A Brief Look at the Dodd-Frank Act
Pittenger, William L., Real Estate Issues
THE DODD-FRANK WALL STREET REFORM AND CONSUMER Protection Act, as it is formally known, is the most sweeping piece of financial legislation enacted in the U.S. since The Great Depression of the 1930s. It was created to enhance the stability of the U.S. financial system and address many of the things that led to its near collapse in late 2008. The stated purpose of the act is to "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too big to fail, to protect consumers from abusive financial services practices and for other purposes." The Act was first proposed in December 2009 and was signed into law by the President on July 21, 2010.
The act contains some 2,000 pages of text, 16 titles and appears to require agencies to conduct at least 40 studies and perhaps as many as 67 to determine how to proceed putting regulatory flesh on the legislative bones. It requires regulators to create some 243 rules and to periodically issue 22 reports. It creates new agencies, merges some, eliminates others and creates new oversight for specific institutions deemed to be systemically important and whose failure could put the nation's economy at risk. The act affects the entire financial services industry including financial institutions, their regulators and even consumers.
The financial crisis that began in 2008 was largely a product of outdated regulation and supervision combined with credit innovation and technology that were advancing faster than regulatory and risk management controls. One gaping hole in the prior regulatory system was that no one had clear responsibility for monitoring the financial system as a whole. While financial innovation was hailed as a positive, the mismatch between that and risk management was an unintended consequence that led to near disastrous results.
While protecting consumers through new agencies, proposed efficiencies, enhanced enforcement, greater transparency and more are lofty goals, legislation as far reaching as Dodd-Frank will certainly have unintended consequences not yet even envisioned. With the holes in the law intended to be filled by further study and regulation, agencies, attorneys, advocates, and others will likely parse the language for years as they argue intent, try to clarify the law's ambiguities and debate such things as does the law really mean "and" or was it intended to be "or."
The law sets forth timelines for certain implementation steps. Moreover, each implementation step creates additional timelines and deadlines, many of which seem impossible to meet given their complexities and political realities surrounding them. Creation of the Consumer Financial Protection Bureau (CFPB), for example, is among the biggest and most complex endeavors. While the bureau's duties look clear on paper, implementation of regulation together with how the new agency draws resources from or delegates examination authority to existing agencies is currently a tangled web.
Its director, when appointed, is subject to Senate confirmation which, if recent history is a guide, will be a lengthy and politically charged process. The leading candidate for the position was widely thought to be Harvard Law Professor and Presidential assistant, Elizabeth Warren. As of this writing, however, she serves as a "special advisor" to the CFPB, under appointment by the Treasury Secretary, and has not yet been nominated to be the permanent head. That adds uncertainty and will almost certainly create delays in implementing the bureau's mission.
Perhaps the biggest hole left unplugged in the act is the future of Fannie Mae and Freddie Mac. The two government sponsored entities were placed into conservatorship in late 2008 but for reasons that are not clear, Congress chose not to address their future as part of the Dodd- Frank Act.
What is clear is that the Act's many provisions and those that will follow with creation of numerous regulations will increase regulatory and legal risk and the cost of doing business for virtually all financial service institutions. …