2017 looks to be a year of change. With the incoming political administration, many policymakers hope to reform some key laws established under outgoing President Barack Obama. While much of the early focus has been on the Affordable Care Act, another controversial law — The Dodd-Frank Wall Street Reform and Consumer Protection Act (known as Dodd-Frank) — may not be far behind. Given that changes to Dodd-Frank could have an impact on consumers everywhere, it’s important to understand what Dodd-Frank currently does and what may become different about it in the near future.
Enacted in 2010 in response to the 2007 economic meltdown, Dodd-Frank sought to eliminate future crises by putting the government in control of regulating the financial industry.
Benefits and challenges.
Specifically, Dodd-Frank created the Consumer Financial Protection Bureau (CFPB), a government agency responsible for oversight of the financial industry, including banks, credit unions, credit card issuers, and loan providers.1
After its formation, the CFPB focused on addressing a number of banking and investment practices, particularly mortgage lending, which is often assumed to be the primary cause of the 2007 financial crisis. Dodd-Frank made mortgage terms and paperwork easier for consumers to understand and stopped higher commissions for loans with higher fees and/or higher interest rates.2 Dodd-Frank also eliminated the ‘too big to fail’ phenomenon that required substantial taxpayer buyouts for failing financial institutions during the 2007 economic crisis.2
Dodd-Frank supporters point to a recent report that noted the CFPB has won “$11.4 billion in relief for more than 25 million aggrieved consumers” since its inception.3 Others, however, contend that Dodd-Frank created slow-downs in lending, essentially preventing consumers’ ability to get personal and small business loans. Dodd-Frank detractors also argue that the legislation created a lack of liquidity in the market which in turn resulted in U.S. businesses losing ground to foreign competition and, in some cases, eliminating jobs.
President Donald Trump has stated his intentions to dismantle Dodd-Frank4, starting with cutting funding for the CFPB. He’s also said he would diminish the capacity and authority of the Financial Security Oversight Council, another government-run agency that looks out for systemically risky financial institutions. Both moves could potentially save millions of consumers’ tax dollars in operating expenses.
Seeking a CHOICE.
Others seek to repeal Dodd-Frank altogether and replace it with alternative legislation. One such option is the Financial CHOICE Act, which stands for Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs.5
Proposed by Representative Jeb Hensarling, Chairman of the House Financial Services Committee, the act would eliminate certain regulations such as ones that prevent banks from proprietary trading.5 Easing regulatory restrictions, many believe, will lead to stronger competition with foreign business, which in turn could lead to better exchange rates, more consumer lending, more jobs, and a more robust economy overall.
The pros and cons of Dodd-Frank will be debated intensely in the coming months. Those who want to eliminate the current legislation will cite a stronger economy and more consumer lending resulting from fewer financial regulations, while supporters of the law will point to the same lack of consumer protection that gave rise to one of the most devastating economic crises in history. Regardless of the end result, it’s important to understand how regulations are changing — because financial regulations don’t just affect banks and other institutions, they also impact the everyday consumer.