What Is the Dodd-Frank Act?

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, or, the Dodd-Frank Act, is a set of laws passed to ensure financial stability after the Great Recession of 2008. The Act protects taxpayers from the burden of another bank bailout, as well as unfair treatment by financial organizations, such as money lenders, debt collectors, and credit reporting agencies.

Lack of Financial Oversight Triggered the 2008 Recession

The economic ramifications of the 2008 recession were widespread—small banks closed, large banks required government bailouts, and consumers suffered unimaginable financial setbacks. Recognizing the need to prevent another such catastrophe, Congress set out to identify and address the problem’s cause.

The primary problem, it seemed, was a lack of a central agency overseeing all financial institutions. This absence of uniform oversight left holes in the regulatory system that allowed questionable lending practices to flourish.

The high foreclosure rate that followed ultimately led to a government bailout of the banking sector. Taxpayers—many of whom had already suffered significant financial hits—were left to foot the bill.

(You can review the legislative history of the Act on the website of the Law Librarians’ Society of Washington, DC.)

The Dodd-Frank Act

The Dodd-Frank Act came into being as a way to protect the public from another banking collapse and to provide practical help to individual consumers victimized by unscrupulous actors in the financial industry. The Act solves these problems in two ways:

Regulations safeguarding against toxic lending practices and bank failure.

  • The Financial Stability Oversight Council (FSOC), which oversees the financial industry, shored up regulatory gaps.
  • Banks and nonbanks must retain a higher percentage of cash (make fewer loans) to ensure that they can weather an economic downturn, such as an increase in foreclosures.
  • Banks, nonbanks, and public corporations must register and report certain information (such as CEO compensation), and conduct transactions in a forthright and transparent manner.
  • Financial institutions must truthfully disclose the cost of loans to consumers (including fees).

(You can learn about additional aspects of the Dodd-Frank Act on the website of the U.S. Commodity Futures Trading Commission.)

Meaningful protection and assistance to consumers.

  • The Consumer Financial Protection Bureau (CFPB) instituted rules ensuring individuals receive fair treatment by mortgage lenders and other financial providers.
  • As a result of CFPB’s rules, banks and loan servicers cannot start a foreclosure until a homeowner is 120 days behind on a payment.
  • A mortgage lender or servicer must evaluate an owner's application for a foreclosure alternative, such as a loan modification, during the waiting period and cannot start foreclosing until after completing the review.
  • Individuals can get help with almost any type of financial problem by filing a complaint with the CFPB.

This list represents a few of the protections afforded by the CFPB. If you’d like to learn more, read What Is the Consumer Financial Protection Bureau?

Dodd-Frank Act and the Trump Administration

On February 3, 2017, the Trump administration issued the Presidential Executive Order on Core Principles for Regulating the United States Financial System. It directs the FSOC to evaluate existing laws and to determine whether they support the stated goals of the order. Those goals include:

  • helping Americans build wealth through independent, informed financial decisions,
  • preventing future bank bailouts,
  • instituting regulations that prevent market failures, the use of unscrupulous business tactics, and the distribution of misinformation, and
  • stimulating economic growth.

While the executive order itself does not (and cannot) undo the Dodd-Frank Act, it is assumed that President Trump is signaling Congress that he would like it to implement his campaign promise of dismantling the Act. The actual intent isn’t clear, however, given that the stated goals of the executive order mirror the goals (and practical effect) of the Dodd-Frank Act.

As of this writing (February 10, 2017), the Dodd-Frank Act continues to protect consumers.

(For more information, see Trump Administration Executive Order Targets the Dodd-Frank Act.)

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