The Dodd-Frank Wall Street Reform and Consumer Protection Act is a law that places significant regulations on financial institutions to prevent unnecessary risk-taking and abusive lending practices, explains The White House. The law is a direct result of the 2008 financial crisis.
On July 21, 2010, President Obama signed the act into law. It was specifically written to prevent another financial crisis from occurring. Before the law, the financial system lacked oversight, resulting in a broken and exploitative system that enabled banks to take risk without understanding the consequences. Furthermore, the government had no authority to do anything about it. As a result, high-risk lending, hiding fees and misguiding borrowers became standard practice, notes The White House.
The Dodd-Frank Act includes the Financial Stability Oversight Council that monitors banks from becoming too big to fail, points out CNBC. If a bank becomes too large, the Federal Reserve may impose tighter regulations or divide the bank into smaller parts. Since the law prevents taxpayers from bailing out a financial institution, all banks are required to have a shutdown process in place if the company becomes insolvent. The Bureau also requires lenders to generate plain English documents for consumers and limits fees that loans and mortgages can incur.
The law is named after the sponsors of the legislation, Senator Christopher J. Dodd and U.S. Representative Barney Frank, states CNBC.