regulators and other agencies.

Independence of the Bureau. There has been much discussion of whether the financial regulatory

reform process will result in an ―independent‖ consumer agency. The CFPA establishes the Bureau ―in

the Federal Reserve System,‖ but the structure created for its governance should allow it to function in

practice as an autonomous agency. Its director will be appointed by the President with the advice and

consent of the Senate, and the FRB is specifically barred from intervening in any matter before the

Bureau; appointing, directing or removing any Bureau officer or employee; merging or consolidating the

Bureau or any of its functions with any part of the FRB or any Federal Reserve Bank; reviewing,

approving, delaying or preventing issuance of any Bureau rule or order; or requiring any Bureau officer to

submit his or her Congressional testimony or other submissions to Congress for FRB review, approval or

comment. In addition, the CFPA gives the Bureau a dedicated funding source outside the Congressional

appropriations process in the form of quarterly required transfers from the Federal Reserve System‘s

earnings, although Dodd-Frank also authorizes appropriations to fund the Bureau in the event the Bureau

determines that the transfer from the Federal Reserve System will not be sufficient to fund its operations.

Responsibilities of the Bureau. The Bureau‘s primary functions include the supervision of ―covered

persons‖ for compliance with ―Federal consumer financial law‖ and the promulgation of regulations

implementing those laws. These key terms are defined as follows:

―Covered person‖ is broadly defined to include any person offering or providing a consumer financial product or service and any affiliated service provider.

―Financial product or service‖ is defined to include, among other things, extending and brokering credit and leases that are the functional equivalent of credit; real estate settlement and appraisals; taking deposits; transmitting funds; acting as a custodian of funds or of any financial instrument for consumers; providing stored value or payment instruments; check cashing and collection; providing payment and financial data processing to consumers; financial advisory services; and debt collection. ―Financial


product or service‖ expressly excludes the ―business of insurance,‖ which is defined as the writing of insurance or the reinsuring of risks, including acts necessary to such writing or reinsuring, and related activities conducted on behalf of an insurer.

―Federal consumer financial law‖ includes the CFPA and other enumerated statutes including, among others, the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act. Notably, the Community Reinvestment Act is not included, with the result that responsibility for examining for and enforcing compliance with it will remain with the federal bank regulatory agencies.

The CFPA includes several specific grants of authority to the Bureau relating to particular consumer

protections. These include:

defining ―unfair, deceptive or abusive acts and practices‖80

and the power to take action to prevent covered persons from engaging in them;

prescribing new rules regarding disclosures related to consumer financial products and promulgating model forms;

requiring covered persons to give a consumer, on request, information that the covered person has about the purchase by the consumer of a consumer financial product from the covered person; and

prescribing registration requirements for covered persons (other than insured depository institutions and credit unions).

The Bureau will also have the power to prohibit anything connected with the marketing, sale or

enforcement of the terms of a consumer financial product that does not conform to the CFPA or the

Bureau‘s rules on unfair, abusive or deceptive acts and practices; violations of recordkeeping or reporting

requirements; and ―knowingly or recklessly‖ providing ―substantial assistance to another person‖ in

connection with an unfair, abusive or deceptive act or practice.

Persons subject to Bureau jurisdiction. The CFPA describes three different types of covered persons

over whom the Bureau will have varying degrees of direct supervisory authority.

Nondepository covered persons. First is a nondepository covered person, which means any person who originates or brokers consumer real-estate secured loans or related loan modification or foreclosure relief services, offers or provides consumer private education or payday loans, or who is a ―larger participant of a market for other consumer financial products or services.‖ What constitutes a ―larger participant‖ in a given market will be defined by the Bureau, a definition that will necessarily be of great interest to affected persons. The Bureau may also determine any person to be a covered person if it finds that the person has engaged in ―conduct that poses undue risks to consumers‖ in relation to consumer financial products or services. The Bureau is required to examine and require reports from, and may impose registration and recordkeeping requirements on, such persons. It will also generally

80

―Abusive‖ is not a term currently employed by the federal laws prohibiting unfair and deceptive acts and practices. The CFPA‘s definition of ―abusive‖ broadly covers acts or practices that ―materially interfere‖ with a consumer‘s ability to understand a term or condition, or take ―unreasonable advantage‖ of a consumer‘s lack of understanding, inability to protect his or her interests or reliance on a covered person to act in the consumer‘s interest.


have exclusive enforcement authority over such persons‘ compliance with federal consumer financial laws, except that the FTC will retain its existing authority to enforce federal consumer financial laws against those nondepository covered persons over whom it has jurisdiction under the Federal Trade Commission Act. The Bureau and the FTC are required to reach an agreement on coordination of enforcement actions.

Insured depository institutions and credit unions with assets over $10 billion. The second group consists of insured depository institutions and credit unions with over $10 billion in assets and their affiliates. The Bureau will have exclusive authority to examine these institutions directly for consumer compliance, and to require reports from them. The Bureau and an institution‘s prudential regulator must conduct their examinations of an institution simultaneously, unless the institution requests otherwise. The Bureau will also have primary enforcement authority with respect to these institutions‘ compliance with federal consumer financial law. The federal prudential regulator of one of these institutions may recommend that the Bureau initiate an enforcement action, but the prudential regulator may only initiate one itself if the Bureau does not commence its own action within 120 days of receiving the other agency‘s recommendation.

Insured banks and credit unions with assets under $10 billion. The third group of covered persons consists of insured banks and credit unions with assets of $10 billion or less. (Affiliates of these institutions are not covered, unlike affiliates of larger depository institutions.) The federal banking agencies will remain responsible for examining and enforcing these institutions‘ compliance with federal consumer financial law. The Bureau will not be given direct examination powers over this class of institutions, but will instead be permitted only to send examiners ―on a sampling basis‖ to accompany examiners from an institution‘s federal prudential regulator. Enforcement powers will rest exclusively with the prudential regulator, although the Bureau may require reports from these institutions.

The CFPA specifically excludes certain classes of persons from the Bureau‘s authority. In particular,

merchants, retailers and other sellers of non-financial goods or services are not subject to the Bureau‘s

authority except to the extent that they offer any consumer financial product or service or are otherwise

subject to a federal consumer financial law for which the Bureau has responsibility. The offering of credit

by a merchant or retailer is generally excluded from the Bureau‘s authority, so long as the credit is

extended to allow a consumer to purchase a non-financial product or service and the debt is not

conveyed to a third party (unless in default) or subject to a finance charge. The Bureau is given this

authority over accounts receivable sales transactions by merchants and retailers of non-financial goods or

services, and more general authority over any such merchant or retailer that is engaged in an accounts

receivable sales transaction. As a result, the impact on the ability or willingness of these businesses to

finance themselves through factoring could be significant.

Persons registered with the SEC or CFTC, including broker-dealers and investment advisers, are not

subject to the Bureau‘s authority under the CFPA when acting in their registered capacity. In addition,

real estate agents and brokers, motor vehicle dealers,81

manufactured home retailers, accountants and

tax preparers, attorneys (for activities engaged in as part of the practice of law), persons regulated by a

81

Dodd-Frank authorizes the FRB to implement rules applying the Electronic Fund Transfer Act to motor vehicle dealers that are exempt from Bureau jurisdiction, and requires the FRB to issue rules applying the Equal Credit Opportunity Act to such dealers.


state insurance or securities regulator, and qualified retirement or eligible deferred compensation plans

are also generally excluded from the Bureau‘s rulemaking, supervisory or enforcement authorities,

provided in each case that the person meets certain requirements. In addition, most persons registered

or required to be registered with the SEC or CFTC are excluded as well, although the CFTC is required to

consult and coordinate with the Bureau on any CFTC rulemaking that relates to a product or service that

is the same as, or competes directly with, a product regulated by the Bureau, and the SEC is required

similarly to consult with the Bureau ―where feasible.‖ Finally, as noted, the Bureau may not define

―engaging in the business of insurance‖ to be a financial product or service.

The CFPA also specifically provides that the FTC may enforce the Bureau‘s rules on unfair, deceptive or

abusive acts or practices with respect to persons under the FTC‘s jurisdiction. Similarly, the Bureau may

enforce any of the FTC‘s rules regarding unfair or deceptive acts or practices with respect to any covered

person. The FTC‘s current jurisdiction is otherwise explicitly preserved by the CFPA, with the exception

of those rulemaking and other authorities granted to the FTC under a federal consumer law for which the

Bureau is acquiring responsibility.

Bureau rulemaking authority and involvement of prudential regulators. The Bureau will have the

ability to issue rules implementing, and to enforce, the federal consumer financial laws. Responsibility for

existing regulations implementing those laws will likewise be transferred to the Bureau. The Bureau will

also generally be able to grant exemptions from those laws, either to classes of covered persons or for

specific types of financial products and services.

The Bureau is required to consult with the federal prudential regulators as part of any rulemaking, but

those other regulators would not be permitted to block or otherwise directly affect a Bureau rulemaking,

other than through the Council established in Title I. The Council will have the ability to stay or set aside

any Bureau rulemaking, but may do so only through a cumbersome process that must culminate with two-

thirds of the Council‘s member agencies voting in favor of staying or setting aside the rule. Further,

before the Council may vote on such an action, numerous other requirements must be met, potentially

including public hearings held by each Council member agency on the proposed Bureau rule. In addition,

the standard for this type of Council action is that the Bureau rule ―would put the safety and soundness of

the United States banking system or the stability of the financial system of the United States at risk,‖

which is a difficult criterion to satisfy. In sum, the requirements for the Council to stay or set aside a

Bureau rule are so substantial that it appears unlikely that the process could ever successfully be

invoked, rendering the Council‘s oversight of the Bureau‘s rulemaking largely moot.

In addition, the Bureau‘s rulemakings will be subject to additional review requirements under the

Regulatory Flexibility Act for their effect on small businesses (and small nonprofits and local government

entities), and in particular for any potential for a Bureau rule to increase the cost of credit for these small


entities. These additional requirements will likely have the effect of causing many of the Bureau‘s

rulemakings to move more slowly.82

Continuation of existing orders and agreements. Existing orders, determinations, resolutions, rulings

and agreements under federal consumer financial laws made by agencies whose consumer protection

functions are transferred to the Bureau will remain in effect and enforceable by (or against) the transferor

agency and not the Bureau. There is an exception, however, for those applicable to insured depository

institutions and insured credit unions with assets of over $10 billion and their affiliates, which will be

enforceable by or against both the transferor agency and the Bureau.

State law preemption. The CFPA does not preempt state law except in cases where state law is

―inconsistent‖ with the CFPA, and then only to the extent of the inconsistency. The CFPA also authorizes

state attorneys general, following consultation with the Bureau and the relevant prudential regulator (if

any), to bring civil actions in the name of their state to enforce the CFPA or regulations issued under the

CFPA, although it limits this ability in the case of actions against national banks and federal savings

associations. Specifically, state attorneys general are not permitted to bring civil actions against national

banks and federal savings associations to enforce a provision of the CFPA, but they are authorized to

bring such actions to enforce Bureau regulations issued under the CFPA. The Bureau may intervene as

a party in any such action brought by a state attorney general.

The CFPA amends the National Bank Act specifically to address preemption of state consumer financial

laws. The CFPA permits preemption of state consumer financial laws only if (1) the state law has a

discriminatory effect on national banks as compared to such state‘s state banks; (2) in accordance with

the preemption standard in the U.S. Supreme Court‘s decision in Barnett Bank v. Nelson, 517 U.S. 25

(1996), the state law ―prevents or significantly interferes‖ with the national bank‘s exercise of its powers,

with that determination being made either by the OCC (by regulation or order) on a ―case-by-case‖ basis

or by a court; or (3) the state law is preempted by federal law other than the CFPA. The second

preemption standard has been the focus of rigorous debate for several reasons. First, it has been

suggested that by explicitly including the ―preempts or significantly interferes‖ language from Barnett

Bank, which was absent in the Senate Bill, the CFPA may narrow the OCC‘s discretion to make

preemption determinations. In addition, it is unclear what the practical impact will be of the requirement

for a ―case-by-case‖ determination, which the CFPA defines as a determination regarding the effect of a

particular state law on ―any national bank that is subject to that law‖ or to a ―substantively equivalent‖ law

of another state. It appears that the OCC may make preemption decisions either by regulation or order,

but in either case the action must be limited to a specific state law and those laws that are ―substantively

82

The only other federal agencies subject to these requirements, which mandate the involvement of the Small Business Administration in the agency‘s rulemaking process, are the Environmental Protection Agency and the Occupational Safety and Health Administration.


equivalent‖ to it. The OCC must consult with the Bureau on any determination regarding whether a state

law is ―substantively equivalent‖ to a law that is the subject of an OCC preemption determination. In

addition, OCC preemption decisions made based on the Barnett Bank standard will not be valid unless

the record supporting the decision includes ―substantial evidence‖ that preemption would be consistent

with that standard. There is an explicit provision that the authority of a national bank to charge interest

allowed by the law of the state where it is located, including the meaning of ―interest,‖ is not altered or

affected by these preemption provisions or any other provision of the National Bank Act.

The CFPA amends the National Bank Act to provide that neither that Act nor Section 24 of the Federal

Reserve Act (which permits national banks to make real estate–secured loans) shall prevent state

consumer financial laws from applying to subsidiaries and affiliates of national banks that are not

themselves national banks to the same extent such laws apply to any other person subject to them—

overruling the recent U.S. Supreme Court decision in Watters v. Wachovia Bank, 550 U.S. 1 (2007). The

National Bank Act is also amended to specify that neither it nor Section 24 of the Federal Reserve Act

shall be construed as preempting, annulling or otherwise affecting the application of any state law to any

subsidiary, affiliate or agent of a national bank (other than one that is a national bank).

Preemption standards for laws affecting federal savings associations are explicitly made the same as

those applicable to national banks.

Visitorial standards. The CFPA also amends the National Bank Act to specify that, ―in accordance‖ with

the recent Supreme Court decision in Cuomo v. Clearing House Association, 557 U.S. __ (2009), the

visitorial powers provisions of the National Bank Act shall not be construed to limit the ability of state

attorneys general to bring actions in court against a national bank to enforce any applicable law. Given

the formulation of this provision, it appears that its intent is not to grant new powers to state attorneys

general, but to assert that existing federal law permits such actions.

A corresponding change is made to the Home Owners‘ Loan Act regarding actions against federal

savings associations.

Electronic Fund Transfer Act amendments. Two new sections are added to the Electronic Fund

Transfer Act (―EFTA‖). New Section 920 of EFTA, which is the more controversial, gives the FRB the

authority to establish rules regarding interchange fees charged by payment card issuers for electronic

debit transactions, and to enforce a new statutory requirement that such fees be reasonable and

proportional to the actual cost of a transaction to the issuer, with specific allowances for the costs of fraud

prevention. It also limits the ability of payment card networks to attempt to limit the ability of any person to

offer discounts or incentives for the use of a competing network or an alternative form of payment, and

requires the FRB to issue rules barring issuers or payment card networks from placing certain restrictions

on the number of payment card networks over which an electronic debit transaction may be processed or

inhibiting the ability of a person who accepts debit cards from directing the routing of electronic debit


transactions. There are exemptions to the interchange fee limits for issuers with assets of less than $10

billion and for fees for transactions involving government-issued debit or prepaid cards. Also, although

Dodd-Frank generally gives the Bureau the authority to enforce EFTA, rulemaking and enforcement

authority under Section 920 is given exclusively to the FRB.

Dodd-Frank also adds a new Section 919 to EFTA, which requires the FRB to prescribe rules related to

disclosures, cancellation and refund policies and error resolution for remittance transfers. It also permits

the FRB to prescribe rules regarding receipts for remittance transfers to countries that prohibit the sender

of a remittance transfer from knowing the amount of currency received by the transferee. Although Dodd-

Frank grants this authority to the FRB, it will be transferred to the Bureau under other provisions of Dodd-

Frank.


B. SECURITIES INVESTOR PROTECTIONS AND RELATED REFORMS

1. Standards of Conduct for Broker-Dealers

One topic that has been discussed extensively in the context of financial regulatory reform is whether

broker-dealers and investment advisers should be subject to the same standard of conduct and whether

that standard should be that of fiduciary or something else. The Senate Bill addressed this question by

requiring the SEC to conduct a study of the matter.

While that study is still required by Section 913 of Dodd-Frank, as described in Section VII.B.6 below,

Section 913 also authorizes the SEC to commence a rulemaking, as necessary or appropriate in the

public interest and for the protection of retail customers (and such other customers as the SEC provides),

to address the legal or regulatory standards of care for broker-dealers and investment advisers and their

associated persons for providing personalized securities investment advice to retail customers. In this

rulemaking, the SEC is directed to consider the findings, conclusions and recommendations of the study

required under Section 913.

In this regard, Section 913 amends Section 15 of the Exchange Act expressly to provide that the SEC

may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing

personalized investment advice about securities to retail customers (and any other customers as the SEC

may by rule provide) will be ―the same as the standard of conduct applicable to an investment adviser

under Section 211 of the Advisers Act.‖ New Section 15(k) of the Exchange Act clarifies that the receipt

of compensation based on commissions or other standard compensation for the sale of securities shall

not, in and of itself, be considered a violation of any standard of conduct that the SEC may apply to a

broker-dealer, and states that a broker-dealer will not be required to have a continuing duty of care or

loyalty to the customer after providing personalized investment advice about securities. In addition, new

Section 15(k) provides that if a broker-dealer sells only proprietary or another limited range of products,

the SEC‘s rules may require that the broker-dealer provide notice thereof to each retail customer and

obtain such customers‘ consent or acknowledgment. However, the sale of only proprietary or a limited

range of products will not, in and of itself, be considered a violation of any rule of conduct standard that

the SEC may establish.

In a new Section 15(l) of the Exchange Act, the SEC is directed to facilitate the provision of simple and

clear disclosures to investors regarding the terms of their relationships with broker-dealers and

investment advisers, including any material conflicts of interest, and to examine and, where appropriate,

promulgate rules prohibiting or restricting certain sales practices, conflicts of interest and compensation

schemes for broker-dealers and investment advisers that the SEC deems contrary to the public interest

and the protection of investors.


Section 15 is further amended by adding a new paragraph (m) that requires ―harmonization‖ of

enforcement by the SEC with respect to violations of the standard of conduct applicable to a broker-

dealer and the standard of conduct applicable to investment advisers. Specifically, the act provides that

the SEC‘s enforcement authority with respect to violations of the standard of conduct applicable to a

broker-dealer providing personalized investment advice about securities to a retail customer under the

Exchange Act shall include the enforcement authority of the SEC with respect to such violations under the

Advisers Act. The SEC also is directed to seek to prosecute and sanction violators of the two standards

of conduct to the same extent.

As described in Section V.B.3 above, Section 913 makes a corresponding amendment to the Advisers

Act.

2. SEC Investor Advisory Committee and Office of the Investor Advocate

Investor Advisory Committee. Section 911 of Dodd-Frank adds a new Section 39 to the Exchange Act

that establishes within the SEC a new Investor Advisory Committee (the ―IAC‖). The IAC will advise and

consult with the SEC on regulatory priorities, issues related to the regulation of securities products,

trading strategies and fee structures, the effectiveness of disclosure, investor protection initiatives and

initiatives to promote investor confidence, and the integrity of the securities markets. The IAC will also be

charged with submitting to the SEC such findings and recommendations, including proposed legislative

changes, as the IAC deems appropriate. The IAC will be composed of:

the Investor Advocate, a new office within the SEC, as described below;

a representative of the state securities commissions;

a representative of ―the interests of senior citizens‖; and

between 10 and 20 individuals appointed by the SEC who are knowledgeable about investment issues and decisions and who would represent the interests of (1) individual equity and debt investors (including mutual fund investors) and (2) institutional investors (including pension funds and registered investment companies).

Members will serve four-year terms. The IAC members will employ their own officers, although the

chairperson and vice-chairperson may not be employed by an issuer. Officers will serve for three-year

terms.

The IAC will meet at least twice per year. The SEC will be required publicly to disclose any IAC finding or

recommendation that it receives, and at the same time to indicate what action, if any, the SEC will take to

address that finding or recommendation.

Section 912 amends Section 19 of the Securities Act, which sets forth certain ―special powers‖ of the

SEC, to clarify that the SEC has the authority to engage in ―investor testing‖—gathering information from

and communicating with investors or other members of the public, academics or consultants, and

engaging in ―temporary investor testing programs‖ that the SEC determines are in the public interest or


will protect investors, for the purpose of considering any new rule or program or evaluating an existing

rule or program.

Office of the Investor Advocate. Section 915 of Dodd-Frank amends Section 4 of the Exchange Act to

establish within the SEC an Office of the Investor Advocate. The Investor Advocate will be appointed by,

and report directly to, the SEC chairperson. The Investor Advocate must be someone with experience in

advocating for the interests of investors in securities, and will serve a range of functions associated with

investor protection matters, including:

assisting retail investors in resolving significant problems they have with the SEC or SROs;

identifying areas in which investors would benefit from SEC or SRO rule changes;

identifying problems investors have with financial service providers and investment products;

analyzing the potential impact of proposed SEC and SRO rules on investors; and

proposing legal, administrative or personnel changes designed to mitigate any identified investor protection concerns.

The Investor Advocate is required to submit annual reports directly to the Congressional Banking

Committees regarding its objectives and its activities, including a discussion of the response of the SEC

and the SROs to any issues that the Investor Advocate has identified in the relevant period, without prior

review by the SEC or any of its non-Investor Advocate personnel.

Section 919D of Dodd-Frank adds a new Section 4(g)(8) to the Exchange Act, which requires the Investor

Advocate to appoint an ombudsman, no later than 180 days after the first Investor Advocate is appointed.

The ombudsman will report directly to the Investor Advocate and will act as a liaison between the SEC

and any retail investor in resolving problems that retail investors may have with the SEC or with SROs,

and will review and make recommendations regarding policies and procedures to encourage persons to

present questions to the Investor Advocate regarding compliance with the securities laws. The

ombudsman also must submit a semiannual report to the Investor Advocate that describes the activities

and evaluates the effectiveness of the ombudsman during the preceding year. The Investor Advocate

must include the ombudsman‘s report in its own report to the Congressional Banking Committees.

3. Whistleblower Incentives and Protections

Section 922 adds a new Section 21F to the Exchange Act, designed to incentivize and protect

whistleblowers who voluntarily provide original, independently derived information to the SEC relating to a

violation of the securities laws. Dodd-Frank establishes a ―Securities and Exchange Commission Investor

Protection Fund‖ in the U.S. Treasury to be used to ―compensate‖ whistleblowers whose information

leads to a successful civil or criminal enforcement action under the securities laws resulting in monetary

penalties exceeding $1 million. Whistleblowers will be entitled to receive a payment equal to between 10

percent and 30 percent of the amount of such monetary penalties collected; the amount within that range

will be determined at the discretion of the SEC, based on a number of criteria, such as the significance of


the information provided and the interest of the SEC in deterring violations of the relevant laws, but the

SEC may not consider the balance of the SEC Investor Protection Fund in making this determination.

The SEC Investor Protection Fund will be funded out of these monetary penalties according to rules set

out in the new Exchange Act provision. Among other limitations, whistleblowers will not be permitted to

receive an award if they gain their information during an audit of financial statements required under the

securities laws.

Section 922 also creates a private right of action for whistleblowers against employers who discharge,

demote, suspend, threaten, harass or discriminate against whistleblowers, and makes changes favoring

whistleblowers who seek to file a whistleblower protection claim under 18 U.S.C. § 1514A, including by

extending limitations periods and providing for a jury trial.

In addition, Section 922 expands protections for whistleblowers employed by nationally recognized

statistical rating organizations, by permitting such employees to bring civil enforcement actions in the

event of discrimination.

Different whistleblower protections are provided to employees of public companies under current law.

Section 929A of Dodd-Frank amends Section 806(a) of the Sarbanes-Oxley Act to clarify that employees

of consolidated subsidiaries and affiliates of public companies are included in these existing whistleblower

protections.

The SEC is authorized to issue rules and regulations to implement the provisions of the whistleblower

program, and pursuant to Section 924, must (1) establish a separate office within the SEC to administer

the program and (2) issue rules to implement the program within 270 days after the enactment of Dodd-

Frank. The SEC is also required to submit reports on the whistleblower program to the Congressional

Banking Committees no later than October 30 of each fiscal year. In addition, the SEC‘s inspector

general must conduct a study of the whistleblower protections, including whether the final rules issued to

implement the whistleblower protection program are clear and ―user-friendly,‖ an evaluation of the SEC‘s

response to whistleblower-provided information, and whether the minimum and maximum reward levels

are adequate to entice whistleblowers to come forward. This report must be provided to the

Congressional Banking Committees within 30 months after the enactment of Dodd-Frank. The office

within the SEC responsible for administering the whistleblower protection program must also provide

annual reports to the Congressional Banking Committees.

4. Amendments Relating to Antifraud and Other Liability Standards; Enforcement Matters

Expanded application of antifraud provisions. Section 929L amends a number of Exchange Act

provisions to expand the application of antifraud provisions, including:

the amendments to Sections 9 and Section 10(a)(1) discussion in Section IV.K above;


an amendment to Section 9(b), which relates to options, to expressly cover options transactions not on an exchange;

an amendment to Section 9(c), which relates to endorsements and guarantees of performance related to options, expressly to cover all broker-dealers, not just members of a national securities exchange; and

an amendment to Section 15(c)(1)(A) to eliminate the requirement that the prohibited conduct must relate to off-exchange transactions.

Extraterritorial application of the antifraud provisions of federal securities laws. Section 929P

expands extraterritorial jurisdiction in actions brought by the U.S. Department of Justice or the SEC under

the antifraud provisions of the Securities Act, the Exchange Act and the Advisers Act. In the case of the

Securities Act and the Exchange Act, this includes ―conduct within the United States that constitutes

significant steps in furtherance of the violation, even if the securities transaction occurs outside the United

States and involves only foreign investors,‖ as well as ―conduct occurring outside the United States that

has a foreseeable substantial effect within the United States.‖ Section 929P makes a corresponding

change to the Advisers Act.

This provision does not override the Supreme Court‘s recent decision in Morrison v. National Australia

Bank, No. 08-1191 (June 24, 2010), which held that Section 10(b) of the Exchange Act does not afford a

private right of action in respect of claims of ―foreign plaintiffs suing foreign and American defendants for

misconduct in connection with securities traded on foreign exchanges.‖83

However, as discussed below

in Section VII.B.6, Section 929Y of Dodd-Frank requires the SEC to conduct a study of whether such

private claims should be permitted.

Extension of statute of limitations for securities fraud violations. Section 1079B(b) of Dodd-Frank

adds a new Section 3301 to Chapter 213 of Title 18 of the U.S. Code that extends the statute of

limitations for a securities fraud offense to six years from the commission of the offense. For purposes of

Section 3301, a securities fraud offense generally includes criminal securities fraud (as defined under

Section 1348 of the U.S. Code) and willful violations of the Exchange Act, the Securities Act, the Advisers

Act, the Investment Company Act or the Trust Indenture Act of 1939.

Enhanced SEC aiding and abetting authority. A number of provisions enhance the SEC‘s authority to

bring aiding and abetting actions. With respect to the Securities Act, Section 929M adds a new clause (b)

to Section 15, imposing aiding and abetting liability, in any civil action brought by the SEC under Section

20(b) or (d), on any person who knowingly or recklessly provides substantial assistance to another in

violation of the Securities Act or rules thereunder. Section 929M adds virtually identical language to

83

For information on this decision, please see our previous memorandum, dated June 25, 2010, entitled ―Securities Class Action Claims Based on Purchases or Sales of Securities Outside the United States.‖


Section 48 of the Investment Company Act with respect to any action brought by the SEC under Section

42(d) or (e) of that Act.

Similar changes to the Advisers Act are made by Section 929N, as described in Section V.B.3 above.

Section 929O amends Section 20(e) of the Exchange Act to expand aiding and abetting liability in SEC

enforcement actions brought under Section 21(d)(1) or (3) of the Exchange Act to cover any person that

―knowingly or recklessly‖ provides substantial assistance to another person in violation of the Exchange

Act or rules thereunder, rather than only persons who ―knowingly‖ provide such assistance. This

provision appears to be designed to resolve conflicting decisions in the federal courts as to whether such

claims may be based on ―recklessness.‖

Control person liability under the Exchange Act. Section 929P also amends Section 20(a) of the

Exchange Act to clarify that the SEC may impose joint and several liability on control persons.

Broader industry bars for persons who violate the securities laws. Section 925 amends the

Exchange Act and the Advisers Act to grant the SEC authority to bar individuals who violate the

Exchange Act or the Advisers Act from being associated with the full range of registered securities

entities—broker-dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent

or nationally recognized statistical rating organization (―NRSRO‖)—rather than only the specific type of

registered securities entity associated with the violation.

SEC retains authority over formerly associated persons. Section 929F amends several provisions of

the federal securities laws to make clear that the SEC (or in some cases the PCAOB) may bring

enforcement proceedings against persons who were formerly associated with a regulated entity (including

broker-dealers, government securities brokers or dealers, public accounting firms and investment

companies) in order to prevent an individual from avoiding a penalty or collateral bar simply because he

or she is no longer associated with that entity at the time that the SEC (or PCAOB) seeks to institute

proceedings.

Enhanced SEC remedial powers. Section 929P amends the Securities Act, the Exchange Act and the

Advisers Act to give the SEC authority to seek civil penalties in cease and desist proceedings.

SEC examination and inspection and enforcement deadlines. Section 929U adds a new Section 4E

to the Exchange Act to impose deadlines on the SEC staff for the completion of enforcement

investigations and compliance examinations and inspections. The SEC staff will have 180 days after

issuing a Wells notice to any person to either file an action against such person or to notify the director of

the SEC‘s Division of Enforcement of its intent not to file an action. However, if the director of the Division

of Enforcement (or the director‘s designee) determines that an enforcement investigation is sufficiently

complex such that a determination cannot be made within the 180-day period, the deadline may be

extended for one additional 180-day period after providing notice to the chairman of the SEC. The


deadline may be extended further as needed for one or more additional 180-day periods after the lapse of

the second 180-day period with the approval of the SEC. Section 929U does not specify any

consequences of a failure to meet these deadlines.

Prohibitions on mandatory arbitration provisions. Section 921 of Dodd-Frank amends the Exchange

Act and the Advisers Act to grant the SEC the authority to prohibit or impose conditions or limitations on

the use of mandatory pre-dispute arbitration clauses in agreements between any broker-dealer, municipal

securities dealer or investment adviser, and their customers, with respect to disputes that arise under the

federal securities laws or rules of any SRO.

Nationwide service of SEC subpoenas. Section 929E amends the Securities Act, the Exchange Act,

the Investment Company Act and the Advisers Act expressly to provide that, in each case, in any action

or proceeding instituted by the SEC in the federal district courts, a subpoena to compel the attendance of

a witness or the production of documents or tangible things may be served at any place in the United

States, and that Rule 45(c)(3)(A)(ii) of the Federal Rules of Civil Procedure (which generally provides that

an issuing court upon timely motion must quash a subpoena that requires a non-party to travel more than

100 miles from where that person resides, is employed or regularly transacts business in person) will not

apply to such subpoenas.

Authority to share privileged information with other regulators. Section 929K amends the Exchange

Act to permit the SEC and U.S. and non-U.S. regulators, including law enforcement authorities, to share

information without waiving any privilege applicable to that information, and prevents the SEC from being

compelled to disclose privileged information obtained from a non-U.S. securities authority or law

enforcement authority, if the non-U.S. authority in good faith represents to the SEC that the information is

privileged.

Similarly, the SEC staff will have 180 days from the date on which it completes the on-site portion of its

compliance examination or inspection and receives all records requested from the entity being examined

or inspected to provide the entity with written notification indicating either that the examination or

inspection has concluded, has concluded without findings or that the staff requests the entity to undertake

corrective action. However, if the head of any SEC division or office responsible for compliance

examinations and inspections determines that an examination or inspection is sufficiently complex such

that a determination cannot be made within the 180-day period, the deadline may be extended for one

additional 180-day period upon notice to the chairman of the SEC. Again, Section 929U does not specify

any consequences of a failure to meet these deadlines.

5. Additional Provisions

SIPC reforms. Section 929C increases SIPC‘s authority to borrow from the Treasury Department, from

$1 billion to $2.5 billion.


Section 929H amends SIPA to increase the standard maximum cash advance for each customer and to

include an inflation adjustment for the standard maximum cash advance.

Section 929V amends SIPA to increase the minimum assessment paid by SIPC members from $150 to

0.02 percent of the gross revenues from the securities business of such member, and to increase the

maximum fine for prohibited acts under SIPC from $50,000 to $250,000. Section 929V also amends

SIPA to provide that any person who falsely represents by any means, with actual knowledge of the

falsity of the representation and with an intent to deceive or cause injury to another, that such person or

another person is a SIPC member or that any person or account is protected or eligible for protection

under SIPA or by SIPC, will be liable for any damages caused and will be fined up to $250,000 or

imprisoned for up to five years. Any court having jurisdiction of a civil action under SIPA will have

temporary and final injunctive authority to prevent or restrain violations of the foregoing.

Reporting of cancelled securities. Section 17(f)(1) of the Exchange Act requires various participants in

the securities industry to report to the SEC or the Treasury Secretary (in the case of government

securities) information about missing, lost, counterfeit or stolen securities, and to make certain inquiries

with respect to such securities. Section 929D amends Section 17(f)(1) to extend this requirement to

securities that are cancelled.

Obligations in respect of missing security holders. Section 929W of Dodd-Frank amends Section

17A of the Exchange Act to require the SEC to revise its regulations on transfer agents‘ obligation to

search for lost securityholders. Specifically, the SEC is required to extend the application of these

regulations to brokers and dealers and to provide for:

a requirement that the paying agent provide a single written notification to each missing securityholder that such holder has been sent a check that has not yet been negotiated (unless the value of the check is less than $25), with such notice to be provided no later than seven months after the sending of the check; and

a provision clarifying that the foregoing provision has no effect on state escheatment laws.

For purposes of the revised regulations, a security holder will be a ―missing security holder‖ if a check

sent to such holder is not negotiated before the earlier of the paying agent sending the next regularly

scheduled check or the elapsing of six months after the sending of the not-yet-negotiated check. The

term ―paying agent‖ includes any issuer, transfer agent, broker, dealer, investment adviser, indenture

trustee, custodian or other person that accepts payments from the issuer of a security and distributes the

payments to the holders of the security.

The SEC is required to effect these revisions within one year after the enactment of Dodd-Frank.


6. Studies

Study on standard of care applicable to broker-dealers and investment advisers. As noted in

Section VII.B.1 above, Section 913 of Dodd-Frank retains the Senate Bill direction that the SEC evaluate

the effectiveness of the existing legal or regulatory standards of care imposed by the SEC, a national

securities association (such as FINRA) and other federal and state laws and authorities on broker-dealers

and investment advisers, and their associated persons, for the provision of personalized investment

advice and recommendations about securities to retail customers (defined as a natural person, or legal

representative thereof, who receives personalized investment advice about securities from a broker-

dealer or investment adviser, and uses that advice primarily for personal, family or household purposes).

This study will consider a number of specific questions designed to evaluate the effectiveness of the legal

and regulatory standards applicable to broker-dealers and investment advisers when providing

personalized investment advice and recommendations about securities to retail investors, and the costs

and benefits of adopting a uniform standard. The study will also consider retail investors‘ ability to

understand regulatory differences, and matters relating to enforcement of standards of care by applicable

regulators.

The SEC must report to the Congressional Banking Committees within six months after the enactment of

Dodd-Frank and seek public comment on these matters in order to prepare the report to Congress. As

discussed above, Dodd-Frank authorizes the SEC to issue rules related to these matters.

Studies of investors’ financial literacy and mutual fund advertising. Section 917 requires the SEC to

conduct a study of the financial literacy of retail investors, including the most useful and relevant

information that retail investors need to make informed investment decisions, methods to increase

transparency of expenses and conflicts of interest, and the most effective existing private and public

investor education efforts. The SEC is required to submit a report to the Congressional Banking

Committees within two years after the enactment of Dodd-Frank.

Section 918 requires the GAO to conduct and submit to the Congressional Banking Committees within 18

months after the enactment of Dodd-Frank a study on mutual fund advertising to identify:

current marketing practices for the sale of open-end investment company shares, including the use of past performance data, funds that have merged, and incubator funds;

the impact of such advertising on consumers; and

recommendations to improve investor protection in mutual fund advertising and additional information that may be necessary to ensure that investors can make informed financial decisions when purchasing mutual fund shares.

Study on potential conflicts of interest between research and investment banking functions at

securities firms. In 2003, the SEC and various other regulators entered into a settlement agreement

with several securities firms to resolve certain claims of conflicts of interest between the research and


investment banking functions at the same securities firm. Section 919A of Dodd-Frank requires the GAO

to conduct a new study designed to identify and examine potential conflicts of interest that may exist

between the research and investment banking functions within the same firm (both equity and fixed

income). The GAO is directed to consider in its study, among other things, whether the undertakings set

forth in the 2003 settlement agreement, including physical separations and communications firewalls

between research and investment banking, coverage decisions and other independence measures,

should be codified and applied permanently to securities firms. (Many of these settlement provisions, or

substantially comparable measures, have already been codified in the SRO rules.) In conducting the

study, the GAO is directed to consult with the SEC, state attorneys general and other state securities

officials, FINRA, investor advocates, broker-dealers, retail and institutional investors, and academics.

The GAO‘s report to the Congressional Banking Committees is due within 18 months after the enactment

of Dodd-Frank.

Study on investor access to information about investment advisers and broker-dealers. Section

919B requires the SEC to study and recommend ways to improve investor access to registration

information about investment advisers, broker-dealers and their associated persons, and to identify

additional information that should be made publicly available. The SEC must complete this study within

six months after the enactment of Dodd-Frank, and the SEC must implement any recommendations of

the study within 18 months of its completion.

Study on financial planners and use of financial designations. Section 919C requires the GAO to

conduct a study on the effectiveness of state and federal regulations to protect investors and other

consumers from misleading financial advisor designations, on the regulation of financial planners and on

any gaps in such regulation. In conducting the study, the GAO is directed to consider a number of

factors, including whether current regulations provide adequate professional standards for financial

planners; the possible risk to investors and other consumers by financial planners in connection with the

sale of other financial products, such as insurance and securities; the ability of investors and other

consumers to understand licensing requirements and standards of care that apply to those who hold

themselves out as financial planners; and whether regulation and professional oversight of financial

planners would benefit consumers. The GAO is required to submit this study to the Congressional

Banking Committees and the Special Committee on Aging of the Senate within 180 days after the

enactment of Dodd-Frank.

Study on Fannie Mae and Freddie Mac. Section 1491 expresses Congress‘s view that the hybrid

public-private status of Fannie Mae and Freddie Mac is untenable and must be resolved in order to

ensure the future of the residential mortgage market and that the reform of these government-sponsored

enterprises is an essential element in any effort to enhance the protection, limitation, and regulation of the

market. Consistent with that sense of Congress, Section 1077 requires the Treasury Secretary to

prepare and submit to the Congressional Banking Committees a report with recommendations regarding


options for ending the conservatorship of Fannie Mae and Freddie Mac, such as a wind-down and

liquidation, privatization, incorporation of their functions into a federal agency, or dissolving them into

smaller companies. The study will also analyze numerous aspects of the housing finance system,

including the role of federal agencies in supporting that system.

Study on extraterritorial jurisdiction for private claims. As described in Section VII.B.4 above, the

Supreme Court's recent decision in Morrison v. National Australia Bank, No. 08-1191 (June 24, 2010),

held that Section 10(b) of the Exchange Act does not afford a private right of action in respect of claims

by ―foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities

traded on foreign exchanges." Section 929P of Dodd-Frank provides the SEC and the U.S. Department

of Justice, but not private parties, with extraterritorial jurisdiction over claims under the antifraud

provisions of the Securities Act, Exchange Act and Advisers Act. With respect to private parties, Section

929Y requires the SEC to study the extent to which private rights of action under the antifraud provisions

of the Exchange Act should be extended to cover conduct within the United States that constitutes a

significant step in the furtherance of the violation, even if the securities transaction occurs outside the

United States and involves only non-U.S. investors, and conduct occurring outside the United States that

has a foreseeable substantial effect within the United States. Among other things, the study must

analyze:

the scope of such a private right of action, including whether it should extend to all private actors or only institutional investors, or otherwise;

what implications such a private right of action would have on international comity;

the economic costs and benefits of extending a private right of action for transnational securities frauds; and

whether a narrower extraterritorial standard should be adopted.

The SEC must submit a report of the study and its recommendations to the Congressional Banking

Committees within 18 months after the enactment of Dodd-Frank.

Study on private rights of action for aiding and abetting liability. Dodd-Frank does not incorporate

an amendment offered during the House-Senate conference negotiations that would have had the effect

of overturning the Supreme Court‘s decision in Stoneridge Investment Partners, LLC v. Scientific Atlanta,

Inc. et al., No. 06-43 (January 15, 2008). In Stoneridge, the Supreme Court reaffirmed its decision in

Central Bank of Denver, N. A. v. First Interstate Bank of Denver, N. A., No. 92-854 (April 19, 2004) that

Section 10(b) of the Exchange Act does not impose liability for aiding and abetting a public company‘s

fraud, and made clear that plaintiffs cannot seek to impose liability on secondary actors who do not make

a statement or engage in a deceptive act that is relied upon by investors. Instead, Section 929Z requires

the GAO to study the impact of authorizing a private right of action against any person who aids or abets

another person in violation of the securities laws. To the extent feasible, the study must include:


a review of the role of secondary actors in the issuance of securities by companies;

the courts‘ interpretation of the scope of liability for secondary actors under federal securities laws after January 14, 2008; and

the types of lawsuits decided under the Private Securities Litigation Act of 1995.

The GAO must submit a report on its findings to Congress within one year after the enactment of Dodd-

Frank.

Study on person-to-person lending. Section 989F requires the GAO to study person-to-person lending

to determine the optimal federal regulatory structure. The GAO is required to consult with federal banking

agencies, the SEC, consumer groups, outside experts and the person-to-person lending industry. The

study must include an examination of:

the existing regulatory structure;

the state and federal regulators responsible for the oversight and regulation of this market;

any government or private studies of person-to-person lending completed or in progress as of the enactment of Dodd-Frank;

consumer privacy and data protections, minimum credit standards, anti-money laundering and risk management in the existing regulatory structure, and whether additional safeguards are needed; and

the uses of person-to-person lending.

The GAO is required to submit a report on the study, including alternative regulatory options, to the

Congressional Banking Committees within one year after the enactment of Dodd-Frank.


C. MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT

Title XIV of Dodd-Frank, entitled the ―Mortgage Reform and Anti-Predatory Lending Act,‖ amends the

laws governing the origination, servicing and management of residential mortgages. Title XIV requires

registration by and establishes standards for mortgage loan originators, sets minimum underwriting

standards for certain residential mortgages, creates new liabilities for creditors, prohibits mandatory

arbitration provisions in residential mortgage loans, alters the standards for mortgages considered to be

―high cost,‖ sets residential mortgage servicing standards related to escrow accounts, and establishes

standards for residential appraisals. Title XIV also establishes the Office of Housing Counseling to

provide home ownership counseling and related services, allocates additional funding to the Emergency

Homeowner's Relief Fund, expands HUD‘s Neighborhood Stabilization Program, and establishes a

foreclosure legal assistance program.

1. Residential Mortgage Loan Origination Standards

Registration and compensation of residential mortgage loan originators. Section 1402 amends the

Truth in Lending Act (the ―TILA‖) to require that all mortgage originators (defined in Section 1401 to

include, with certain exceptions, persons who, for compensation or gain, take residential mortgage

applications, assist consumers in obtaining or applying for a residential mortgage or offer or negotiate

residential mortgages) be qualified, registered and licensed with the appropriate authorities. Section

1402 also mandates that the Bureau prescribe regulations requiring depository institutions to establish

and maintain procedures reasonably designed to ensure and monitor their compliance with the

registration requirements for mortgage originators.

Section 1403 amends TILA to prohibit steering incentives by preventing residential mortgage originators

from receiving compensation that varies based upon the terms of the residential mortgage they originate

other than the principal amount of the loan. This section provides that only consumers may pay

origination fees to mortgage originators, except under certain circumstances where the mortgage

originator does not receive any compensation from the consumer or when the Bureau grants a waiver.

Section 1403, supplemented by Section 1405, also requires the Bureau to promulgate regulations

prohibiting mortgage originators from engaging in certain abusive, deceptive, predatory or unfair lending

practices or steering consumers into certain products, such as residential mortgages that they lack the

ability to repay or loans with predatory terms. Section 1404 establishes liability for breaches of these

provisions under TILA and caps liability thereunder to the greater of the damages suffered and three

times the mortgage originator‘s compensation.

Minimum standards for mortgages. Section 1411 amends TILA to establish minimum standards for

mortgage underwriting, requiring a creditor to make a reasonable and good faith determination that the

borrower has a reasonable ability to repay the loan and to pay all the related taxes, insurance and


assessments. This provision outlines the steps a creditor must take to reach such a determination,

including considering the effects of multiple loans if the creditor knows, or has reason to know, that more

than one mortgage loan will be secured by the same property and verifying the borrower‘s credit history,

income, debt-to-income ratio and employment status. Additionally, when determining a consumer‘s ability

to repay a variable-rate loan, the creditor must use a payment schedule that fully amortizes the loan.

Section 1412 provides a ―qualified mortgage‖ safe harbor that is deemed to satisfy the underwriting

standards set forth in Section 1411. The ―qualified mortgage‖ definition, which the Bureau has the

discretion to modify over time, generally describes a fully documented mortgage loan without negative

amortization or interest-only features that has an annual percentage rate (―APR‖) that does not exceed

the prime rate by more than 1.5 percentage points for a first lien or 3.5 percentage points for a

subordinate lien and that meets certain procedural underwriting standards.

The same ―qualified mortgage‖ definition, modified to exclude loans with adjustable rates and rates that

fall below a certain threshold, is used in Section 1414 to identify loans that may include terms that require

the borrower to pay a prepayment penalty (a maximum of three percent that is reduced by one

percentage point for every year the loan is outstanding) for paying down all or part of the principal.

Creditors that offer loan products that feature prepayment penalties are required also to offer products

that do not impose such penalties.

Additional creditor liability. Section 1413 provides that violations of the steering incentives restrictions

of Section 1403 and the mortgage underwriting standards of Section 1411 may be asserted by a borrower

against a creditor as a matter of defense by recoupment or setoff in defending a foreclosure. In this

context, the usual time restrictions imposed by TILA on claims against creditors do not apply. In addition,

Title XIV doubles TILA‘s existing civil liability fines.

Mandatory arbitration provisions prohibited. Section 1414 provides that no residential mortgage or

open-end consumer credit plan secured by a principal residence may include terms requiring arbitration

or any other non-judicial dispute resolution mechanism. However, this provision does not prevent the

consumer and the creditor or any assignee from agreeing to arbitration or any other non-judicial dispute

resolution mechanism as the method for resolving a dispute or claim at any time after it arises.

Additional notice and disclosure requirements. Title XIV imposes a number of additional notice and

disclosure requirements on creditors. For example, Section 1418 requires creditors to provide a stand-

alone written notice to borrowers six months prior to the date on which the interest rate on an adjustable

rate mortgage will reset that explains how the new interest rate will be determined and that provides a

good-faith estimate of the borrower‘s new monthly payment. Section 1420 requires creditors to include

certain information in billing statements or coupon books, including the amount of the remaining principal

obligation, the current interest rate, the date on which the interest rate will reset, the amount of any


prepayment fee that may be charged, a description of late-payment fees, the creditor‘s contact

information, and the names and contact information for certified consumer counseling programs.

2. High-Cost Mortgages

Title XIV amends TILA to establish a concept of ―high-cost mortgages‖ to which additional requirements

will apply. Section 1431 defines ―high-cost mortgages‖ based on the presence of certain pricing features,

such as an APR for a first mortgage that exceeds the prime rate by more than 6.5 percentage points (8.5

percentage points if the dwelling is personal property and the transaction is for less than $50,000), an

APR for a secondary mortgage that exceeds the prime rate by more than 8.5 percentage points, total

points and fees that exceed five percent of the total transaction amount (eight percent if the transaction is

for less than $20,000), or prepayment fees or penalties that the creditor can collect more than 36 months

after the closing of the transaction or that exceed two percent of the amount prepaid.

The restrictions imposed on high-cost mortgages include limits on balloon payments (Section 1432), a

requirement that prior certification be obtained from an approved home ownership counselor that the

consumer has received appropriate counseling (Section 1433), limits on late payment fees (Section

1433), a prohibition on acceleration other than in connection with a payment default, due-on-sale clause

or material violation of the loan documents (Section 1433), and a prohibition on financing points and fees

(Section 1433).

3. Office of Housing Counseling

Subtitle D of Title XIV establishes the Office of Housing Counseling within HUD. This office will take

responsibility for all activities and matters relating to homeownership counseling and rental housing

counseling, including managing national public service multimedia campaigns to promote housing

counseling, developing suitable education programs, and managing state, local and non-profit grants for

housing counseling assistance.

4. Mortgage Servicing

Escrow accounts. Section 1461 of Dodd-Frank provides that a creditor must establish an escrow

account to cover the payment of taxes, hazard insurance and any other similar required periodic

payments when consummating a consumer credit transaction secured by a first lien on a principal

dwelling, except under limited circumstances, such as where the creditor operates predominantly in rural

or underserved areas, originates few mortgage loans, retains its mortgage loan originations in a portfolio

and meets an asset size threshold.

Section 1461 also provides that creditors may not require that an escrow account be established in

connection with a transaction unless (1) required by federal or state law; (2) a loan is made, guaranteed

or insured by a state or federal government lending or insuring agency; or (3) the transaction is secured

by a first mortgage on a principal dwelling and the principal obligation amount does not exceed certain


specified amounts. Unless the underlying mortgage is terminated, the escrow account established under

these circumstances must remain in existence for a minimum of five years and until such borrower

reaches applicable equity thresholds.

Force-placed hazard insurance. Section 1463 provides that servicers of federally related mortgages

must have a reasonable basis to believe that a borrower has failed to satisfy its contractual obligations to

obtain insurance before the servicer may obtain force-placed hazard insurance. The notice requirements

surrounding force-placed hazard insurance are also clarified and the terms pursuant to which it may be

terminated are articulated.

5. Appraisal Activities

Section 1471 of Dodd-Frank amends TILA to provide that creditors may not extend higher-risk mortgages

without first satisfying certain appraisal requirements. These include requirements that an appraisal

include a physical property visit and that a second appraisal be obtained if the property being purchased

was purchased by its seller within the previous 180 days and is being resold for more than the seller‘s

purchase price.

Section 1472 makes it unlawful to violate appraiser independence standards with respect to any

mortgage loan. Actions that violate the appraiser independence standards include efforts to coerce an

appraiser to base an appraisal on any factor other than appraiser‘s independent judgment; efforts to

encourage the appraiser to appraise at a targeted value; and withholding or threatening to withhold timely

payment for an appraisal report when services were rendered in accordance with the contract. These

standards do not preclude parties from asking appraisers to consider additional information, including

additional comparable properties, to provide additional detail or explanation, or to correct errors. Section

1472 also prohibits appraisers from having a direct or indirect financial interest in the property being

appraised and contains mandatory reporting requirements for individuals involved in real estate

transactions if they believe that an appraiser is failing to comply with professional standards or is

otherwise involved in unethical or unprofessional conduct.

6. Funded Programs

Section 1496 reauthorizes the Emergency Mortgage Relief Program and provides $1 billion in additional

funds for the Emergency Homeowner's Relief Fund, to be used to make loans to help homeowners out of

work to make mortgage payments. Section 1497 provides $1 billion in additional assistance for HUD‘s

Neighborhood Stabilization Program to enable state and local governments to finance the purchase and

redevelopment of abandoned and foreclosed properties. Section 1498 requires the Secretary of HUD to

establish a program for making grants to entities to fund a full range of foreclosure legal assistance for

low-income and moderate-income homeowners and tenants. Funds distributed under Section 1498 are

not permitted to be used in support of class action litigation.


D. IMPROVING CONSUMER ACCESS TO FINANCIAL SERVICES

Title XII of Dodd-Frank, entitled the ―Improving Access to Mainstream Financial Institutions Act of 2010,‖

is designed to encourage the provision of financial products and services to low-income and moderate-

income Americans who currently may not have access to mainstream financial products and services.

Among other things:

The Treasury Secretary is authorized to establish a multiyear program of grants, cooperative agreements, financial agency agreements and other programs and undertakings designed to (1) enable low-income and moderate-income individuals to establish one or more accounts in a federally insured depository institution that are appropriate to meet the financial needs of such persons and (2) improve access to accounts, on reasonable terms, for such persons.

Institutional participation in any such program is restricted to ―eligible entities,‖ including federally insured depository institutions; 501(c)(3) entities; community development financial institutions; state, local and tribal government entities; and partnerships or joint ventures of any of these parties.

The Treasury Secretary is authorized to establish multiyear demonstration programs with eligible entities to provide low-cost, small dollar loans that would serve as alternatives to more costly small dollar loans. Instead of the term ―more costly small dollar loans,‖ the Senate Bill used the term ―payday loans‖; the Dodd-Frank language appears to broaden the potential scope of this provision, but ―payday loans‖ presumably would be a target of any Treasury program that may be established.

Eligible entities participating in the ―small dollar loan alternative‖ program are required to promote and take appropriate steps to ensure the provision of financial literacy and education opportunities to each consumer provided with a loan, such as counseling services, educational courses or wealth-building programs.

The Community Development Banking and Financial Institutions Act of 1994 is amended to permit the Community Development Financial Institutions Fund to make grants to community development financial institutions in order to support small dollar loan programs (consumer loans not exceeding $2,500 and meeting certain other conditions), including funding of loan loss reserves.

The Treasury Secretary is authorized to promulgate regulations to administer the grant programs and

undertakings authorized by Title XII. For each year that a program or project is carried out under these

provisions, the Treasury Secretary must submit a report to the Congressional Banking Committees

describing the activities funded, amounts distributed and measurable results.


E. SPECIAL GRANT PROGRAM TO PROTECT SENIORS

Section 989A of Dodd-Frank provides that the Office of Financial Literacy of the Bureau must establish a

program to provide monetary grants to states and eligible entities (state securities commissions,

insurance commissions and consumer protection agencies) for the protection of individuals aged 62 or

older from misleading and fraudulent marketing in the sale of or advice about financial products (including

misleading designations). Dodd-Frank authorizes appropriations of $8 million in each of fiscal years 2011

through 2015 for this grant program.

Documents

VII. CONSUMER AND INVESTOR PROTECTION and Investor Protection.pdfVII. CONSUMER AND INVESTOR PROTECTION Dodd-Frank contains provisions designed to protect consumers of financial services