Reform 2.0

As we all know by now, the Democratic Party suffered a shellacking in last week's mid-term elections. The Republican Party now has a substantial majority in the House of Representatives and the Democrats' majority in the Senate has been winnowed down to a handful of seats. While the Democrats still have control of the White House and half of Congress, many people have been questioning what the shift in power means for many of the signature initiatives passed during the first two years of the Obama Administration, including financial reform.

While nothing, other than continued partisan bickering, is certain, there are a few relatively safe bets regarding the future of financial reform. A wholesale repeal of the Dodd-Frank Act is highly unlikely; the democrats still have too much control to allow a repeal to occur. Instead, the election's impact on financial reform will occur in more indirect ways. As Jennifer Taub of The Pareto Commons blog indicated, supporters of financial reform will face "the 'Triple A' problem. Appointments. Appropriations. Annoyances."

Regarding appointments to critical new bureaus and offices created under Dodd-Frank — (think the Consumer Financial Protection Bureau or the Office of Financial Research) – for which the President must seek the advice and consent of the Senate, the Republicans in the Senate can block or stall. Under Senate rules, by filibustering, a single Senator can prevent debate and voting on candidates unless sixty Senators vote for cloture — to end the filibuster. Getting sixty votes was already difficult after Senator Scott Brown won the special election in Massachusetts in January. Prior to the midterms, there were only 59 Senators who voted with the Democratic caucus and 41 Senate Republicans. However, as a result of the elections, the appointment process will be even more difficult given that Republicans have picked up at least 6 seats in the Senate.

As for appropriations, Congress controls the budgets for those agencies that are not self-funded. Many fear that this will result in further cuts to already strained budgets at those same agencies tasked both with writing the rules to implement the law and for enforcement of its provisions. Such a result could weaken the already moderate reforms contained in Dodd-Frank.

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Finally, there is the annoyance tactic. It is expected that once the Republicans take over the oversight committees, agency heads will be brought to testify at numerous hearings, distracting them from the very labor-intensive process of making the hundreds of rules and performing studies mandated under Dodd-Frank.

The bottom line is that after the election neither the Democrats, nor the Republicans will be able to get everything they want. Compromise and reaching across the aisle will no longer be a luxury, it will be a necessity. While in the short term, this probably means a slower and more cumbersome implementation of financial reform, hopefully, in the long term, it will lead to a more moderate slate of reforms that both consumers and those in the financial industry will find palatable.

Unwanted Trips to the Courthouse

Cue Edvard Grieg's "Morning Mood." Every day seems to bring something new in the consumer finance investigation and enforcement world, whether it's concern over whether more judges will find problems in the foreclosure paperwork, dismiss the case and give the house to the borrowers like one court did in New York or wondering who might be the next area of interest for all the government investigators. We've got an idea.

To recap, first the spotlight -- at least the media spotlight -- focused on the lenders themselves. Next came interest in the loan servicers, who were essentially ordered to temporarily halt foreclosures and take time for inner reflection on the legitimacy and propriety of their procedures. Then the Attorneys General wanted to check and make sure that the servicers have done their self-analytical homework, of course, so we've got the previously mentioned 50-state AG investigation getting rolling. Lawsuits brought by hungry plaintiffs' attorneys (to paraphrase Colonel Nathan Jessep in "A Few Good Men," "is there another kind?"), including predictable class actions, were sure to follow, and here we go. But there's a twist.

Several news outlets recently have discussed the rash of litigation against servicers and specifically against LPS. Lender Processing Services, Inc. has found itself on the wrong end of a handful of suits, including in courts in Mississippi, Kentucky and Georgia. But these suits aren't just alleging improper foreclosure practices or documentation on the part of the servicers or processing firms like LPS. They're bringing a new target: the lawyers and law firms who participated in the foreclosure process. The Mississippi case charged LPS and its lawyers with illegal fee-splitting (which probably raises additional state Bar/ethics concerns for those lawyers). And as noted today by the Wall Street Journal, courts are putting pressure on lawyers in Maryland, New York, Ohio and Florida (with other states sure to follow) to verify the accuracy, sometimes under penalty of perjury, of the information they're asking the court to rely on in allowing the foreclosure to go forward, or even in defending their fees connected to the foreclosure. We'll be watching all of these developments.