Dodd-Frank Summary

The Dodd-Frank Wall Street Reform and Consumer Protection act aims to bring accountability back to both banks and financial institutions. The Dodd-Frank Act also attempts to remove inefficiencies in government agencies as well as create new ones to oversee troubled sectors.

A big concern of policy makers when creating this act was Consumer protections. A major factor of consumer protections is that there will no longer taxpayers funded bailouts to liquidate large financial companies. The FDIC can only borrow the amount of funds that it believes it will be able to recover. This bill also imposes many new rules on mortgage companies.

Mortgage Reform

The bill establishes a federal standard for all home loans to ensure borrowers can repay the loans, and also prohibits lending institutions from having financial incentives for issuing subprime loans. To ensure they give loans they feel consumers can pay, if they irresponsibly lend, they will be required to pay as much as three-years of interest payments and attorneys fees for consumers who default. One of the biggest protections for consumers on mortgages is that lenders must disclose the maximum rate a consumer may pay on a variable rate mortgage.

This change was brought on because of how liberal mortgage companies were getting with the issuance of loans as well as the ambiguity they spoke with on variable interest rates, which locked customers into something they couldn't afford. In this situation, consumers will be both winners and losers. They will win because they will be given understandable loans and be able to pay them off, but lose because they will have to live within their means and will no longer be able to purchase real estate that they want but cannot afford. Mortgage companies will not like this change because subprime mortgages were very profitable during strong economic times. Another group of people who will be disappointed is the construction industry who will be forced to build cheaper houses because their customers won't be able to secure as large of a loan.

Government

One of the biggest agencies create by this bill is the Consumer Financial Protection Bureau. The CFPB will be responsible for writing rules and regulations to govern bank and nonbank financial institutions with more than ten million dollars in assets. This was a necessary agency to create because before this bill, many agencies were responsible for consumer protections which led to important issues falling through the cracks. In addition to the CFPB the bill creates the Financial Stability Oversight Council which has the job of ensuring financial companies do not get too big to survive. This council sets risk guidelines and as well as requires companies to submit shutdown plans in case of failure. It is in the interest of both investors and small businesses that these entities are in place.