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What is the Dodd-Frank legislation?

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Quick Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act is the Obama Administration's legislative response to the financial crisis that hit the American economy in 2008. The purpose is to decrease a number of risks within the U.S. financial system through the establishment of several agencies, notes Investopedia.

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Full Answer

One of the agencies that the Dodd-Frank Act created was the Financial Stability Oversight Council and the Orderly Liquidation Authority which tracks the financial stability of firms large enough to cause significant harm to the economy if they do not survive. If those companies become too weak, the law as it stands, in 2015, sets the stage for orderly liquidation, keeping tax dollars from supporting those types of firms. If banks become so large that they represent a risk to the financial system, the council can break those banks up and elevate reserve requirements, as stated by Investopedia.

The Consumer Financial Protection Bureau was set up to stop predatory mortgage practices and make mortgage paperwork simpler for customers to understand before they sign contracts at closing. The Bureau also keeps mortgage brokers from elevating their commissions by boosting fees and interest rates, and it prevents loan originators from pushing borrowers to the loan that gives the originator the highest commission.

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