The Dodd-Frank Act is fully entitled the Dodd-Frank Wall Street Reform and Consumer Protection Act. This enormous law served to reform the financial world following the financial crisis and Great Recession that began in 2008. President Obama’s administration passed it through congress in 2010.
This Dodd-Frank Act legislation is literally thousands of pages long and contains numerous provisions. The regulations of this Dodd-Frank Act law are set for implementation over the course of a number of years. They were meant to reduce the obvious risks for failure in the American financial system. In order to oversee and carry out the numerous parts of the act it addresses, the controversial legislation created a range of new government agencies.
The first of these new agencies is the Financial Stability Oversight Council and Orderly Liquidation Authority. This group is tasked with overseeing major financial firms whose continued financial stability is necessary for the proper and continuous functioning of the U.S. economy.
These companies were negatively referred to as “too big to fail.” The agency also handles necessary restructurings or liquidations of such firms in an orderly fashion should they become too unstable. They are charged with preventing these firms from being propped up with tax dollars. This council has great authority. They can even break apart banks which they deem in their judgment to be so big that they pose a risk to the banking system. It may also order higher reserve requirements for such banks. Another new group the Federal Insurance Office is similarly tasked with identifying and overseeing insurance companies which are too important to fail.
The CFPB Consumer Financial Protection Bureau was created to stop predatory forms of mortgage lending by the lenders. They are also responsible for increasing the simplicity of mortgage terms so that consumers can understand what they are signing before they complete the contracts. The group stops mortgage brokers from obtaining larger commissions when they close loans that have higher interest rates and fees.
It states that originators of mortgages may not direct possible borrowers to loans which provide the largest payouts to the loan originators. This group also governs various other kinds of lending to consumers. Their domain includes debt and credit cards and consumer complaints. They insist that lenders provide information in a manner that is simplest for consumers to comprehend. Credit card application simplified terms are an example of their work.
One potent rule that emerged from this Dodd-Frank Act legislation proved to be the so-called Volcker Rule. Named for the former Federal Reserve Chairman Paul Volcker, the rule was intended to reduce the amount of speculative trading, while simultaneously banning proprietary trading, by banking institutions. Banks have complained that these changes in the business model will make it more difficult to stay profitable.
The rule addresses regulating the derivatives like the infamous credit default swaps that majorly contributed to the financial meltdown in 2008. This rule also limits the ability of financial companies to utilize derivatives. The goal is to stop the systemically critical institutions from building up enormous risks that could ruin the banking system and overall economy.
The Dodd-Frank Act further created the new SEC Office of Credit Ratings. This group received the job of watching the credit agencies to ensure that the credit ratings they provide for various entities prove to be both dependable and reliable. Credit rating companies received a lot of blame for the financial crisis for falsely dispensing investment ratings that were misleading and overly positive.
Critics of the Dodd-Frank Act legislation claim the law will hamper economic growth and lead to higher unemployment in the future. Fans of the act insist that over time it will reduce the chances of the economy suffering from another 2008 styled crisis all the while safeguarding consumers from the abuses that eventually led to the crisis.