Dodd-Frank Act

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21 Aug, 2024

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Dodd-Frank Act of 2010 is a regulation passed by the United States legislature after witnessing the financial crisis in 2007-08. The main intention of this Act was to prevent any other economic or financial crisis from arising in the future.

The U.S. Dodd-Frank Act history denotes its name after the former U.S. Senator Christopher John Dodd and U.S. House Representative Barney Frank (originally Barnett Frank). This Act ensured transparency and eliminated any financial risks and associated doubts from the consumer's mind. However, there were certain critics of the law.

What Is Dodd-Frank Act?

Dodd-Frank Act refers to the legislation passed by the Federal judiciary to protect the financial services industry from any economic or financial crisis.
After the Great Recession of 2007, U.S. Senator Christopher Dodd and Representative Barney Frank in 2010 worked on the implementation of this act. It happened during the presidency of Barack Obama.
There are, in total, 13 main provisions plus some other provisions related to the Act. They intend to adhere to standards and prescribed regulations to prevent future financial crashes.
Along with this Act, even the Consumer Protection Act was proposed and enacted.

Dodd-Frank Act Explained

The Dodd-Frank Act of 2010, which was the short form for the Dodd-Frank Wall Street Reform and Consumer Protection Act, was a vital step the federal government took to prevent the financial crisis and its effect on the economy. They wanted to protect the nation from any such future consequences. It brought a drastic change in the financial services industry. However, the U.S. Dodd-Frank Act was not alone in the process.

Although the Act was passed in 2010, the Dodd-Frank Act's history dates back to 2007. At the beginning of the year, the federal state had already witnessed the post-effects of the financial crisis. The U.S. economy had begun to deteriorate. The entire financial system failed to perform its functions. In that phase, 465 U.S. banks lost their power. Plus, $689 billion assets of the customers were lost. The prices of goods and real estate hit low. Plus, the economy started facing huge unemployment. Therefore, during the summer of 2009, former Treasury Secretary Timothy Geithner proposed this reform.

After various revisions, finally, in 2010, under the presidency of Barack Obama, the Dodd-Frank Act got released. However, even the Consumer Protection Act was passed at the same time. While the former aimed to reduce financial risks, the latter protected the consumers trading in the financial market.

Provisions

Apart from the history, the summary of the Dodd-Frank Act has various components. Let us look at them:

Provision #1 - Financial Stability Oversight Council (FSOC) (Title I and VIII)

FSOC studies the factors affecting the financial industry and protecting consumers from malpractices.

Provision #2 - Federal Reserve System (Title 11)

This summary of the Dodd-Frank Act deals with the federal reserve section 13(3). Accordingly, the Federal Reserve Bank will be a part of the credit and lending facility.

Provision #3 - Orderly Liquidation Authority (Title 2)

It looks after the failed financial institutions under the Bankruptcy code.

Provision #4 - Securitization (Title 9)

Securitizers must have a solution while issuing asset-backed securities to avoid default.

Provision #5 - Bank-holding companies (BHC) (Title I, III, VI, and X)

Here, Title I (Collins Amendment) speaks about minimum capital requirements. Title III (Durbin Amendment) states that the interchange transaction fees for debit card issuers are reasonable. But it is only applicable for issuers with assets exceeding $1 billion. Also, the office of Thrift Supervision (OTS) was transferred to the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC).

Other related changes in the federal deposit insurance are where the Depositors Insurance Fund (DIF) ratio must be 1.35%. In addition, the Volcker Rule states the avoidance of trading risky assets in the market.

Provision #6 - Bureau of Consumer Financial Protection (CFPB) (Title X)

The CFPB supervises consumer products and protects illegal ones. They release information in a readable and easy format for the consumers to grasp better.

Other Provisions

Apart from the above-stated provisions, the Dodd-Frank Act includes more components. Let us look at them:

Provision #7 - Truth in Lending Act (TILA) (Title 14)

Under the Act, the lenders must verify the borrower's repaying ability based on certain factors. They must meet certain requirements under the Ability-to-Repay, before availing mortgage.

Provision #8 - Derivatives Contract (Title 7 and 16)

This provision of the Dodd-Frank Act regulates the exchange of swaps based on interest rates, physical commodities, currencies, and credit default swaps.

Provision #9 - Nationally Recognized Statistical Rating Organization (NRSRO) (Title 9)

According to this provision, the NRSRO must provide credit ratings for financial products. Also, the SEC Office of Credit Ratings got established. It provided reports and disclosures, created standards for legal liability, and other functions.

Provision #10 - Investor Protection (Title 9)

This title enabled the setup of an Investor Advisory Committee for matters of investor protection. Besides, financial advisers in municipal securities markets should register with the SEC.

Provision #11 - Hedge Funds (Title 4)

Private advisers with over $150 million in assets should register with the SEC.

Provision #12 - Executive Compensation and Corporate Governance (Title 9)

This provision required public companies to disclose the corporate governance details, including the payroll structure, to the CEO (Chief Executive Officer). Also, financial regulators were required to adhere to the new standards created.

Provision #13 - Federal Insurance Office (Title 5)

The last provision dealt with the insurance companies and related regulations.

Others

There are various other provisions related to the Act in the legislation. They include improving access to financial institutions (Title 12), the Troubled Asset Relief Program (TARP) (Title 13), and the Office of Women (Section 342).

Pros And Cons

Since the Dodd-Frank Act has been life-saving for the state, it has certain pros and cons. Let us look at them:

Pros	Cons
The Act protected the consumers (via CFPB) while dealing in the financial market.	Too many regulations ceased the path of profits for the economy.
The implementation of the Volcker Rule refrained the banks from making speculative investments.	The liquidity of financial instruments in the market may reduce.
There was proper disclosure, and the financial service industry started adhering to the guidelines and standards.	The Treasury may be required to spend more against its proposed budget.
Various debt, mortgage, and derivatives contract regulations enabled growth.	Even after enactment, federal housing agencies did not follow some regulations.
Plus, whistleblower provisions within the state were strengthened.
The methods for credit rating were improvised.
New standards were issued before lenders while issuing mortgages.
Even the pay structure and gap between the CEO and workers were considered.

Dodd-Frank Act vs Glass Steagall Act vs Consumer Protection Act

Although the Dodd-frank and Consumer Protection Acts were issued on the same date, they differ from the Glass-Steagall Act. Therefore, it is vital to look at their differences:

Basis	Dodd-Frank Act	Glass Steagall	Consumer Protection Act
Meaning	This Act aims to prevent any financial crisis affecting the financial service industry.	Glass Steagall Act refers to the provisions released for separating commercial and investment banks.	The consumer protection act intends to provide safety measures to protect consumers in the financial market.
Total Provisions	There are 13 provisions, along with other miscellaneous titles.	It includes four provisions related to the Banking Act of 1933.	The major provisions of the consumer protection act are restricted to six.
Enactment	In 2010, U.S. Senator Christopher Dodd and Representative Barney Frank were under the presidency of Barack Obama.	After the stock market crash in 1929, U.S. Senator Carter Glass and Representative Henry Steagall passed the Banking Act.	Along with the Dodd-Frank Act, it was released.

Frequently Asked Questions (FAQs)

1. Which element in damp does the Dodd-Frank Act add?

As per the Act, sections 1031 and 1036 are added to the UDAAP. Here, they refer to unfair, deceptive, or abusive acts or practices on financial products. Plus, it is illegal to practice them in the United States.

2. Is the Dodd-Frank Act still in effect?

Yes, the Act is still in practice in the Federal state. It was reformed on May 22, 2018, during former President Donald Trump's rule. It came to be known as Dodd-Frank Wall Street Reform.

3. Which federal agency was created by the Dodd-Frank Act?

Although many agencies became a part of the Act, the Consumer Financial Protection Bureau (CFPB) was in power. They ensure that the financial firms adhere to the standards and regulations.

4. How many titles organize the Dodd-Frank Act?

In total, there are 16 titles within the Dodd-Frank Act. These titles cover various topics and also provisions of the Act.