What Is the Dodd-Frank Act?
The Dodd-Frank Act, also known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, was enacted in 2010. It was a direct response to the financial crisis of 2008 and the resulting government "bailouts" administered by the Federal Reserve under the Troubled Asset Relief Program. According to the findings of a Senate subcommittee investigating the crisis, it was ultimately caused by "high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street."
The Dodd-Frank Act initiated a broad range of reforms affecting nearly every aspect of the financial system with the goal of preventing a repeat of the 2008 crisis and the need for future government bailouts. The Act also sought to establish additional protections for consumers.
What Does The Act Do?
The Dodd-Frank Act contains 16 major areas of reform, ranging from insurance reform to corporate governance reform. Some of the key reform areas and reforms are described below.
Banking and Financial Firm Reforms
The Act created the Financial Stability Oversight Council to oversee banks and financial firms like hedge funds whose failure could impact the entire financial system. The Council's goal is to remove expectations for future government bailouts. It also serves as an early warning system, identifying and responding to emerging threats before they cause widespread damage to the financial system.
Specifically, the Council is authorized to:
- Break up banks that are considered too large
- Require banks to increase the amount they are required to hold in reserve (reducing their lending and investing capacities)
- Require banks to provide plans for a quick and orderly shutdown in the event they become insolvent
- Provide for the liquidation or restructuring of firms that are considered financially weak
The Act also strengthened the Volcker Rule which generally prohibits banks from engaging in risky short-term trading of securities, derivatives, and commodity futures for their own benefit and also prohibits banks from investing in hedge or private equity funds. It also prohibits banks from converting their charters to avoid enforcement actions by the government.
In addition, the Act requires hedge funds and private equity advisors to register with the SEC and to provide information about their trades and portfolios in order to determine whether they are creating any systemic risks. The Dodd-Frank Act also requires the Federal Reserve to examine a company's non-bank subsidiaries that engage in bank related activities (such as mortgage lending) in the same way that they would examine a bank conducting such activities.
Federal Reserve Reforms
The Dodd-Frank Act restricted the emergency lending (or bailout) authority of the Federal Reserve by:
- Prohibiting lending to an individual entity
- Prohibiting lending to insolvent firms
- Requiring approval of lending by the Secretary of the Treasury
- Requiring sufficient collateral for any loans to protect taxpayers from losses
In addition, the Act imposed greater transparency on the Federal Reserve, requiring it to disclose all the terms and conditions of any emergency lending on an on-going basis. It also directed an audit of all emergency lending administered by the Federal Reserve during the financial crisis.
The Dodd-Frank Act provided specific relief for consumers victimized by the risky lending practices leading up to the financial crisis. It allocated $1 billion to states and localities to help redevelop foreclosed properties and halt falling property values. Another $1 billion was allocated for "bridge loans" to help unemployed homeowners cover their mortgage payments until they attain reemployment.
In addition, the Act implemented a series of mortgage reforms to protect consumers. These reforms:
- Require lenders to ensure that homeowners can repay on their loans
- Require lenders to disclose the maximum a consumer could pay on a variable rate mortgage
- Remove financial incentives used by lenders to pressure borrowers into more costly loans
- Penalize lenders that violate federal standards by prohibiting them from foreclosing on non-compliant mortgages or allowing the borrowers to recover damages as high as 3 years worth of interest payments
- Prohibit pre-payment penalties
- Allow borrowers with high-cost loans to lower their interest rates
- Establish an Office of Housing Counseling to provide counseling on homeownership and rental housing
The Dodd-Frank Wall Street Reform and Consumer Protection Act created several reforms within the financial system, some of which are described above. Many of these reforms have also had important impacts on the litigation process, including the creation of new legal claims and defenses.
If you are facing debtor-creditor or foreclosure litigation, it is important to speak with an attorney to determine all of the rights and remedies available to you. FindLaw's directory includes listings of attorneys specializing in securities law.