What It Does, Major Components, Criticisms

What Is the Dodd-Frank Wall Road Reform and Shopper Safety Act?

The Dodd-Frank Wall Road Reform and Shopper Safety Act is laws that was handed by the U.S. Congress in response to monetary trade conduct that led to the monetary disaster of 2007–2008. It sought to make the U.S. monetary system safer for shoppers and taxpayers.

Named for sponsors Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), the act incorporates quite a few provisions, spelled out over 848 pages, that had been to be applied over a interval of a number of years.

Understanding the Dodd-Frank Act

The Dodd-Frank Wall Road Reform and Shopper Safety Act is an enormous piece of monetary reform laws that was handed in 2010, throughout the Obama administration.

Generally referred to as the Dodd-Frank Act, or Dodd-Frank, it established quite a lot of new authorities businesses tasked with overseeing the varied parts of the legislation and, by extension, varied elements of the monetary system.

The 2007–2008 monetary disaster is maybe the worst financial disaster to befall the nation (and the world) because the Wall Road crash in 1929. Broadly talking, it was attributable to greed-driven conduct and lax oversight of monetary establishments.

The loosening of monetary trade rules within the a long time main as much as 2007 allowed varied forms of establishments within the U.S. monetary companies trade to lend cash in ways in which had been riskier than ever earlier than. The housing sector specifically skilled large development that could not be supported.

The bubble burst, sending the banking trade and international inventory markets right into a downfall. It created the worst international recession in generations.

Dodd-Frank was created to maintain something related from ever taking place once more.

Elements of the Dodd-Frank Act

Listed here are among the legislation’s key provisions and the way they work:

• Monetary Stability: Underneath the Dodd-Frank Act, the Monetary Stability Oversight Council and the Orderly Liquidation Authority monitor the monetary stability of main monetary companies. The failure of those corporations (deemed too large to fail) might have a severe destructive influence on the U.S. financial system. The legislation additionally gives for liquidations or restructurings through the Orderly Liquidation Fund. This fund was established to help with the dismantling of monetary corporations which were positioned in receivership to forestall tax {dollars} from getting used to prop up such companies. The council has the authority to interrupt up banks which can be thought of so giant as to pose systemic threat. It could additionally power banks to extend their reserve necessities. Equally, the brand new Federal Insurance coverage Workplace was tasked with figuring out and monitoring insurance coverage corporations that additionally felt to be too large to fail.
• Shopper Monetary Safety Bureau: The Shopper Monetary Safety Bureau (CFPB), established beneath Dodd-Frank, was given the job of stopping predatory mortgage lending and serving to shoppers to know the phrases of a mortgage earlier than agreeing to it. This mirrored the widespread sentiment that the subprime mortgage market was the underlying reason behind the 2007–2008 disaster. The CFPB deters mortgage brokers from incomes larger commissions for closing loans with larger charges and/or larger rates of interest. It requires that mortgage originators not steer potential debtors to the mortgage that can end result within the highest fee for the originator. The CFPB additionally governs different forms of client lending, together with credit score and debit playing cards, and addresses client complaints. It requires lenders, excluding vehicle lenders, to reveal data in a kind that’s simple for shoppers to learn and perceive. Such an instance is the simplified phrases now on bank card functions.
• Volcker Rule: The Volcker Rule restricts how banks can make investments, limits speculative buying and selling, and eliminates proprietary buying and selling. Banks will not be allowed to be concerned with hedge funds or personal fairness companies, that are thought of too dangerous. To reduce doable conflicts of curiosity, monetary companies will not be allowed to commerce proprietarily with out enough “pores and skin within the recreation.” The Volcker Rule is clearly a pushback within the path of the Glass-Steagall Act of 1933, which first acknowledged the inherent risks of monetary entities extending industrial and funding banking companies on the identical time. The act additionally incorporates a provision for regulating derivatives, such because the credit score default swaps that had been extensively blamed for contributing to the 2007–2008 monetary disaster. Dodd-Frank arrange centralized exchanges for swaps buying and selling to cut back the potential for counterparty default. It required better disclosure of swaps buying and selling data to extend transparency in these markets. The Volcker Rule additionally regulates monetary companies’ use of derivatives in an try to forestall “too large to fail” establishments from taking giant dangers that may wreak havoc on the broader financial system.
• Securities and Trade Fee (SEC) Workplace of Credit score Rankings: Dodd-Frank established the SEC Workplace of Credit score Rankings as a result of credit standing businesses had been accused of giving out deceptive favorable funding rankings within the lead-up to the monetary disaster. The workplace is charged with making certain that businesses present significant and dependable credit score rankings of the companies, municipalities, and different entities that they consider.
• Whistleblower Program: Dodd-Frank additionally strengthened and expanded the present whistleblower program promulgated by the Sarbanes-Oxley Act (SOX) of 2002. Particularly, it established a compulsory bounty program beneath which whistleblowers can obtain from 10% to 30% of the proceeds from a litigation settlement, broadened the scope of a lined worker by together with workers of an organization’s subsidiaries and associates, and prolonged the statute of limitations beneath which whistleblowers can carry ahead a declare in opposition to their employer from 90 to 180 days after a violation is found.

The Financial Progress, Regulatory Aid, and Shopper Safety Act

When Donald Trump was elected president in 2016, he pledged to repeal Dodd-Frank. Siding with critics, the U.S. Congress handed the Financial Progress, Regulatory Aid, and Shopper Safety Act, which rolled again important parts of the Dodd-Frank Act.

It was signed into legislation by then-President Trump on Might 24, 2018.

These are among the provisions of that legislation, and among the areas by which earlier requirements had been loosened:

• The brand new legislation eased the Dodd-Frank rules for small and regional banks by growing the asset threshold for the appliance of prudential requirements, stress check necessities, and necessary threat committees.
• For establishments which have custody of shoppers’ belongings however don’t perform as lenders or conventional bankers, the brand new legislation supplied for decrease capital necessities and leverage ratios.
• The brand new legislation exempted escrow necessities for residential mortgage loans held by a depository establishment or credit score union beneath sure circumstances. It additionally directed the Federal Housing Finance Company (FHFA) to arrange requirements for Freddie Mac and Fannie Mae to think about different credit score scoring strategies.
• The legislation exempted lenders with belongings of lower than $10 billion from necessities of the Volcker Rule and imposed much less stringent reporting and capital norms on small lenders.
• The legislation required that the three main credit score reporting businesses permit shoppers to freeze their credit score information freed from cost as a method of deterring fraud.

After Joseph Biden was elected president in 2020, the CFPB centered on rescinding guidelines from the Trump period that had been in direct battle with the constitution of the CFPB.

In June 2021, President Biden, together with the U.S. Division of Training and assist from the CFPB, introduced plans to cancel greater than $500 million of scholar mortgage debt, which stays the topic of ongoing litigation. The CFPB has strengthened its oversight of for-profit faculties to tamp down on predatory scholar mortgage practices.

The Biden administration has additionally introduced its intent to reestablish guidelines in opposition to different types of predatory lending, similar to payday loans. Moreover, subprime auto mortgage practices can be addressed by the CFPB.

Criticism of the Dodd-Frank Act

Proponents of Dodd-Frank believed that the legislation would forestall the financial system from experiencing a disaster like that of 2007–2008 and shield shoppers from lots of the abuses that contributed to the disaster.

Detractors, nevertheless, have argued that the legislation might hurt the competitiveness of U.S. companies relative to their overseas counterparts. Particularly, they contend that its regulatory compliance necessities unduly burden group banks and smaller monetary establishments, even if they performed no position in inflicting the monetary disaster.

Such monetary world notables as former Treasury Secretary Larry Summers, Blackstone Group L.P. (BX) CEO Stephen Schwarzman, activist Carl Icahn, and JPMorgan Chase & Co. (JPM) CEO Jamie Dimon additionally argue that, whereas every establishment is undoubtedly safer as a result of capital constraints imposed by Dodd-Frank, the constraints make for a extra illiquid market total.

The dearth of liquidity will be particularly potent within the bond market, the place all securities will not be marked to market and lots of bonds lack a continuing provide of patrons and sellers. The upper reserve necessities beneath Dodd-Frank imply that banks should hold the next share of their belongings in money. This decreases the quantity that they can maintain in marketable securities.

In impact, this limits the bond market-making position that banks have historically undertaken. With banks unable to play the a part of a market maker, potential patrons are more likely to have a tougher time discovering counteracting sellers. Extra importantly, potential sellers might discover it tougher to search out counteracting patrons.

The Backside Line

The Dodd-Frank Act, enacted in 2010, was a direct response to the monetary disaster of 2007–2008 and the following authorities bailouts beneath the Troubled Asset Aid Program (TARP).

This legislation established a variety of reforms all through the whole monetary system, with the aim of stopping a repeat of the 2007–2008 disaster and the necessity for additional authorities bailouts. The Dodd-Frank Act additionally included extra protections for shoppers.

Though the Trump administration reversed and weakened a number of elements of the Dodd-Frank Act, significantly these affecting shoppers, the Biden administration intends to reestablish and strengthen the earlier reversals to guard people who could also be topic to predatory lending practices in industries like for-profit schooling and vehicles.