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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.

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