Dodd-Frank Act Explanation
Written by True Tamplin, BSc, CEPF®
Updated on July 13, 2021
Dodd-Frank Act Defined
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive financial reform legislation package passed in 2010 in the United States.
A direct response to the 2008 sub-prime mortgage and subsequent financial crisis, its broad sweeping reforms focused on consumer lending reform as well as creating agencies and controls to keep financial institutions in check and from growing “too big to fail.”
Dodd-Frank created multiple agencies:
- The Consumer Financial Protection Bureau: the CFPB is tasked with making consumer loans and mortgages easier to understand so borrowers at least know what risks they are taking on. It also creates limited, fiduciary-like duties for lenders in an effort to deter predatory actions,
- The Financial Stability Oversight Council, which monitors the size and health of major financial institutions as well as oversees their liquidation if need be.
- The SEC Office of Credit Ratings which directly oversee credit rating agencies, which are actually private enterprises.
Dodd-Frank Law Reforms
It also directly enacted reforms such as:
- The Volcker Rule, which stops banks from making speculative investments because these banks hold FDIC-insured consumer deposits,
- Whistleblower protections and rewards programs where employees are actually paid for reporting wrongdoings of their employers to the government.
- Expansion of who must register as investment advisers to include previously excluded hedge fund managers.
There are dozens of other reforms and committees created by the Dodd-Frank Act, greatly expanding the already complex financial regulatory system.
Some people believe that complexity is what lead to the financial crisis in the first place, where murky regulations created loopholes for questionable business practices to take place.
There have already been major reversals of some of these policies for that reason under the Trump administration.
How do you feel on the matter?
Is more regulation the answer or should the government let market forces prevail?