…the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted.
What Happened? In 2008, financial markets crashed due to a number of causes. Millions of people lost their jobs. Real Estate values plummeted. Homeowners went “under water” with their mortgages. Many financial companies who were deemed “too big to fail” were given a taxpayer-funded bailout to prop them up. As is always true, the average person got hurt the worst. People wanted changes because no one was bailing them out of their financial troubles.
What Changed? It was in this bleak atmosphere that Congress responded by enacting The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010 to help prevent this type of financial crisis from happening again. It was the most comprehensive financial reform since the 1930’s.
How Does Dodd-Frank Help? Here are a few of the key ways Dodd-Frank protects consumers, taxpayers and small investors.
- Looking for Early Signs of Financial Institution Failure. Dodd-Frank created The Financial Stability Oversight Council as a central monitor looking for excessive risks in the entire financial industry.
- Limiting Banks’ Investments with Depositors’ Money. Dodd-Frank contains the Volcker Rule which prohibits banks from owning, investing in, or sponsoring hedge funds, private equity funds, or proprietary trading operations for their own profit. These now-prohibited investment operations were the kind that put depositors’ money at risk in 2008 and a big reason why some of the institutions on the brink of failure were bailed out with taxpayers’ money.
- Protecting Consumers from Unfair, Abusive Financial Practices. Consumers could not fully understand the loan terms being offered because of confusing disclosure forms. There was no way to clearly compare loan terms from one lender to the next. Some lenders, including some mortgage lenders, credit card companies, payday lenders and others broke laws, lied to and took advantage of people any way they could. Dodd-Frank created an independent agency, The Consumer Financial Protection Bureau (CFPB), to set and enforce clear and consistent rules for the financial marketplace to assure that lenders followed the law and treat borrowers honestly and fairly.
- Keeping an Eye on Wall Street. Dodd-Frank also:
- Regulates Risky Derivatives: Dodd-Frank requires that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission or the Commodity Futures Trading Commission. In this way, excessive risk-taking can be identified and brought to policy-makers’ attention before a major crisis occurs.
- Brings Hedge Funds’ Trades Into the Light: One of the causes of the 2008 financial crisis was that hedge funds and other privately held investment funds weren’t regulated so no one knew what they were investing in or how much was at stake.
- Oversees Credit Rating Agencies: Dodd-Frank created an Office of Credit Ratings at the SEC to regulate credit ratings agencies like Moody’s and Standard & Poor’s. Many blame the agencies for over-rating some bundles of very risky and complex investments contributing to the financial crises.
If you would like to learn more about what happened in the 1990’s that helped set the stage for the financial crisis, read about the repeal of the Glass-Steagel Act. If you would like to read a summary of how the CFPB helps consumers, you ‘ll find it here. .