The Dodd Frank Wall Street Reform and Co

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The Dodd-Frank Wall Street Reform and Consumer Protection Act

MBE 501: Regulations and Regulator

Dr. Gerardin

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The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a reform to prevent

the excessive risk-taking that led to the financial crisis. The law is used to provide protections

for American families, creating new consumer surveillance to prevent mortgage companies and

pay day lenders from exploiting consumers. The reform included a number of provisions that

lower risk taking and holding Wall Street accountable which include (Wall Street Reform, (n.d.):

 Taxpayers will not have the cost of Wall Street’s irresponsibility  Separate “proprietary trading” from business of banking

 End of bailouts

The reform created an independent agency to set and enforce rules for the financial

institutions and make sure they are held at high standards. The agency is known as the

Consumer Financial Protection Bureau (CFPB) (Wall Street Reform, n.d.). The CFPB had

released new rules that protect consumers, however, some will result in higher costs for the

consumer that it protects. The following six rules will increase consumer cost: Mortgage

Market’s QM/Ability to Pay Rule, Auto Lending Crackdown, Toughened Mortgage Servicing

Rules, Money Transfer Fees, Mortgage Disclosures and Jumbo and Interest-Only Mortgages

(American Banker, n.d.).

Under the Qualified Mortgage rule, lenders will look at the consumer’s ability to pay

back the loan. It must not burden a borrower’s debt-to-income ratio in excess of 43%. The costs

of originating a loan that does not meet the qualification will rise dramatically. This will

possibly take the form of higher interest rates and fees charged by lenders to make up for the

additional legal liabilities of the non-QM mortgages. This rules also creates a new quality

control requirement that will add to the lender’s costs and cause penalties if they do not comply.

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for minorities. Mortgages servicers have to comply with more than a dozen rules that will

increase cost of servicing defaulted loans. The CFPB rule for transferring money result in higher

fees for workers sending money abroad. Lenders increase fees to ensure that compliance and

related costs are covered. With Jumbo and Interest-Only loans buyers of high-priced homes will

face higher lender costs or have to post larger down payments. Low-balance loans can also be

affected (American Banker, n.d.).

The Dodd-Frank Act has added $21.8 Billion in costs with its 398 new regulations and it

has used 60.7 million paperwork burden hours. This has changed the financial industry,

overhauled mortgage lending, and directly affected the availability of credit. Many of the

regulations have had adverse effects, burdensome costs and consequences on small businesses

and consumers. Banks have reported increased costs to comply with the Dodd-Frank Act, likely

to increase cost of banking and lending for the consumers (Winkler, Gitis, et al, 2014).

Although many believe that the crisis is behind us, the consequences are not yet fully

known. It is very important to know why the crisis occurred because new regulations will fail if

the cause is not fully understood (Nichols, Hendrickson & Griffith, (2011). There are no

guarantees that there will not be another financial crisis. However, there are different traits that

will determine when a financial crisis can occur. The following are some observations when

determining the next financial crisis from previous crises (McMillan, 2016):

 80% of the crisis happened during a recession

 Forty Percent of past bear markets came during times of rapid rising of commodity prices  The Federal Reserve raised interest rates aggressively during 40 percent of the past bear

Markets

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REFERENCES

Wall Street Reform: The Dodd-Frank Act. Retrieved February 28, 2016 from https://www.whitehouse.gov/economy/middle-class/dodd-frank-wall-street-reform

Winkler, A., Gitis, B. & Batkins, S. (2014, July 15). Dodd-Frank at 4: More Regulation, More Regulators, and a Sluggish Housing Market.

6 CFPB Rules That Will Increase Consumer Costs. American Banker. Retrieved February 28, 2016 from

http://www.americanbanker.com/gallery/six-cfpb-rules-that-will-increase-consumer-costs-1058633-1.html

McMillan, B. (2016, January 12). Are We Headed For Another Financial Crisis Like 2008? Forbes. Retrieved February 28, 2016 from

http://www.forbes.com/sites/bradmcmillan/2016/01/12/are-we-headed-for-another-financial-crisis-like-2008/#5649bdf853af

Nichols, M., Hendrickson, J.M, & Griffith, K. (2011) Was the Financial crisis the result of ineffective policy and too much regulation? An empirical investigation. Journal of Banking Regulation. Retrieved February 28, 2016 from