The Dodd-Frank Wall Street Reform and Consumer Protection Act is a law that regulates the financial markets and protects consumers. Its components are designed to prevent a repeat of the 2008 financial crisis.
Keep reading for a broad overview of what this law did and how it affects you.
What Is the Dodd-Frank Wall Street Reform Act?
The Dodd-Frank Wall Street Reform Act, or simply "Dodd-Frank," is the most comprehensive piece of financial reform since the Glass-Steagall Act. Glass-Steagall regulated banks after the 1929 stock market crash until it was repealed by the Gramm-Leach-Bliley Act in 1999.
One aspect of the Gramm-Leach-Bliley Act deregulated banks' uses of deposited funds, allowing them to once again invest those deposits in unregulated derivatives. Many blame the 2008 recession in large part on the trading of risky derivatives.
The Dodd-Frank Act is named after the two lawmakers who created it: Senator Chris Dodd and Representative Barney Frank. On July 21, 2010, President Obama signed it into law.
Broadly speaking, the provisions in the law sought to protect consumers and taxpayers from the risks of investment that banks make. However, many banks complained that the regulations were too harsh, especially on small banks. Lawmakers and President Donald Trump have sought to roll back aspects of the law, including a major rollback in 2018 that passed with some bipartisan support.
How Does the Dodd-Frank Wall Street Reform Act Work?
Here are some of the ways in which the Dodd-Frank Act sought to make the financial system safer for consumers and taxpayers.
Keeps an Eye on Wall Street
The Financial Stability Oversight Council identifies risks that affect the entire financial industry. If any firms become too big, the FSOC will turn them over to the Federal Reserve for closer supervision. For example, the Fed can make a bank increase its reserve requirement. That will make sure they have enough cash on hand to prevent bankruptcy. The chair of the FSOC is the Treasury secretary. The council has 10 voting members and five nonvoting members. Voting members include the Securities and Exchange Commission, the Fed, the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency, and the Consumer Financial Protection Agency. Dodd-Frank also strengthened the role of whistleblowers protected under Sarbanes-Oxley.
Keeps Tabs on Giant Insurance Companies
Dodd-Frank created a new Federal Insurance Office under the Treasury Department. It identifies insurance companies that create a risk for the entire system. It also gathers information about the insurance industry. In December 2014, for example, it reported on the impact of the global reinsurance market to Congress. The FIO makes sure insurance companies don't discriminate against minorities. It represents the U.S. on insurance policies in international affairs. The FIO works with states to streamline regulation of surplus lines insurance and reinsurance.
Stops Banks From Gambling With Depositors' Money
The Volcker Rule bans banks from using or owning hedge funds for their own profit. It prohibits them from using your deposits to trade for their profit. Banks can only use hedge funds at a customer's request. However, this aspect of the Dodd-Frank Act has been a prominent target for rollback, including multiple proposed and finalized rule changes from agencies like the Fed and the FDIC.
Reviews Federal Reserve Bailouts
The Government Accountability Office can review future Fed emergency loans, and the Treasury Department must approve the new powers. This provision addressed critics who thought the Fed went overboard with its emergency loans and other "bailouts" to the banks during the Great Recession.
Monitors Risky Derivatives
The Securities and Exchange Commission and the Commodity Futures Trading Commission regulate the most dangerous derivatives. They are traded at a clearinghouse, which is similar to a stock exchange. That makes the trading function more smoothly. The regulators can also identify excessive risk and bring it to policy-makers' attention before a major crisis occurs.
Brings Hedge Fund Trades to Light
One of the causes of the 2008 financial crisis was that hedge fund trades had become so complex that they were increasingly difficult for even experienced traders to understand. When housing prices fell, so did the value of the derivatives traded. But instead of dropping a few percentages, their prices fell to zero.
To address this issue, Dodd-Frank requires all hedge funds to register with the SEC. They must provide data about their trades and portfolios so the SEC can assess overall market risk. This gives states more power to regulate investment advisers.
Oversees Credit Rating Agencies
Dodd-Frank created an Office of Credit Ratings at the SEC. It regulates credit-rating agencies like Moody's and Standard & Poor's. Critics of these agencies say they helped fuel the crisis by inaccurately reporting on the safety of some derivatives. Under Dodd-Frank, the SEC can require them to submit their methodologies for review. It can deregister an agency that gives faulty ratings.
Regulates Credit Cards, Loans, and Mortgages
Dodd-Frank created the Consumer Financial Protection Bureau, which consolidated many watchdog agencies and put them under the Treasury Department. It oversees credit reporting agencies and credit and debit cards. It also oversees payday and consumer loans, except for auto loans from dealers. Banking fees are also under the purview of the CFPB. These include fees associated with credit, debit, mortgage underwriting, and more.
Although Dodd-Frank didn't ban risky mortgage loans, such as interest-only loans, it sought to protect homeowners by requiring better disclosure of what the loans actually were. Banks have to prove that borrowers understand the risks. They also have to verify the borrower's income, credit history, and job status.
CFPB also played a role in increasing the FDIC insurance on bank deposits to $250,000.
Many banks fought aspects of Dodd-Frank from the beginning, and in 2018, Congress joined them by rolling back some provisions of the law. The Economic Growth, Regulatory Relief, and Consumer Protection Act eased regulations on "small banks" with assets between $100 billion and $250 billion. Under the looser restrictions, these banks no longer had to run stress tests to ensure they could withstand a major financial catastrophe.
One benefit for consumers under this act is that consumers can now freeze their credit for free. Previously, they had to pay a $10 fee to each credit company.
The bill received some bipartisan support, but it was opposed by Democratic Minority Leader Rep. Nancy Pelosi. Republicans largely favored the bill, as did President Trump. The Trump Administration has signaled that it would approve even further rollbacks of Dodd-Frank provisions.
- The Dodd-Frank Wall Street Reform Act was a massive overhaul of the financial institution passed in the wake of the 2008 financial crisis.
- Broadly speaking, the law sought to enact stricter oversight on banks while expanding protections for consumers and taxpayers.
- One notable aspect of the law was the creation of the Consumer Finance Protection Bureau.
- There have been repeated efforts to roll back Dodd-Frank provisions, some of which have been successful.