Dodd–Frank Wall Street Reform and Consumer Protection Act

What Is the Dodd-Frank Wall Street Reform Act?

The Dodd-Frank Wall Street Reform Act, or simply "Dodd-Frank," is the most comprehensive piece of financial reform since the Glass-Steagall Act. Glass-Steagall regulated banks after the 1929 stock market crash until it was repealed by the Gramm-Leach-Bliley Act in 1999.

The Dodd-Frank Act is named after the two lawmakers who created it: Senator Chris Dodd and Representative Barney Frank. On July 21, 2010, President Obama signed it into law.1

Broadly speaking, the provisions in the law sought to protect consumers and taxpayers from the risks of investment that banks make. However, many banks complained that the regulations were too harsh, especially on small banks. Lawmakers and President Donald Trump have sought to roll back aspects of the law, including a major rollback in 2018 that passed with some bipartisan support.

Keeps an Eye on Wall Street

The Financial Stability Oversight Council identifies risks that affect the entire financial industry. If any firms become too big, the FSOC will turn them over to the Federal Reserve for closer supervision. For example, the Fed can make a bank increase its reserve requirement. That will make sure they have enough cash on hand to prevent bankruptcy. The chair of the FSOC is the Treasury secretary. The council has 10 voting members and five nonvoting members. Voting members include the Securities and Exchange Commission, the Fed, the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency, and the Consumer Financial Protection Agency.

Dodd-Frank also strengthened the role of whistleblowers protected under Sarbanes-Oxley.

Dodd-Frank created a new Federal Insurance Office under the Treasury Department. It identifies insurance companies that create a risk for the entire system. It also gathers information about the insurance industry. In December 2014, for example, it reported on the impact of the global reinsurance market to Congress. The FIO makes sure insurance companies don't discriminate against minorities. It represents the U.S. on insurance policies in international affairs. The FIO works with states to streamline regulation of surplus lines insurance and reinsurance.

Stops Banks From Gambling With Depositors' Money

The Volcker Rule bans banks from using or owning hedge funds for their own profit. It prohibits them from using your deposits to trade for their profit. Banks can only use hedge funds at a customer's request. However, this aspect of the Dodd-Frank Act has been a prominent target for rollback, including multiple proposed and finalized rule changes from agencies like the Fed and the FDIC.

Reviews Federal Reserve Bailouts

The Government Accountability Office can review future Fed emergency loans, and the Treasury Department must approve the new powers. This provision addressed critics who thought the Fed went overboard with its emergency loans and other "bailouts" to the banks during the Great Recession.

Monitors Risky Derivatives

The Securities and Exchange Commission and the Commodity Futures Trading Commission regulate the most dangerous derivatives. They are traded at a clearinghouse, which is similar to a stock exchange. That makes the trading function more smoothly. The regulators can also identify excessive risk and bring it to policy-makers' attention before a major crisis occurs.

Brings Hedge Fund Trades to Light

One of the causes of the 2008 financial crisis was that hedge fund trades had become so complex that they were increasingly difficult for even experienced traders to understand. When housing prices fell, so did the value of the derivatives traded. But instead of dropping a few percentages, their prices fell to zero.

To address this issue, Dodd-Frank requires all hedge funds to register with the SEC. They must provide data about their trades and portfolios so the SEC can assess overall market risk. This gives states more power to regulate investment advisers.

Oversees Credit Rating Agencies

Dodd-Frank created an Office of Credit Ratings at the SEC. It regulates credit-rating agencies like Moody's and Standard & Poor's. Critics of these agencies say they helped fuel the crisis by inaccurately reporting on the safety of some derivatives. Under Dodd-Frank, the SEC can require them to submit their methodologies for review. It can deregister an agency that gives faulty ratings.

Regulates Credit Cards, Loans, and Mortgages

Dodd-Frank created the Consumer Financial Protection Bureau, which consolidated many watchdog agencies and put them under the Treasury Department. It oversees credit reporting agencies and credit and debit cards. It also oversees payday and consumer loans, except for auto loans from dealers. Banking fees are also under the purview of the CFPB. These include fees associated with credit, debit, mortgage underwriting, and more.

Although Dodd-Frank didn't ban risky mortgage loans, such as interest-only loans, it sought to protect homeowners by requiring better disclosure of what the loans actually were. Banks have to prove that borrowers understand the risks. They also have to verify the borrower's income, credit history, and job status.