The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008. The act's numerous provisions, spelled out over thousands of pages, are scheduled to be implemented over a period of several years and are intended to decrease various risks in the U.S. financial system. The act established a number of new government agencies tasked with overseeing various components of the act.

The Financial Stability Oversight Council and Orderly Liquidation Authority monitors the financial stability of major firms whose failure could have a major negative impact on the economy (companies deemed "too big to fail"). It also provides for orderly liquidations or restructurings if these firms become too weak and prevents tax dollars from being used to prop up such firms. The council has the authority to break up banks that are considered to be so large as to pose a systemic risk; it can also force them to increase their reserve requirements. Similarly, the new Federal Insurance Office is supposed to identify and monitor insurance companies considered "too big to fail."

The Consumer Financial Protection Bureau (CFPB) is supposed to prevent predatory mortgage lending and make it easier for consumers to understand the terms of a mortgage before finalizing the paperwork. It prevents mortgage brokers from earning higher commissions for closing loans with higher fees and/or higher interest rates, and says that mortgage originators cannot steer potential borrowers to the loan that will result in the highest payment for the originator.

The CFPB also governs other types of consumer lending, including credit and debit cards, and addresses consumer complaints. It requires lenders, excluding automobile lenders, to disclose information in a form that is easiest for consumers to read and understand; an example is the simplified terms you'll find on credit card applications.

The Volcker Rule is supposed to limit speculative trading and eliminate proprietary trading by banks. This change could make it more difficult for banks to be profitable. The act also contains a provision for regulating derivatives such as the credit default swaps that were widely blamed for contributing to the 2008 financial crisis. The Volcker Rule also regulates financial firms' use of derivatives in an attempt to prevent "too-big-to-fail" institutions from taking large risks that might wreak havoc on the broader economy.

Dodd-Frank also established the SEC Office of Credit Ratings, since credit rating agencies were accused of giving misleadingly favorable investment ratings that contributed to the financial crisis. The office is tasked with ensuring that agencies provide meaningful and reliable credit ratings of the entities they evaluate.

Proponents of Dodd-Frank believe the act will prevent our economy from experiencing a crisis like that of 2008 and protect consumers from many of the abuses that contributed to that crisis. Critics believe the act will hurt economic growth. If this criticism proves true, the act could affect Americans in the form of higher unemployment, lower wages and slower increases in wealth and living standards. Detractors also believe the bill could harm the competitiveness of U.S. firms relative to their foreign counterparts. Other critics state that the act will be ineffective in achieving its intended goals and that it doesn't make sense to put faith in the same regulators who failed to prevent the 2008 crisis. Furthermore, common sense tells us that it will cost money to operate all these new agencies and enforce all these new rules, and that money will come from taxpayers.

Because the act is still in the process of being implemented and because those provisions that have been implemented are still relatively new, it will probably be years before the full implications of the Dodd-Frank Act become clear.

  1. What is the purpose of the Volcker Rule?

    The Volcker rule limits two main types of activities by large institutional banks. Banks are prohibited from engaging in ... Read Full Answer >>
  2. Has the Dodd-Frank regulatory reform bill protected consumers?

    Though it is difficult to assess the net impact of legislative bills the size of Dodd-Frank as the act was 2,300 pages long, ... Read Full Answer >>
  3. What is the long-term outlook of the banking sector?

    The long-term outlook of the banking sector remains cyclical, but with less volatility than in the past. Given structural ... Read Full Answer >>
  4. What are some examples of moral hazard in the business world?

    Moral hazard is a situation in which one party to an agreement engages in risky behavior or fails to act in good faith because ... Read Full Answer >>
  5. How often do mutual funds report their holdings?

    The Securities and Exchange Commission (SEC) requires mutual funds to report complete lists of their holdings on a quarterly ... Read Full Answer >>
  6. Do negative externalities affect financial markets?

    In economics, a negative externality happens when a decision maker does not pay all the costs for his actions. Economists ... Read Full Answer >>
Related Articles
  1. Professionals

    Career Advice: Investment Banking Vs. Law

    Learn some of the most important differences between a career in investment banking and law, and figure out which career suits you better.
  2. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  3. Professionals

    10 Must Watch Documentaries For Finance Professionals

    Find out about some of the best documentaries that finance professionals can watch to gain a better understanding of their industry.
  4. Economics

    The 5 Countries That Produce the Most Carbon Dioxide (CO2)

    Learn about the top five countries, China, the United States, India, Russia and Japan, that are the largest contributors to carbon dioxide emissions.
  5. Stock Analysis

    Why Is GE Selling Some of Its Subsidiaries?

    Learn why GE is selling off a substantial amount so it does not have to comply with increased government regulation in the wake of the 2008 financial crisis.
  6. Economics

    Explaining the Tier 1 Leverage Ratio

    The Tier 1 leverage ratio measures a bank’s core capital against its total assets.
  7. Investing Basics

    What Is Schedule 13G Used For?

    Schedule 13G is an SEC form an investor must file upon taking ownership of 5% or more of a company’s outstanding shares.
  8. Insurance

    Airbnb Insurance: Will It Cover Enough?

    If a paying guest trips over a rug in your home, breaks an ankle and sues for damages, here's how to make sure your coverage protects you.
  9. Insurance

    5 (Possibly) Costly Risks of Being an Airbnb Host

    Guests who get injured or damage your neighbor’s property are just a couple of examples of what can go wrong. Here’s how to protect yourself.
  10. Economics

    How Does the Puerto Rican Debt Crisis Affect the US?

    Learn about the specifics of the Puerto Rican debt crisis and why economists disagree on how significantly it could affect the United States.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Emergency Banking Act Of 1933

    A bill passed during the administration of former U.S. President ...
  3. Slander

    Slander is the act of harming one person’s reputation by telling ...
  4. Libel

    Libel is publishing a statement about someone in written form ...
  5. Defamation

    Defamation is any statement (written or spoken) that damages ...
  6. Fair Housing Act

    This law (Title VIII of the Civil Rights Act of 1968) forbids ...

You May Also Like

Hot Definitions
  1. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  2. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  3. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  4. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  5. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  6. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!