If you have an interest in learning about regulatory changes that affect the American financial system, then you have probably come across the 2010 Dodd-Frank Act in your daily perusal of the news. This was a federal act that got signed into law in the summer of 2010 by then President Barack Obama. Its dual main purpose was to help reform Wall Street by increasing federal regulation of American banks, and to help protect American consumers by insisting on more transparent communication from financial institutions involved in lending practices to consumers.
How and Why the Act Was Proposed
Like all acts eventually signed into federal law, this one started its life in Congress and had congressional sponsors. The two people most credited with moving the bill forward were Senator Christopher J. Dodd and Representative Barney Frank, which is how the act got its name. The full name of the legislation is the Dodd-Frank Wall Street Reform and Consumer Protection Act.
2010 was the year it was formally signed into law, and the year gives you a good indication of why the act was initially proposed. The United States went through what is termed a financial crisis in the years 2007 and 2008, one which had been building since the earlier 2000s. This was a complex time for the American financial system and worth reading more about to gain fuller understand of why the government felt the Dodd-Frank Act was necessary. Some elements of the crisis included banks beginning to fail in the U.S. and abroad. Some of the bank problems were due to difficult patterns in mortgage rates and lending practices. Low rates earlier in the decade meant many people had taken out loans for homes, and then interest rates had soared much higher. Financial institutions that made the loans were filing for bankruptcy.
Some of the Act’s Provisions
In a financially interconnected world, problems like this can lead quickly to recession and ultimately to financial depression. The U.S. government passed this complex act of over 2,000 pages to address some of the biggest problems and avoid that kind of financial panic. It established new agencies whose job it was to carry out the act’s provisions and to regulate the way banks worked, including how they could invest while also making loans. This kind of oversight was deemed especially important for the biggest banks, whose failures could have long-term impact on the overall economy. Banks were pushed to have bigger reserve amounts in case of failures, and consumer protections were put into place so that borrowers would have a better understanding of a financial institution’s lending practices and of the terms of loans and payback terms so they wouldn’t be exploited by high interest rates and hidden fees. This included loans such as mortgages and credit card loans.
Supporters of the act believe that it helped the U.S. to move out of recession and that its regulatory practices helped to stabilize the economy and protect consumers. Critics argue that keeping regulation in place costs tax payers too much, and affects how much both big and small banks can earn. Whether or not the Dodd-Frank Act will have suggested longer-term effects, either good or bad, may soon be moot, as the new administration will likely repeal it.