From Nudges to Mandates: Dodd-frank Mortgage Regulation As a Case Study in Behavioralist Policy Paradox

Abstract: This article critically analyzes the three primary justifications for the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 and provides a normative evaluation and positive explanation of the way that Dodd Frank regulates consumer mortgage contracts. Among the conclusions: the contractual features targeted by Dodd Frank likely had little to do with the housing collapse and the Great Recession, but instead were targeted for various fairness reasons; substantively, Dodd Frank does not implement the kind of policy changes recommended by behavioral economics, but instead consists of a set of contractual prohibitions, mandates and modestly revised old-style disclosure regulations; these reforms are explained primarily by the positive political economy of competition in the financial services industry and the liability risks imposed by the relevant consumer financial protection laws. In the actual Dodd Frank world, where lenders face potentially massive ex post liability for allowing consumers to choose “predatory” mortgages, nudges inevitably collapse into mandates. This restriction of the set of contracts from which consumers may choose is likely to harm the very subset of consumers that it is intended to help and will inevitably entail huge consumer welfare losses.