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The Dodd-Frank Act: How it Affects You, Key Features, and Controversies Explained

Last updated 03/28/2024 by

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Summary:
The Dodd-Frank Act is a reform law that was passed in 2010 for the purpose of preventing risky financial activities that caused the 2007-2008 crisis and protecting consumers and taxpayers from predatory lending. The act started several new government agencies with a mission to keep watch on different parts of the financial system. Critics argued the implementation of the Dodd-Frank Act could put U.S. companies at a disadvantage compared to their global competitors. And in response to these criticisms, in 2018, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which significantly reduced the scope and reach of the Dodd-Frank Act. However, the Biden administration is now aiming to restore and strengthen those previous provisions in the act.
The Dodd-Frank Act is one of the biggest reasons there are so many laws regulating Wall Street today. It was first started after the 2007-2008 financial crisis, which left many people wondering how to prevent another economic meltdown. This piece of legislation aimed to protect consumers and taxpayers by making the financial system safer and more transparent. In short, the Dodd-Frank Act was put in place to keep us all from experiencing another financial disaster.
The Dodd-Frank Act, named after its sponsors Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), consists of 848 pages and multiple provisions to be implemented over several years.

Getting a grip on the Dodd-Frank Act

Are you curious about what the Dodd-Frank Act is all about? It’s a groundbreaking financial reform law that was passed back in 2010, during the Obama administration. You may have heard it referred to as Dodd-Frank – that’s just the shorthand. This act brought about several new government agencies with a mission to keep a watchful eye on different parts of the financial system. So, in essence, the Dodd-Frank Act was designed to make sure that we don’t fall victim to the same kind of financial shenanigans that caused the 2008 crisis.
The 2007-2008 financial crisis was a huge disaster that rocked the entire world, and it all started with some seriously greedy behavior and a lack of oversight in the financial industry. In the years leading up to the crisis, regulations were loosened, and financial institutions started lending money loosely as well. The housing market saw massive growth that was completely unsustainable, and when the bubble finally burst, it sent shockwaves through the banking industry and stock markets worldwide. The global recession that resulted was one of the worst in recent memory. The Dodd-Frank Act aims to prevent a recurrence.

Dodd-Frank Act’s components

Check out these crucial provisions of the law and how they function:
  • Financial Stability: Monitors major financial firms to prevent negative impact on the economy. The Orderly Liquidation Fund assists with dismantling firms without using tax dollars. The council can break up banks deemed too large to pose systemic risk and force them to increase reserve requirements. The Federal Insurance Office monitors large insurance companies.
  • Consumer Financial Protection Bureau: Prevents predatory lending and helps consumers understand loan terms. Deters mortgage brokers from earning higher commissions and requires easy-to-understand disclosure of information.
  • Volcker Rule: Restricts banks from risky investments and proprietary trading. Regulates derivatives and requires greater transparency in swap trading.
  • SEC Office of Credit Ratings: Ensures credit rating agencies provide reliable and meaningful ratings.
  • Whistleblower Program: Mandatory bounty program rewards whistleblowers 10-30% of litigation settlement proceeds. Broadens scope of covered employees and extends statute of limitations.

The economic growth, regulatory relief, and consumer protection act

Donald Trump’s election in 2016 raised concerns about the future of the Dodd-Frank Act. He sought to repeal the law, arguing that it stifled economic growth and burdened businesses with excessive regulation. In response to these criticisms, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which significantly reduced the scope and reach of the Dodd-Frank Act.
On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law.
These are some provisions and areas where previous standards were loosened under the law:
  • The law increased the asset threshold for prudential standards, stress test requirements, and mandatory risk committees for small and regional banks.
  • Institutions with custody of clients’ assets but not functioning as traditional bankers have lower capital requirements and leverage ratios under the new law.
  • Escrow requirements for certain residential mortgage loans held by depository institutions or credit unions are exempted under the new law, with the FHFA setting up credit scoring standards for Freddie Mac and Fannie Mae.
  • Lenders with assets less than $10 billion are exempted from the Volcker Rule, and small lenders have less stringent reporting and capital norms.
  • The new law required free credit file freezes for consumers as a way of deterring fraud from the three major credit reporting agencies.
The CFPB rescinded rules from the Trump era that conflicted with its charter under President Biden. In June 2021, President Biden announced plans, with support from the CFPB and the U.S. Department of Education, to cancel over $500 million in student loan debt, which is currently being litigated. The CFPB has increased its oversight of for-profit colleges to curb predatory student loan practices.
The Biden administration plans to reinstate regulations against payday loans and address subprime auto loan practices through the CFPB.

Criticisms of the Dodd-Frank Act

The Dodd-Frank Act was first introduced with the aim of preventing another economic crisis and protecting consumers from financial misconduct. Its supporters were optimistic that the law would effectively address the issues that led to the 2007-2008 crisis.
Critics of Dodd-Frank argued that its implementation could put U.S. companies at a disadvantage compared to their global competitors. They claimed that the law’s regulatory requirements placed an unfair burden on smaller financial institutions, including community banks, that had no involvement in the financial crisis.
Former Treasury Secretary Larry Summers, Blackstone Group L.P. (BX) CEO Stephen Schwarzman, activist Carl Icahn, and JPMorgan Chase & Co. (JPM) CEO Jamie Dimon have joined the debate surrounding the effectiveness of Dodd-Frank. Although each institution is undoubtedly safer under the capital constraints imposed by the law, critics argue that it has resulted in a more illiquid market overall. The imposition of regulatory compliance requirements has created an additional burden for financial institutions, particularly community banks and smaller organizations. This has led to concerns that Dodd-Frank could negatively impact the competitiveness of U.S. firms relative to their foreign counterparts.
The Dodd-Frank Act’s higher reserve requirements force banks to keep more cash, limiting their ability to hold marketable securities, and particularly affecting the bond market’s liquidity.
The reduced market-making role of banks due to Dodd-Frank limits the availability of counteracting sellers and buyers in the bond market, making it difficult for buyers to find sellers and sellers to find buyers.

Frequently asked questions about the Dodd-Frank Act

The purpose of the Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Recession, and it made changes affecting all federal financial regulatory agencies and almost every part of the nation’s financial services industry.
The Dodd-Frank Act is categorized into 16 titles and, by one law firm’s count, it requires that regulators create 243 rules, conduct 67 studies, and issue 22 periodic reports. To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Is the Dodd-Frank Act still in force today?

Dodd-Frank Act is still in effect, but its regulatory power was weakened by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018. Some aspects such as bank stress tests, continue to be employed, and the Federal Reserve releases stress test results periodically.

Can the bond market be impacted by the Dodd-Frank Act?

Dodd-Frank’s higher reserve requirements force banks to hold more cash and less marketable securities, limiting their traditional bond market-making role. As a result, finding buyers and sellers for bonds might become more challenging, making the market less liquid.

How the 2018 rollback of Dodd-Frank regulations affected the financial industry

In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act rolled back Dodd-Frank regulations, raising the asset threshold for more strenuous capital and liquidity requirements from $50 billion to $250 billion. This change reduced the regulations for smaller and medium-sized banks. Observers attributed the collapse of Silicon Valley Bank in March 2023 to the lack of regulatory scrutiny on financial institutions of this size.
The Dodd-Frank Act was born from the 2007-2008 financial crisis and the government’s bailout of large banks under TARP. Signed into law in 2010, the Act implemented a sweeping set of reforms across the entire financial system to prevent another crisis and the need for future bailouts. The Act also added more protections for consumers to guard against predatory lending practices. Despite the Trump administration’s efforts to weaken certain aspects of Dodd-Frank, the Biden administration is now aiming to restore and strengthen those previous protections.

Key takeaways

  • The Dodd-Frank Act is a reform law that was passed in 2010 to prevent risky financial activities and protect consumers and taxpayers from predatory lending.
  • The act brought about several new government agencies with a mission to keep a watchful eye on different parts of the financial system.
  • The Dodd-Frank Act was designed to prevent another financial crisis similar to the 2007-2008 crisis caused by some seriously greedy behavior and a lack of oversight in the financial industry.
  • The Dodd-Frank Act includes crucial provisions such as financial stability, the Consumer Financial Protection Bureau, the Volcker Rule, the SEC Office of Credit Ratings, and the Whistleblower Program.
  • In response to criticisms that Dodd-Frank could put US companies at a disadvantage compared to their global competitors, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018, which significantly reduced the scope and reach of the Dodd-Frank Act.
  • The Biden administration is now aiming to restore and strengthen previous provisions in the Dodd-Frank Act, such as regulations against payday loans and subprime auto loan practices through the CFPB.

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