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Dodd-Frank Wall Street Reform Act

A Summary of its Regulations


Couple talking with financial advisor
PhotoAlto/Eric Audras/Brand X Pictures/Getty Images
Frank and Dodd

U.S. Sen. Christopher Dodd (D-CT) (R) and Rep. Barney Frank (D-MA) (L) speak to the media after a meeting with President Barack Obama at the White House May 21, 2010 in Washington, DC.

Photo by Alex Wong/Getty Images
Bankers who took the bailout

(L-R) Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon, Bank of New York Mellon CEO Robert Kelly, Bank of America CEO Ken Lewis and State Street CEO Ronald Logue

Photo: Chip Somodevilla/Getty Images

Summary of Dodd-Frank Wall Street Reform Act:

The Dodd-Frank Wall Street Reform Act was the most comprehensive financial reform since the Glass-Steagall Act. Like Glass-Steagall, it sought to regulate the financial markets and make another economic crisis less likely. Banks were deregulated in 1999 by the Gramm-Leach-Bliley Act, which repealed Glass-Steagall.

The Dodd-Frank Act was named after the two legislators who created it. It was introduced by Senator Chris Dodd on March 15, 2010 and passed by the Senate on May 20. The bill was revised by Congressman Barney Frank and approved by the House on June 30. On July 21 2010, President Obama signed the Dodd-Frank Wall Street Reform Act into law. (Source: U.S. Senate, Dodd-Frank Wall Street Reform Act, Morrison & Forster, Summary of Dodd-Frank Reform Act)

Dodd-Frank proposed eight areas of regulation. Here are the major parts of the Act.

Regulate Credit Cards, Loans and Mortgages:

The Consumer Financial Protection Bureau consolidated the functions of many different agencies. It oversees credit reporting agencies, credit and debit cards, as well as payday and consumer loans (but not auto loans from dealers). The CFPB regulates credit fees, including credit, debit, mortgage underwriting and bank fees. It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It also requires banks to verify borrower's income, credit history and job status. The CFPB is under the U.S. Treasury Department.

Oversee Wall Street:

The Financial Stability Oversight Council looks out for risks that affect the entire financial industry. It also oversees non-bank financial firms like hedge funds. If any of these companies get too big, it can recommend they be regulated by the Federal Reserve, which can ask it to increase its reserve requirement. This prevents another AIG from becoming too big to fail. The Council is chaired by the Treasury Secretary, and has nine members: the Fed, SEC, CFTC, OCC, FDIC, FHFA and the new CFPA.

Stop Banks from Gambling with Depositors' Money:

The Volcker Rule bans banks from using or owning hedge funds for the banks' own profit. That's because they'd often use their depositors' funds to do so. Banks can use hedge funds for their customers only. Determining which funds are for the banks' profits and which funds are for customers has been difficult. Therefore, Dodd-Frank gave banks seven years to divest the funds. They can keep any funds if that are less than 3% of revenue. Banks have lobbied hard against the rule, delaying its implementation until at least 2013.

Regulate Risky Derivatives:

Dodd-Frank required that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). In this way, excessive risk-taking can be identified and brought to policy-makers' attention before a major crisis occurs. A clearinghouse, similar to the stock exchange, must be set up so these derivative trades can be transacted in public. However, Dodd-Frank left it up to the regulators to determine exactly the best way to put this into place, which has led to a series of studies.

Bring Hedge Funds Trades Into the Light:

One of the causes of the 2008 financial crisis was that, since hedge funds and other financial advisers weren't regulated, no one knew what they were investing in or how much was at stake. That's why the Fed and other agencies thought the mortgage crisis would be confined to the housing industry. To correct for that, Dodd-Frank says that hedge funds must register with the SEC and provide date about their trades and portfolios so the SEC can assess overall market risk. States are given more power to regulate investment advisers, since Dodd-Frank raises the asset threshold limit from $30 million to $100 million. In January 2013, 65 banks around the world had registered their derivatives business with the CFTC. (Source: NYT Dealbook, Banks Face New Checks on Derivatives Trading, January 3, 2013)

Oversee 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 derivatives and mortgage-backed securities. This mislead investors who didn't realize the debt was in danger of not being repaid. The SEC can require agencies to submit their methodologies for review, and can deregister an agency that gives faulty ratings.

Increase Supervision of Insurance Companies:

It created a new Federal Insurance Office under the Treasury Department, which identifies insurance companies like AIG that create risk to the entire system. It will also gather information about the insurance industry and make sure affordable insurance is available to minorities and other underserved communities. It will represent the U.S. on insurance policies in international affairs. The new office will also work with the states to streamline regulation of surplus lines insurance and reinsurance. It was supposed to release a "Study and Report on the Regulation of Insurance" in January 2012. It was also supposed to report to Congress the impact of the reinsurance reforms prescribed by the Nonadmitted and Reinsurance Reform Act of 2010, and release an update by January 1, 2015. (Source: CFT News, Federal Insurance Office Requests Public Comment On Scope of Global Reinsurance Market, June 27, 2012)

Reform the Federal Reserve:

The Government Accountability Office(GAO) was allowed to audit the Fed's emergency loans during the financial crisis. It can review future emergency loans, when needed. The Fed cannot make an emergency loan to a single entity, like Bear Stearns or AIG, without Treasury Department approval. (Although the Fed did work closely with Treasury during the crisis.) The Fed must make public the names of banks that received these loans or TARP funds. (Article updated April 3, 2013)

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