Dodd-Frank Act

Contributor(s): Linda Rosencrance

The Dodd-Frank Act (fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) is a United States federal law that places regulation of the financial industry in the hands of the government. The legislation, which was enacted in July 2010, created financial regulatory processes to limit risk by enforcing transparency and accountability. 

Because the Great Recession of the late 2000s was due in part to low regulation and high reliance on large banks, one of the main goals of the Dodd-Frank Act was to subject banks to more stringent regulation. The Act created the Financial Stability Oversight Council (FSOC) to address persistent issues affecting the financial industry and prevent another recession.

By keeping the banking system under a closer watch, the Act seeks to eliminate the need for future taxpayer-funded bailouts. To both ensure cooperation by financial insiders and fight corruption in the financial industry, the Dodd-Frank Act contains a whistleblowing provision to encourage those with original information about security violations to report them to the government. Whistleblowers receive a financial reward.

The Dodd-Frank Act followed a number of financial regulation bills passed by Congress to protect consumers, including the Sarbanes-Oxley Act in 2002 and the Gramm-Leach-Bliley Act in 1999. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) to protect consumers from large, unregulated banks and consolidate the consumer protection responsibilities of a number of existing bureaus, including the Department of Housing and Urban Development, the National Credit Union Administration and the Federal Trade Commission.

The Consumer Financial Protection Bureau works with regulators in large banks to prevent risky business practices that ultimately hurt consumers. In addition to regulatory controls, the CFPB provides consumers with access to truthful information about mortgages and credit scores along with a 24-hour, toll-free consumer hotline to report issues with financial services.

Other provisions of Dodd-Frank include the creation of the Financial Stability Oversight Council (FSOC), which is tasked with monitoring the financial stability of large companies whose failure would negatively impact the United States economy and the Volcker Rule, which requires financial institutions to separate their investment and commercial functions.

Proponents of Dodd-Frank believe the act prevents the United States economy from experiencing a crisis like that of 2008 and protects consumers from many of the abuses that contributed to that crisis. Detractors believe the compliance burdens the legislation creates makes it difficult for U.S. companies to compete with foreign counterparts. In February of 2017, President Donald Trump issued an executive order that directed regulators to review provisions put in place by the Dodd-Frank Act and submit a report on potential regulatory and legislative reforms.

What the Dodd-Frank Act does

The Dodd-Frank Act put restrictions on the financial industry and created programs to stop mortgage companies and lenders from taking advantage of consumers. Dodd-Frank added more mechanisms that enabled the government to regulate and enforce laws against banks as well as other financial institutions.

The act put into place a wide range of reforms affecting nearly every aspect of the financial system aimed at preventing a repeat of the 2008 financial crisis and the need for future government bailouts.

Dodd-Frank also established two new agencies: the Financial Stability Oversight Counsel and the Consumer Financial Protection Bureau to enforce rules and protect consumers. 

Key provisions

Key provisions of the Dodd-Frank Act include:

  • The Volcker Rule, which is aimed at preventing commercial banks from taking part in speculative activities and proprietary trading for profit. Specifically, it limits banks’ investments in private equity funds and hedge funds.
  • The Consumer Financial Protection Bureau (CFPB) was established as an independent financial regulator to oversee consumer finance markets, including student loans, credit cards, payday loans and mortgages. The CFPB can supervise certain financial companies, write new rules as well as enforce consumer protection laws via fines and other means.
  • The SEC Office of Credit Ratings ensures that agencies provide reliable credit ratings of the businesses, municipalities and other entities they evaluate.
  • The whistleblower program established a mandatory bounty program that enables whistleblowers to receive from 10% to 30% of the proceeds from a litigation settlement. In addition, the program broadened the definition of covered employees to include employees of a company’s affiliates and subsidiaries. It also extended the statute of limitations under which whistleblowers can bring forward claims against their employers from 90 days to 180 days after a violation is discovered.

History of the Dodd-Frank Act

The Dodd-Frank Act was introduced after the financial crisis of 2008 to protect consumers and maintain the stability of the financial system. President Barack Obama’s administration first proposed the legislation that became known as Dodd-Frank in June 2009. The first version of the act was presented to the House of Representatives in July 2009.

Senator Christopher Dodd (D-Conn,), and U.S. Representative Barney Frank (D-Mass.) introduced new revisions to the bill in December 2009. The act was eventually named after the two legislators. The Dodd-Frank Act officially became law in July 2010.

Criticism and Rollback

Critics of Dodd-Frank argued that limiting the risks financial firms can take also limited the growth potential of these institutions, lowering the overall liquidity of the market. They also said that the added regulations hampered smaller financial institutions and community banks.

As a result, Congress passed a rollback of Dodd-Frank rules for these small banks on May 2, 2018. The Economic Growth, Regulatory Relief, and Consumer Protection Act eased regulations on small and midsize banks. Banks with between $100 billion and $250 billion in assets are no longer in the category of “too big to fail” and thanks to the rollback now face lower levels of scrutiny over their stability and readiness for another downturn. This makes it easier for community lending institutions and smaller banks to operate.

Additionally, these smaller banks no longer have to comply with the Volcker Rule so those with less than $10 billion in assets can again use depositors’ funds for risky investments. Under the rollback, fewer than 10 banks, including Wells Fargo and J.P. Morgan, have to deal with the strictest regulations of the Dodd-Frank Act.

Economist Ben Bernanke provides an overview of the Dodd-Frank Act.

This was last updated in June 2019

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No issues, but would like to know more about the Dodd-frank Act.
Karimaziz, what are you interested in learning about regarding the Act? Data management issues, compliance issues, etc.?
Not all of the Dodd-Frank Act provisions have been finalized. Do you think all the proposed rules will pass?
I don't know anything about this yet.
Dodd-Frank requires financial institutions to tag, aggregate and share risk data. How might the Act's repeal affect IT departments?
I've seen that one of the main goals the new administration intends to do is dismantle Dodd-Frank. What would the ramifications of this action be?
Can you please in simple terms explain what the Dodd-Frank Act does. If repealed, what would that mean?
I can tell you this that this law held me up from closing on the deal to buy my house and it also adds three waiting days after your loan is approved from the bank. Another way for the Democratic/ Liberal Government to control the people and Businesses. I hope to hell that Trump will overturn this stupid Law!
The parts of this law under RESPA that offers consumer protections we need to keep. I hope you get a good servicer because I did not. Then you will wish to have certain provisions of this law in place.
What does the Dodd-Frank Act say about vendors keeping part of convenience fee for debit - credit card transactions?
Yes I agree to sharing more data with the consumer. 
Is part of this law about an insurance company being required to notify a mortgage holder of damage to the mortgaged property?

1.       Define a whistleblower, as it relates to the Wells Fargo whistleblower. 

I keep hearing from friends that the Dodd Frank Act makes it possible for financial institutions to use American citizens savings and investment funds to bail out U. S. banks in the event of a a financial crisis. Is this accurate?
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