Wall Street is jittery over what impact the Wall Street Reform and Consumer Protection Act may have on a financial company’s revenues and compliance burdens. Consumers, on the other hand, have bigger fish to fry. They see flat wage growth, high unemployment, the need to de-leverage, and threats of double-dip recessions. The state of the economy puts protection from Wall Street fat cats a low priority.
Still, the Act, which President Obama is expected to sign on Friday, raises questions about how the relationship between producers and distributors of financial services products and consumers will change, particularly on the issues of fraud and abuse.
Rather than bore you with a straight black letter reading of the law, let‘s apply a likely scenario. While the following is based on actual events, the names and certain details have been changed to protect the consumer.
Michelle Ramirez has entered an agreement with financial institution A where institution A will finance $500,000 of the purchase price of a home. The total price of the home is $750,000. As consideration for institution A’s underwriting and to cover institution A’s preparation, document, and other costs, Ramirez plops down $10,000. Should Ramirez not make a good faith effort to find another financial institution willing to underwrite the remaining $250,000, Ramirez will lose $10,000’
Well, the deadline for finding another underwriter passes and Ramirez loses $10,000. Needless to say, Ramirez is perturbed and decides to give this new Wall Street Reform and Consumer Protection Act a shot.
Fortunately for Ramirez, the newly installed bureau chief, Elizabeth Warren, decides to handle her complaint personally. Ramirez has alleged unfairness, deception, and abuse in her complaint. To determine if there was unfairness, Warren will apply a “substantial injury” test. Ramirez must show, under the Act, that the underwriter’s actions substantially injured her and that Ramirez could not reasonably avoid the injury.
Anyone who has been in the consumer protection game, whether as consumer advocate or attorney defending a company, will tell you that words like reasonably and substantial injury strike fear in the hearts of most mortal jurisprudential warriors.
How do you determine whether Ramirez could have reasonably avoided the loss of $10,000? On the one hand, this is a business owner who can read and is accustomed to reading contracts. She must have known and been able to ascertain that unless she met a deadline for securing additional financing, she would be out of $10,000.
On the other hand, should we hold Ramirez’s business experience against her? Anyone can be confused by a contract, especially if it was poorly written. How could Ramirez have reasonably avoided the injuries brought on by a poorly written contract? Does this mean that one standard will be applied to one type of consumer, say educated consumers versus lesser educated consumers?
I do expect one good thing to come out of this otherwise futile exercise in consumer protection. At last we will have documentation to dispel the myth that the financial crisis was primarily the cause of reckless behavior on the part of financial companies. As this bureau will find, like every other consumer protection agency I have worked for, it is the illiteracy of the consumer combined with putting his feelings ahead of rational thought, that more than likely leads to his failure to protect himself while causing consumer affairs headaches for financial service providers.