Dodd-Frank Wall Street Reform and Consumer Protection Act

What Is the Dodd-Frank Wall Street Reform and Consumer Protection Act?

The Dodd-Frank Wall Street Reform and Consumer Protection Act was made as a response to the financial crisis of 2007-2008. Named after supports Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), the act contains various provisions, explained more than 848 pages, that should have been carried out over a period of several years.

Grasping Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is an enormous piece of financial reform legislation that was passed in 2010, during the Obama administration. The Dodd-Frank Wall Street Reform and Consumer Protection Act — ordinarily abbreviated to just the Dodd-Frank Act — laid out a number of new government agencies entrusted with supervising the different components of the law and, by extension, different parts of the financial system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was planned to forestall another financial crisis like the one of every 2007-2008.

Dodd-Frank Wall Street Reform and Consumer Protection Act Components

These are a portion of the law's key provisions and how they work:

Financial Stability: Under the Dodd-Frank Act, the Financial Stability Oversight Council and the Orderly Liquidation Authority monitor the financial stability of major financial firms, in light of the fact that the failure of these companies could adversely affect the U.S. economy (companies considered too big to fail). The law additionally accommodates liquidations or restructurings by means of the Orderly Liquidation Fund, laid out to help with the destroying of financial companies that have been put in receivership and keep tax dollars from being utilized to prop up such firms. The council has the authority to break up banks that are considered so large as to present systemic risk; it can likewise force them to increase their reserve requirements. Essentially, the new Federal Insurance Office was entrusted with recognizing and monitoring insurance companies considered too big to fail.
Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau (CFPB), laid out under Dodd-Frank, was given the job of forestalling predatory mortgage lending (mirroring the far reaching sentiment that the subprime mortgage market was the underlying reason for the 2007-2008 catastrophe) and make it simpler for consumers to comprehend the terms of a mortgage before consenting to them. It dissuades mortgage brokers from earning higher commissions for closing loans with higher fees as well as higher interest rates and requires that mortgage originators not steer likely borrowers to the loan that will bring about the highest payment for the originator. The CFPB likewise oversees different types of consumer lending, including credit and debit cards, and addresses consumer complaints. It requires lenders, excluding automobile lenders, to uncover information in a form that is simple for consumers to peruse and comprehend; a model is the simplified terms presently on credit card applications.
Volcker Rule: Another key component of Dodd-Frank, the Volcker Rule, confines how banks can invest, restricting speculative trading and wiping out proprietary trading. Banks are not permitted to be associated with hedge funds or private equity firms, which are considered too risky. To limit potential conflicts of interest, financial firms are not permitted to trade proprietarily without adequate "dog in the fight." The Volcker Rule is plainly a push back in the direction of the Glass-Steagall Act of 1933, which previously recognized the inherent risks of financial substances broadening commercial and investment banking services simultaneously. The act likewise contains a provision for managing [derivatives](/subsidiary, for example, the credit default swaps that were widely faulted for contributing to the 2007-2008 financial crisis. Dodd-Frank set up centralized exchanges for swaps trading to reduce the possibility of counterparty default and required greater disclosure of swaps trading information to increase transparency in those markets. The Volcker Rule likewise manages financial firms' utilization of derivatives trying to forestall "too big to fail" institutions from taking large risks that could unleash ruin on the more extensive economy.
Securities and Exchange Commission (SEC) Office of Credit Ratings: Because credit rating agencies were blamed for contributing to the financial crisis by giving out misleadingly favorable investment ratings, Dodd-Frank laid out the SEC Office of Credit Ratings. The office is charged with guaranteeing that agencies give meaningful and reliable credit ratings of the organizations, regions, and different substances that they assess.
Whistleblower Program: Dodd-Frank additionally fortified and expanded the existing whistleblower program declared by the Sarbanes-Oxley Act (SOX) of 2002. In particular, it laid out a mandatory bounty program under which whistleblowers can receive from 10% to 30% of the proceeds from a litigation settlement, widened the scope of a covered employee by including employees of a company's subsidiaries and affiliates, and extended the statute of limitations under which whistleblowers can present a claim against their employer from 90 to 180 days after a violation is discovered.

Economic Growth, Regulatory Relief, and Consumer Protection Act

At the point when Donald Trump was chosen president in 2016, he pledged to rescind Dodd-Frank. In May 2018, the Trump administration marked another law rolling back critical bits of Dodd-Frank. Agreeing with the pundits, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which moved back critical segments of the Dodd-Frank Act. It was endorsed into law by then-President Trump on May 24, 2018. These are a portion of the provisions of the new law, and a portion of the areas wherein standards were loosened:

The new law facilitates the Dodd-Frank regulations for small and regional banks by expanding the asset threshold for the application of prudential standards, stress test requirements, and mandatory risk committees.
For institutions that have custody of clients' assets however don't function as lenders or traditional bankers, the new law accommodates lower capital requirements and leverage ratios.
The new law excludes escrow requirements for residential mortgage loans held by a depository institution or credit association under certain conditions. It likewise directs the Federal Housing Finance Agency (FHFA) to set up standards for Freddie Mac and Fannie Mae to consider alternative credit scoring methods.
The law excludes lenders with assets of under $10 billion from requirements of the Volcker Rule and forces less rigid reporting and capital standards on small lenders.
The law expects that the three major credit reporting agencies permit consumers to freeze their credit documents free of charge as an approach to stopping fraud.

After Joseph Biden was chosen president in 2020, the CFPB zeroed in on repealing rules from the Trump period that were in direct conflict with the charter of the CFPB. In June 2021, President Biden, alongside the U.S. Department of Education and support from the CFPB, canceled more than $500 million of student loan debt. The CFPB has reinforced its oversight of revenue driven colleges to tamp down on predatory student loan practices. The Biden administration has additionally announced their intent to restore rules against other predatory lending, for example, payday loans. Moreover, subprime auto loan practices will be tended to by the CFPB.

Analysis of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Proponents of Dodd-Frank accepted the law would keep the economy from encountering a crisis like that of 2007-2008 and safeguard consumers from a significant number of the maltreatments that contributed to the crisis. Detractors, nonetheless, have contended that the law could hurt the competitiveness of U.S. firms relative to their foreign counterparts. In particular, they contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions — in spite of the fact that they played no job in causing the financial crisis.

Such financial world notables as former Treasury Secretary Larry Summers, Blackstone Group L.P. (BX) CEO Stephen Schwarzman, activist Carl Icahn, and JPMorgan Chase and Co. (JPM) CEO Jamie Dimon likewise contend that, while every institution is without a doubt more secure due to the capital constraints forced by Dodd-Frank, the constraints make for a more illiquid market overall.

The lack of liquidity can be particularly strong in the bond market, where all securities are not mark to market and many bonds lack a constant supply of purchasers and venders. The higher reserve requirements under Dodd-Frank mean that banks must keep a higher percentage of their assets in cash, which diminishes the amount that they are able to hold in marketable securities.

In effect, this limits the bond market-production job that banks have traditionally embraced. With banks unable to play the part of a market maker, prospective purchasers are probably going to make some harder memories finding counteracting merchants. All the more significantly, prospective dealers might find it more challenging to track down counteracting purchasers.

The Bottom Line

The Dodd-Frank Act, enacted in 2010, was a direct response to the financial crisis of 2007-2008 and the following government bailouts under the Troubled Asset Relief Program (TARP).

This law laid out many reforms all through the whole financial system, determined to forestall a repeat of the 2007-2008 crisis and the requirement for additional government bailouts. The Dodd-Frank Act likewise incorporated extra protections for consumers.

Albeit the Trump administration turned around and debilitated several parts of the Dodd-Frank Act, particularly influencing consumers, the Biden administration expects to restore and reinforce the previous inversions to safeguard people subject to predatory lending practices in industries, for example, revenue driven education and automobiles.

Features

Pundits of the law contend that the regulatory burdens it forces could make U.S. firms less competitive than their foreign counterparts.
The Dodd-Frank Wall Street Reform and Consumer Protection Act targeted the sectors of the financial system that were accepted to have caused the 2007-2008 financial crisis, including banks, mortgage lenders, and credit rating agencies.
In 2018, Congress passed another law that moved back some of Dodd-Frank's limitations.

FAQ

What are a few reactions of the Dodd-Frank Act?

Detractors of the Dodd-Frank Act have contended that the law could hurt the competitiveness of U.S. firms relative to their foreign counterparts. In particular, pundits contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions — regardless of the fact that they played no job in causing the financial crisis. That's what several financial world notables contended, while every institution is without a doubt more secure due to the capital constraints forced by Dodd-Frank, the constraints likewise make for a more illiquid market overall.

What are the key components of the Dodd-Frank Wall Street Reform and Consumer Protection Act?

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Oversight Council and the Orderly Liquidation Authority monitored the financial stability of major financial firms, in light of the fact that their failure could adversely affect the U.S. economy.The Consumer Financial Protection Bureau (CFPB) was given the job of forestalling predatory mortgage lending. The Volcker Rule restricted how banks can invest, restricting speculative trading and wiping out proprietary trading. The Securities and Exchange Commission's (Sec's) Office of Credit Ratings was charged with guaranteeing that agencies give meaningful and reliable credit ratings of the elements that they assess. At last, Dodd-Frank additionally fortified and expanded the existing whistleblower program proclaimed by the Sarbanes-Oxley Act (SOX).

How should the Dodd-Frank Act influence the bond market?

The expected lack of liquidity due to the higher reserve requirements under Dodd-Frank means that banks must keep a higher percentage of their assets in cash, which diminishes the amount that they are able to hold in marketable securities. In effect, this limits the bond market- making job that banks have traditionally embraced. With banks unable to play the part of a market maker, prospective purchasers are probably going to make some harder memories finding counteracting dealers. All the more significantly, prospective dealers might find it more hard to track down counteracting purchasers.