Dodd-Frank Wall Street Reform and Consumer Protection Act

What Is the Dodd-Frank Wall Street Reform and Consumer Protection Act?

The Dodd-Frank Wall Street Reform and Consumer Protection Act was created as a response to the financial crisis of 2007–2008. Named after sponsors Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), the act contains numerous provisions, spelled out over 848 pages, that were to be implemented over a period of several years.

Key Takeaways

  • The Dodd-Frank Wall Street Reform and Consumer Protection Act targeted the sectors of the financial system that were believed to have caused the 2007–2008 financial crisis, including banks, mortgage lenders, and credit rating agencies.
  • Critics of the law argue that the regulatory burdens it imposes could make U.S. firms less competitive than their foreign counterparts.
  • In 2018, Congress passed a new law that rolled back some of Dodd-Frank’s restrictions.

Understanding Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a massive piece of financial reform legislation that was passed in 2010, during the Obama administration. The Dodd-Frank Wall Street Reform and Consumer Protection Act—typically shortened to just the Dodd-Frank Act—established a number of new government agencies tasked with overseeing the various components of the law and, by extension, various aspects of the financial system.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was intended to prevent another financial crisis like the one in 2007–2008.

Dodd-Frank Wall Street Reform and Consumer Protection Act Components

These are some of the law’s key provisions and how they work:

  • Financial Stability: Under the Dodd-Frank Act, the Financial Stability Oversight Council and the Orderly Liquidation Authority monitor the financial stability of major financial firms, because the failure of these companies could have a serious negative impact on the U.S. economy (companies deemed too big to fail). The law also provides for liquidations or restructurings via the Orderly Liquidation Fund, established to assist with the dismantling of financial companies that have been placed in receivership and prevent tax dollars from being used to prop up such firms. The council has the authority to break up banks that are considered so large as to pose systemic risk; it can also force them to increase their reserve requirements. Similarly, the new Federal Insurance Office was tasked with identifying and monitoring insurance companies considered too big to fail.
  • Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau (CFPB), established under Dodd-Frank, was given the job of preventing predatory mortgage lending (reflecting the widespread sentiment that the subprime mortgage market was the underlying cause of the 2007–2008 catastrophe) and make it easier for consumers to understand the terms of a mortgage before agreeing to them. It deters mortgage brokers from earning higher commissions for closing loans with higher fees and/or higher interest rates and requires that mortgage originators not 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 easy for consumers to read and understand; an example is the simplified terms now on credit card applications.
  • Volcker Rule: Another key component of Dodd-Frank, the Volcker Rule, restricts how banks can invest, limiting speculative trading and eliminating proprietary trading. Banks are not allowed to be involved with hedge funds or private equity firms, which are considered too risky. To minimize possible conflicts of interest, financial firms are not allowed to trade proprietarily without sufficient “skin in the game.” The Volcker Rule is clearly a push back in the direction of the Glass-Steagall Act of 1933, which first recognized the inherent dangers of financial entities extending commercial and investment banking services at the same time. The act also contains a provision for regulating derivatives, such as the credit default swaps that were widely blamed for contributing to the 2007–2008 financial crisis. Dodd-Frank set up centralized exchanges for swaps trading to reduce the possibility of counterparty default and required greater disclosure of swaps trading information to increase transparency in those markets. 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.
  • Securities and Exchange Commission (SEC) Office of Credit Ratings: Because credit rating agencies were accused of contributing to the financial crisis by giving out misleadingly favorable investment ratings, Dodd-Frank established the SEC Office of Credit Ratings. The office is charged with ensuring that agencies provide meaningful and reliable credit ratings of the businesses, municipalities, and other entities that they evaluate.
  • Whistleblower Program: Dodd-Frank also strengthened and expanded the existing whistleblower program promulgated by the Sarbanes-Oxley Act (SOX) of 2002. Specifically, it established a mandatory bounty program under which whistleblowers can receive from 10% to 30% of the proceeds from a litigation settlement, broadened the scope of a covered employee by including employees of a company’s subsidiaries and affiliates, and extended the statute of limitations under which whistleblowers can bring forward a claim against their employer from 90 to 180 days after a violation is discovered.

Economic Growth, Regulatory Relief, and Consumer Protection Act

When Donald Trump was elected president in 2016, he pledged to repeal Dodd-Frank. In May 2018, the Trump administration signed a new law rolling back significant portions of Dodd-Frank. Siding with the critics, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which rolled back significant portions of the Dodd-Frank Act. It was signed into law by then-President Trump on May 24, 2018. These are some of the provisions of the new law, and some of the areas in which standards were loosened:

  • The new law eases the Dodd-Frank regulations for small and regional banks by increasing the asset threshold for the application of prudential standards, stress test requirements, and mandatory risk committees.
  • For institutions that have custody of clients’ assets but do not function as lenders or traditional bankers, the new law provides for lower capital requirements and leverage ratios.
  • The new law exempts escrow requirements for residential mortgage loans held by a depository institution or credit union under certain conditions. It also directs the Federal Housing Finance Agency (FHFA) to set up standards for Freddie Mac and Fannie Mae to consider alternative credit scoring methods.
  • The law exempts lenders with assets of less than $10 billion from requirements of the Volcker Rule and imposes less stringent reporting and capital norms on small lenders.
  • The law requires that the three major credit reporting agencies allow consumers to freeze their credit files free of charge as a way of deterring fraud.

After Joseph Biden was elected president in 2020, the CFPB focused on rescinding rules from the Trump era that were in direct conflict with the charter of the CFPB. In June 2021, President Biden, along with the U.S. Department of Education and support from the CFPB, canceled more than $500 million of student loan debt. The CFPB has strengthened its oversight of for-profit colleges to tamp down on predatory student loan practices. The Biden administration has also announced their intent to reestablish rules against other predatory lending, such as payday loans. Additionally, subprime auto loan practices will be addressed by the CFPB.

Criticism of the Dodd-Frank Wall Street Reform and Consumer Protection Act

Proponents of Dodd-Frank believed the law would prevent the economy from experiencing a crisis like that of 2007–2008 and protect consumers from many of the abuses that contributed to the crisis. Detractors, however, have argued that the law could harm the competitiveness of U.S. firms relative to their foreign counterparts. In particular, they contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions—despite the fact that they played no role in causing the financial crisis.

Such financial world notables as former Treasury Secretary Larry Summers, Blackstone Group L.P. (BX) CEO Stephen Schwarzman, activist Carl Icahn, and JPMorgan Chase & Co. (JPM) CEO Jamie Dimon also argue that, while each institution is undoubtedly safer due to the capital constraints imposed by Dodd-Frank, the constraints make for a more illiquid market overall.

The lack of liquidity can be especially potent in the bond market, where all securities are not mark to market and many bonds lack a constant supply of buyers and sellers. The higher reserve requirements under Dodd-Frank mean that banks must keep a higher percentage of their assets in cash, which decreases the amount that they are able to hold in marketable securities.

In effect, this limits the bond market-making role that banks have traditionally undertaken. With banks unable to play the part of a market maker, prospective buyers are likely to have a harder time finding counteracting sellers. More importantly, prospective sellers may find it more difficult to find counteracting buyers.

What are the key components of the Dodd-Frank Wall Street Reform and Consumer Protection Act?

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Financial Stability Oversight Council and the Orderly Liquidation Authority monitored the financial stability of major financial firms, because their failure could have a serious negative impact on the U.S. economy.

The Consumer Financial Protection Bureau (CFPB) was given the job of preventing predatory mortgage lending. The Volcker Rule restricted how banks can invest, limiting speculative trading and eliminating proprietary trading. The Securities and Exchange Commission’s (SEC’s) Office of Credit Ratings was charged with ensuring that agencies provide meaningful and reliable credit ratings of the entities that they evaluate. Finally, Dodd-Frank also strengthened and expanded the existing whistleblower program promulgated by the Sarbanes-Oxley Act (SOX).

What are some criticisms of the Dodd-Frank Act?

Detractors of the Dodd-Frank Act have argued that the law could harm the competitiveness of U.S. firms relative to their foreign counterparts. In particular, critics contend that its regulatory compliance requirements unduly burden community banks and smaller financial institutions—despite the fact that they played no role in causing the financial crisis. Several financial world notables argued that, while each institution is undoubtedly safer due to the capital constraints imposed by Dodd-Frank, the constraints also make for a more illiquid market overall.

How could the Dodd-Frank Act affect the bond market?

The potential lack of liquidity due to the higher reserve requirements under Dodd-Frank means that banks must keep a higher percentage of their assets in cash, which decreases the amount that they are able to hold in marketable securities. In effect, this limits the bond market-making role that banks have traditionally undertaken. With banks unable to play the part of a market maker, prospective buyers are likely to have a harder time finding counteracting sellers. More importantly, prospective sellers may find it more difficult to find counteracting buyers.

The Bottom Line

The Dodd-Frank Act, enacted in 2010, was a direct response to the financial crisis of 2007–2008 and the ensuing government bailouts under the Troubled Asset Relief Program (TARP).

This law established a wide range of reforms throughout the entire financial system, with the purpose of preventing a repeat of the 2007–2008 crisis and the need for further government bailouts. The Dodd-Frank Act also included additional protections for consumers.

Although the Trump administration reversed and weakened several aspects of the Dodd-Frank Act, particularly affecting consumers, the Biden administration intends to reestablish and strengthen the previous reversals to protect individuals subject to predatory lending practices in industries such as for-profit education and automobiles.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. U.S. Congress. “H.R.4173 — Dodd-Frank Wall Street Reform and Consumer Protection Act.” Accessed Feb. 7, 2022.

  2. U.S. House of Representatives, Committee on the Judiciary, via govinfo. “Dodd-Frank Act’s Effects on Financial Services Competition,” Pages 12–13 (Pages 16–17 of PDF). Accessed Feb. 7, 2022.

  3. U.S. Congress. “S.2155 — Economic Growth, Regulatory Relief, and Consumer Protection Act.” Accessed Feb. 7, 2022.

  4. U.S. Department of the Treasury. “About FIO.” Accessed Feb. 7, 2022.

  5. The White House, Obama White House Archives. “Consumer Financial Protection Bureau 101: Why We Need a Consumer Watchdog.” Accessed Feb. 7, 2022.

  6. Consumer Financial Protection Bureau. “What Is a Truth-in-Lending Disclosure? When Do I Get to See It?” Accessed Feb. 7, 2022.

  7. Congressional Research Service. “The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary,” Page 13 (Page 17 of PDF). Accessed Feb. 7, 2022.

  8. Federal Reserve History. “Banking Act of 1933 (Glass-Steagall).” Accessed Feb. 7, 2022.

  9. U.S. Securities and Exchange Commission. “About the Office of Credit Ratings.” Accessed Feb. 7, 2022.

  10. U.S. Securities and Exchange Commission. “Section 922 (Whistleblower Protection) of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” Pages 2, 6, and 8. Accessed Feb. 7, 2022.

  11. The Wall Street Journal. “Jamie Dimon Pushes for Simpler, More Coordinated Bank Regulations.” Accessed Feb. 7, 2022.

  12. The Wall Street Journal. “How the Next Financial Crisis Will Happen.” Accessed Feb. 7, 2022.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description