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Dodd-Frank Act


Dodd-Frank Act, officially called Dodd-Frank Wall Street Reform and Customer Protection Act was signed into law by President Barack Obama on July 21, 2010. The Act is voluminous and complex peace of legislation that reshaped U.S regulatory system in many sectors, including consumer protection, trading restrictions and credit ratings. It was the response to financial crisis of 2008 as Dodd-Frank put regulation on financial sector and created laws that stopped mortgage companies and lenders taking advantage of customers. The Act generated criticism that it inhibits growth of the economy and puts to much burden on the U.S. companies.

Many experts blamed the lack of oversight and financial regulations for the crisis. It was the worst economic disaster since Great Depression of 1929. Fall in the interest rates allowed people with poor credit score to pursue their dream of buying a house. Problems appeared when interest rates started rising and many defaulted their payments. This created  subprime mortgage crisis. What is more, banks were allowed to trade derivatives and that same defaulted mortgages were used as a collateral.

The name comes from two sponsors of the Act Senator Chris Dodd and U.S Representative Barney Frank. The Act itself has around 2300 pages and has many provisions but we will take a look at some of the key ones:

The Financial Stability Oversight Council monitors the stability and identifies the risk that affect financial industry, especially big financial firms whose collapse can  have serious negative impact on the economy. If a company becomes too big it is subjected to closer inspection. Also they could require banks to increase its reserve requirements.

The Consumer Financial Protection Bureau prevents exploitative mortgage lending and makes it easier for consumers to understand the terms of mortgage. It oversees credit reporting agencies, credit and debit cards and regulates  credit and bank fees. It requires from banks to verify borrower's income, job status and credit history.

One of the key components is Volcker rule bans banks to participate in speculative and risky trading like hedge funds and proprietary trading. This means that banks can't use depositor's money to engage in that type of investing. This provision also regulates derivatives.

Office of Credit Ratings was created under Dodd-Frank to regulate credit agencies, previously accused for giving misleading information. This way OCR ensures that credit reports are reliable and that they use proper methodology. 

The Act also strengthen and expanded whistleblower (employees who report corporate fraud) program by mandating bounty program, broadening the scope of employees and extended the statute of limitations.

On May 24, 2018 President Donald Trump signed into law Economic growth, Regulatory Relief and Consumer Protection Act rolled back some parts of Dodd-Frank Act.
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