Dodd-Frank Act

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.  

• 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.  

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.

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.

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.

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).

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

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:

This has been a guide to What Is Dodd-Frank Act. We explain its provisions, pros, cons, & comparison with the Glass Steagall & Consumer Protection Acts. You can learn more about it from the following articles –

• Investment Company Act Of 1940
• Financial Regulation
• Bank Stress Test