The Dodd-Frank Act, officially called the Dodd-Frank Wall Street Reform and Consumer Protection Act, is legislation signed into law by President Barack Obama in 2010 in response to the financial crisis that became known as the Great Recession. Dodd-Frank put regulations on the financial industry and created programs to stop mortgage companies and lenders from taking advantage of consumers. The dense, complex law continues to be a hot topic in American politics: Supporters say it places much-needed restrictions on Wall Street, but critics charge Dodd-Frank burdens investors with too many rules that slow economic growth.
The Great Recession, a crisis that left millions of Americans unemployed and sparked worldwide economic decline, began in December 2007 and lasted well into 2009.
In September 2008, financial instability peaked when the fourth largest investment bank in the United States, Lehman Brothers, collapsed.
Stocks plummeted, and the markets froze. Fear and instability paralyzed the country as large companies and small businesses alike struggled to continue operating.
Many experts and politicians attribute the downfall to a lack of oversight and regulation of financial institutions. Banks were permitted to use hidden fees and lend to unqualified consumers.
In addition, many investors were extending their funds and exhausting their financial reserves. The federal government stepped in quickly, proposing legislation for financial reform.
Origins of Dodd-Frank
The administration of President Barack Obama first proposed the legislation that became known as Dodd-Frank in June 2009. The initial version was presented to the House of Representatives in July 2009.
Senator Chris Dodd and U.S. Representative Barney Frank introduced new revisions to the bill in December 2009. The legislation was eventually named after the two men.
The Dodd-Frank Act officially became law in July 2010.
This bill included the government’s most substantial changes in response to the economy since the Great Depression. In fact, it’s considered the most comprehensive financial reform since the Glass-Stegall Act, which was put in place after the 1929 stock market crash.
What is Dodd-Frank?
The Dodd-Frank Act is a comprehensive and complex bill that contains hundreds of pages and includes 16 major areas of reform.
Simply put, the law places strict regulations on lenders and banks in an effort to protect consumers and prevent another all-out economic recession. Dodd-Frank also created several new agencies to oversee the regulatory process and implement certain changes.
Some of the main provisions found in the Dodd-Frank Act include:
- Banks are required to come up with plans for a quick shutdown if they approach bankruptcy or run out of money.
- Financial institutions must increase the amount of money they hold in reserve to account for potential future slumps.
- Every bank with more than $50 billion of assets must take an annual “stress test,” given by the Federal Reserve, which can help determine if the institution could survive a financial crisis.
- The Financial Stability Oversight Council (FSOC) identifies risks that affect the financial industry and keeps large banks in check.
- The Consumer Financial Protection Bureau (CFPB) protects consumers from the corrupt business practices of banks. This agency works with bank regulators to stop risky lending and other practices that could hurt American consumers. It also oversees credit and debit agencies as well as certain payday and consumer loans.
- The Office of Credit Ratings ensures that agencies provide reliable credit ratings to those they evaluate.
- A whistle-blowing provision in the law encourages anyone with information about violations to report it to the government for a financial reward.
An additional provision of the Dodd-Frank Act is known as the Volcker Rule, named after Paul Volcker.
Volcker was chairman of the Federal Reserve under presidents Jimmy Carter and Ronald Reagan, and chairman of the Economic Recovery Advisory Board under President Obama.
The Volcker Rule forbids banks from making certain investments with their own accounts. For example, banks can’t invest, own or sponsor any proprietary trading operations or hedge funds for their own profit, with some exceptions.
Debate Over Dodd-Frank
Like many legislative bills, Dodd-Frank has sparked debate among politicians, financial experts and American citizens alike.
Supporters of the bill believe its regulations can protect consumers and help prevent another financial crisis. They contend that banks and other institutions were taking advantage of the American people for too long without being held accountable.
Others think the regulations are too stringent and put an end to overall economic growth. Critics also say the legislation makes it more difficult for companies in the United States to compete internationally.
Today, the “too much regulation” and “not enough regulation” sides of the debate over the Dodd-Frank Act are still a source of contention.
In February 2017, President Donald Trump issued an executive order that instructed regulators to review the provisions in the Dodd-Frank Act and compose a report outlining possible reforms.
The Republican-led Congress made several efforts in 2017 and 2018 to roll back some of the consumer-protection provisions found in the Dodd-Frank Act.
While the Dodd-Frank Act has undoubtedly changed the way financial institutions operate in the United States, it’s uncertain just how long the law will stay in full effect.
Dodd-Frank Act, U.S. Commodity Futures Trading Commission.
Dodd-Frank Act: CNBC Explains, CNBC.
H.R.4173 – Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress.gov.
Wall Street Reform: The Dodd-Frank Act, The White House.
The Great Recession, Federal Reserve History.
Senators Want to Roll Back Bank Regulations on the 10-Year Anniversary of the 2008 Financial Crisis. Newsweek.