It‚Äôs been a year since Congress adjusted parts of the Dodd-Frank Act financial reform package, which was originally implemented in 2010 to address the financial industry excesses that helped cause the financial crisis of 2008.
The Dodd-Frank rollback was a bipartisan effort designed to make life easier for smaller banks, and also extend certain consumer protections. However, the effort drew negative attention from those who argued that dialing back some bank oversight could possibly contribute to another financial crisis.
So what happened with the Dodd-Frank rollback, anyway? In this article, we‚Äôve rounded up what parts of Dodd-Frank changed, what stayed the same and what it all means for your banking and personal finances.
The Obama administration proposed the Dodd-Frank reform bill in response to the financial crash of 2008, which set off the worst economic downturn since the Great Recession. Congress passed the bill in 2010.
The Dodd-Frank Act spans 2,300 pages and directs federal regulators to enforce more than 400 new rules and mandates. According to David Reiling, CEO of Sunrise Banks, ‚ÄúIt imposed particular attention on the mortgage lending industry which was considered the main trigger for the Great Recession of 2008.‚ÄĚ
Some of the rules under Dodd-Frank include:
For more on the specifics of the original Dodd-Frank bill, check out part one of this series here.
Under the original terms of Dodd-Frank, banks faced greater regulation and oversight from the Federal Reserve when they held $50 billion or more in assets. Supporters of the Dodd-Frank rollback thought that this threshold was too low and created an excessive regulatory burden for smaller regional and community banks that don‚Äôt have the same resources as the big banks.
After the rollback, the cutoff for mandatory extra regulation was pushed up to $250 billion in assets. In addition, regulators were given the discretion to require stress tests and extra regulations for banks with between $100 to $250 billion in assets, provided the regulators think it‚Äôs appropriate.
Brandon Renfro, assistant professor of finance at East Texas Baptist University, is supportive of the rollback overall. ‚ÄúBigger players are better able to handle the regulations, due to economies of scale, while the Dodd-Frank rollback will give smaller organizations slack and flexibility to operate.‚ÄĚ
The Dodd-Frank rollback set to reduce regulations and improve profits for smaller banks. Since these banks no longer need to go through the same strict compliance rules and stress testing, they should be able to earn more. Supporters of the rollback believed that small banks could pass these savings on to consumers, by paying higher interest rates on products like CDs and charging less for loans.
The Dodd-Frank rollback also loosened the requirements small banks face for setting up a mortgage loan. Small banks no longer need to follow the Dodd-Frank data reporting requirement meant to help detect predatory and discriminatory lending. This makes it slightly easier for these small banks to offer mortgages.
Finally, the rollback added a new protection for small lenders offering mortgages (those with less than $10 billion in assets). ‚ÄúOne of the changes of the rollback was to allow certain small creditors additional safe harbors when determining a consumer‚Äôs ability to repay a mortgage loan,‚ÄĚ said Reiling. ‚ÄúBy providing additional protection to these institutions who have historically always verified a consumer‚Äôs repayment ability, this may translate to easier access to credit for consumers seeking loans at these institutions.‚ÄĚ
Overall, the intent of the Dodd-Frank rollback is to make it easier for small banks to operate with the goal that this will improve banking and borrowing for consumers. However, this is just an inclination as there are no specific rules in the bill requiring these banks to offer better rates for their customers.
Beyond changes for banking, the Dodd-Frank rollback also created new benefits for consumer credit reports. First, consumers can now request a free credit report freeze from the credit bureaus ‚ÄĒ Equifax, Experian and TransUnion. A credit freeze locks up your report so new loans and lines of credit can‚Äôt be opened under your name ‚ÄĒ a good safeguard if you‚Äôre worried someone stole your identity.
Before the rollback, you had to pay up to $10 per credit bureau to get this protection in place. Now, this service is free for any credit user who wants it.
The Dodd-Frank rollback also extended the length of a short-term fraud alert on your credit report. It‚Äôs now one year, up from 90 days. When your report has a fraud alert, the bureaus must take extra steps to verify your identity before issuing new credit, like by calling you first.
It‚Äôs not as strict as a credit freeze so you can still set up accounts yourself, but adds extra protection against identity theft. Before the rollback, you would need to reapply for a new short-term fraud alert every 90 days, but now it lasts a full year.
It took years for the country to recover from the last financial crisis and it‚Äôs understandable to be concerned about any legislation that might make another one more likely. While the Dodd-Frank rollback does loosen some of the measure‚Äôs original rules, it retains the majority of the original protections: the new regulatory agencies, the Federal oversight of large banks, the new disclosures for mortgages, among many others.
‚ÄúCould the rollback increase the chances of a financial crisis? Yes, but only by some marginal degree,‚ÄĚ said Renfro. ‚ÄúThe key thing of the rollback is that it limits the regulations on the small banks, who were not key contributors to the financial crisis. The large banks are still constrained by the rules of Dodd-Frank so I‚Äôm not too concerned about the change.‚ÄĚ
Passing new legislation is always a balancing act, and the government decided that the extra potential growth and consumer benefits justified removing some of the Dodd-Frank‚Äôs rules. The main framework of the measure‚Äôs protections remains in place, while small banks and community banks get some regulatory relief. That seems like a fair trade-off, but only time will tell whether this is the right move.