Understanding the Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank

The Dodd-Frank Wall Street Reform and Consumer Protection Act or simply Dodd-Frank Act, is regarded as the most extensive financial reform since the rescinding of Glass-Steagall Act. Referred to as the Banking Act of 1993, the Glass-Steagall Act was legislated in order to avert the use of depositors’ funds by banks on precarious ventures like the stock market. In a manner similar to the Glass-Steagall Act, the Dodd-Frank Act aims to monitor and supervise financial markets so that financial crises such as the 2008 economic crunch won’t happen again. In addition, the Act is tailored to protect consumers through its rules and policies which aim to, among other things, shield borrowers from financial institutions’ abusive lending and mortgage procedures and policies. The Dodd-Frank Act was enacted on July 21, 2010 and was named after its proponents — Senator Chris Dodd and Congressman Barney Frank.

Key Provisions of the Dodd-Frank Act

    • Financial Strength and Security

 

Through the Dodd-Frank Act, a new framework, which aims to bolster the security and stability of the country’s financial services system, was established. In doing so, Title I of the Act creates the Financial Stability Oversight Council (FSOC) and the Office of the Financial Research (OFR). Moreover, Title I compels the Federal Reserve Board (FRB) to enforce more rigorous and efficient standards. Furthermore, Title I is buttressed by the Act’s Title VII by providing for the supervision and standardization of designated financial market utilities (FMUs) and methodically significant fees, clearance, and settlement proceedings.

    • Financial Stability Oversight Council

 

Presided by the Secretary of Treasury, the intent of FSCO is to determine the threats on the country’s financial stability that may emerge from the current undertakings of large, interconnected financial entities and movements outside the financial services marketplace. The Council was instituted to advocate and push for market regulation by removing notions of government bailouts and to respond to looming risks on financial stability.

Among the voting members of FSCO are the heads of the Treasury, Federal Reserve, Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), National Credit Union Administration (NCUA), Bureau of Consumer Financial Protection, and a delegated independent member who has insurance expertise.

The Council is responsible for gathering vital information needed in evaluating the threats to the country’s financial system, releasing of report and testimony about financial stability yearly before Congress, supervising non-bank financial institutions such as hedge funds, and observing the financial services marketplace, among other things.

    • Office of the Financial Research

 

The objective of OFR is to aid the FSOC and its member agencies. According to a paper from Mercatus Center at George Mason University, the OFR has a vital position in helping to standardize the government financial regulators’ data collection and in removing duplicative reports. Aside from gathering data, OFR is tasked to disseminate it.

    • Adjustments and Modifications on Regulatory Structure of Banks

 

When the Act’s Title III dissolved the Office of Thrift Supervision (OTS), its roles and duties were passed on to the OCC. The bureau then assumed the oversight of thrifts while the FDIC took over the responsibility of supervising state-chartered thrifts. Furthermore, from an evaluation established on deposit liabilities, the FDIC’s assessment base for deposit insurance was changed to one based on overall assets.

Meanwhile, provisions that will set a delay on federal deposit insurance approvals for specific “non-bank banks” are incorporated into the Act’s Title VI. In addition, regulatory requisites on affiliated undertakings, charter reconstruction or transformation, and other administrative and regulatory concerns are also captured. The contentious “Volcker Rule” is also contained in the Act’s Title VI. Named after the Federal Reserve Chairman Paul Volcker, the Volcker Rule prohibits banks from utilizing or possessing hedge funds for the banks’ own benefit. According to cnbc.com, to help banks determine which funds are for customers and which are for their profits, they have two years to divest their cash reserves in order to comply with the Volcker Rule. The same rule differentiates the business proceedings and undertakings that banks and nonbanks can conduct.

    • Expanding the Protection of Consumers

 

Through Title X of the Dodd-Frank Act, the Bureau of Consumer Financial Protection (BFCP) was formed. BFCP is an independent agency within the Federal Reserve Board (FRB) that has the authority to carry out and implement new federal regulatory system of consumer financial regulation. The BFCP aims to shield consumers from banks’ shady business practices. Moreover, the BFCP combines some current consumer protection obligations in other government bureaus and works with large banks’ regulators to stop undertakings that may inflict harm on consumers. Furthermore, BFCP supervises credit reporting agencies, credit and debit cards, and payday and consumer loans.

Dodd-Frank Act contains residential mortgage protection provisions that will compel lenders to evaluate the capacity of borrowers to repay their mortgages and outlaw certain mortgage lending practices like mortgage originator compensation deals.

    • Systematic Procedures on Liquidation

 

A liquidation system for the resolution of specific bank holding companies, entities that participate or are engrossed in financial proceedings and important non-bank financial institutions that align or correlate, in various ways, the authority executed and employed by the FDIC for insured depository entities. Under the systematic procedures on liquidation, the FDIC will be assigned as the receiver of a specified entity that will be liquidated in a way wherein the threats and risks of financial stability are assuaged and moral hazards are curtailed. In addition, the FDIC has the power to take control of failing entities in a way that shields counterparties, lessens market interruptions, and guarantees that the stockholders and unsecured editors of failed financial firms will incur  the losses first.

    • Derivatives Regulation

 

Title VII of Dodd-Frank Act instituted a new framework in regulating over-the-counter (OTC) derivatives as an answer to the notion that under-supervised OTC activities greatly contribute to the asperity of the financial crisis. The Act compels risky derivatives such as credit default swaps to be supervised by SEC or CFTC. Through this, too much risk-taking will be determined and brought to legislators’ attention before a major crunch takes place. For transparency, a clearing-house analogous to the stock exchange will be established so that the derivatives can be publicly transacted.

Included in Title VII is the Lincoln Provision or the “Swaps Pushout Rule” wherein no aid from the government will be given to any swaps entity, under certain aspects and rulings.

    • Investor Protection and Credit Agency Reform

 

The Act will enable the SEC to promulgate a fiduciary guideline for broker-dealers that offers personalized investment assistance. In addition, the SEC will examine and re-examine adjustments and modifications of self-regulatory organizations that influence guardianship of customer securities or funds; shall assist and ease the provision of straightforward and understandable investor reports about relationship conditions with broker-dealers and investment advisers and disclosures of conflicts of interest; and may share information with government, foreign, and state regulators and impose laws without relinquishing privilege. Furthermore, Dodd-Frank Act establishes the SEC Investor Advisory Committee to discuss on initiatives to improve the confidence of investors.

The legislation, in 2006, of the Credit Rating Agency Reform Act obliges credit rating agencies (CRAs) to register with the SEC and release reports. Under Dodd-Frank Act, CRAs are obliged to report the qualitative and quantitative techniques and assumptions they used and data on primary ratings and ensuing developments, among other things. In addition, the Office of Credit Ratings was formed and its main obligation  will be to oversee and standardize CRAs. Moreover, to help combat corruption and insider trading, the Act has whistle blowing provision — anyone with reliable information regarding security violations can inform the government for a financial reward.

    • Enhanced Oversight on Insurance Firms

 

Title V of the Act forms the Federal Insurance Office (FIO) under the Treasury Department, which will determine and specify insurance firms that generate risks to the whole system; give suggestions on how to improve and bring up to date the US insurance regulation; take precedence over state laws that impede specific international insurance deals; and streamline and justify, in certain aspects, the state policies and levying of non-admitted insurance and re-insurance.

    • Federal Reserve Reform

 

In amending the activities associated with the Federal Reserve System, credit facilities and matters of governance, Title Xi of the Act sets new limitations on the capacity of the Federal Reserve System to make emergency loans, as mandated in the Federal Reserve Act (FRA) authority to give such financial aids. Moreover, the Government Accountability Office (GAO) has the power to audit the operations of Federal Reserve System emergency credit facilities and the formed credit facilities during the recent financial crunch.

    • Registration of Advisers to Private Investment Vehicles

 

Financial consultants on hedge funds, equity funds, and other kinds of private investments are compelled to register with the SEC. They are also obliged to provide information to SEC and other government regulators.