In 2010, the Dodd-Frank Act instituted a set of financial reforms. In 2018, the law was amended. Like most events in Washington, D.C., interpreting the changes as good or bad depends on whether a person supported or decried the bill in the first place.
— By Royston Arch
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was passed in response to the financial collapse that triggered the Great Recession. Banks and other financial institutions indulged in risky behavior, and consumers paid the price when those risks dissolved trillions in assets and caused massive numbers of home foreclosures.
The Act came too late for many people, but it was still viewed as a reining in of financial institution risky behavior. The Act established a whistleblower program for the SEC and created the Consumer Financial Protection Bureau (CFPB), intended to give consumers a voice in Washington, D.C., and a source of help when encountering unfair or discriminatory treatment by financial institutions. In 2018, President Donald Trump signed a law that revamps some provisions of the original Act.
There is some confusion as to whether the new law did or did not include significant rollbacks and what it means for the future.
House of Cards
When the global financial collapse occurred in 2008, it did not take long to determine that financial institutions were at fault due to their willingness to "gamble" on risky mortgages. People who should not have qualified for mortgages were approved in the millions, and the financial institutions bundled the mortgages and sold them as packages to other global institutions, knowing they were extremely risky assets.
It was a house of cards that collapsed, costing more than 8 million people their homes through foreclosure and bank repossessions, and trillions in lost retirement assets. A decade later, many people never fully recovered from the financial disaster.
That Was Then
In 2010, Frank-Dodd was passed in response to the financial collapse. Its honest intent was to add transparency to the financial industry, limit the kind of risky bank behavior that led to a deep recession, give whistleblowers a venue for reporting suspicious or outright illegal behaviors, and give consumers some protections.
The "too big to fail" threshold was set, and the banks meeting that threshold were subject to stricter regulations. The original bill set the threshold for "systematically important" banks at $50 billion, enfolding the smaller community and regional banks into the act.
Volcker Rule limitations were established for banks, hedge funds, private equity funds, and other financial institutions. The Volcker Rule limits risky investments and bank dealings with covered funds.
Section 922 of the Dodd-Frank Wall Street Act gave the SEC the power to create a whistleblower program. The program gives people the ability to voluntarily report violations of the securities and SEC regulations to the SEC, and gives the SEC permission to pay awards to eligible whistleblowers. In 2017, the SEC paid $50 million to whistleblowers and set up a contingent liability of $221 million for probable future payments. The sizable amount of the liability means a case could be made for saying the Dodd-Frank law has not had the intended impact on limiting risky corporate behaviors. Corporations and financial institutions continue to take large risks and sometimes outright break the law.
There has also been mixed reaction to the CFPB. Supporters say it finally gave average consumers a way to fix problems they have with powerful banks, lenders, mortgage companies and other financial companies. Those who do not support the CFPB say there are enough laws on the books to protect consumers, and the CFPB is yet another superfluous government agency wasting more taxpayer dollars.
This is Now
In 2018, President Trump signed the "Economic Growth, Regulatory Relief, and Consumer Protection Act," which made changes to the Dodd-Frank Act of 2010. It is called a "rollback" law, but the businesses most impacted are small or community banks.
The new Act removed the Volcker Rule limitation on bank-affiliated investment advisors from using their names on covered funds and exempted small banks with less than $10 billion in assets from being subjected to the Volcker Rule. In addition, it eliminated financial stress testing and other requirements from bank holding companies with less than $250 billion in assets and reduced the amount of Tier 1 capital custodial banks must hold.
The new law was passed to reduce crippling government restrictions on community and regional banks. Unlike what many people still believe, it does not repeal or replace the 2010 Dodd-Frank law. It does lighten some requirements that were placed on financial institutions.
People opposed to the new law believe it will unleash risky behavior once again on Wall Street. However, major banks must still undergo stress tests, and there remains a federal crisis resolution process for failing financial institutions. The Whistleblower Program is left intact and so is the CFPB.
What Is Next?
What does the future hold? The 2018 law was touted as a first step in revising the regulations of Dodd-Frank.
The original writers of the law – Sen. Chris Dodd and Rep. Barney Frank – said in an interview that they believe Congress will never do another bank bailout with taxpayer money like it did in 2008 and that Dodd-Frank will likely remain intact from this point forward. Should major banks get into trouble to the point of failure, the Dodd-Frank law allows for the "orderly dismantling" of the institution.
Of course, politics can produce unanticipated changes or actions. A major bank failure could change political minds because no one wants to ever see millions of middle–class consumers hurt financially like they were during the recession. There is also little sympathy for large banks that continue to report billions in profits. In the era of political partisanship, there is simply no predicting future outcomes.