US & World Economies US Economy GDP Growth & Recessions What Is the Dodd-Frank Wall Street Reform Act? By Kimberly Amadeo Updated on May 31, 2022 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board From left: Rep. Barney Frank (D-MA) and Sen. Christopher Dodd (D-CT). Photo: Alex Wong / Getty Images Definition The Dodd-Frank Wall Street Reform and Consumer Protection Act is a law that regulates the financial markets and protects consumers. Its components are designed to prevent a repeat of the 2008 financial crisis. Key Takeaways The Dodd-Frank Wall Street Reform Act was a massive overhaul of the financial institution legislation passed in the wake of the 2008 financial crisis.Broadly speaking, the law sought to enact stricter oversight on banks while expanding protections for consumers and taxpayers.One notable aspect of the law was the creation of the Consumer Finance Protection Bureau.There have been repeated efforts to roll back Dodd-Frank provisions, some of which have been successful. Definition and Example of the Dodd-Frank Wall Street Reform Act The Dodd-Frank Wall Street Reform Act, or simply "Dodd-Frank," is the most comprehensive piece of financial reform since the Glass-Steagall Act. Glass-Steagall regulated banks after the 1929 stock market crash until it was repealed by the Gramm-Leach-Bliley Act in 1999. Note The Gramm-Leach-Bliley Act deregulated banks' uses of deposited funds, allowing them to once again invest those deposits in unregulated derivatives. Many blame the 2008 recession in large part on the trading of risky derivatives. The Dodd-Frank Act is named after the two lawmakers who sponsored it: Senator Chris Dodd and Representative Barney Frank. On July 21, 2010, President Obama signed it into law. Alternate name: Dodd-Frank The provisions in the law were created to protect consumers and taxpayers from the risks of investments that banks make. However, many banks complained that the regulations were too harsh, especially on small banks. Lawmakers and President Donald Trump sought to roll back aspects of the law, including a major rollback in 2018 that passed with some bipartisan support. How Does the Dodd-Frank Wall Street Reform Act Work? Here are some of the ways in which the Dodd-Frank Act sought to make the financial system safer for consumers and taxpayers. Keeps an Eye on Wall Street The Financial Stability Oversight Council (FSCO) identifies risks that affect the entire financial industry. If any firms become too big, the FSOC will turn them over to the Federal Reserve for closer supervision. For example, the Fed can make a bank increase its reserve requirement to make sure it has enough cash on hand to prevent bankruptcy. The chair of the FSOC is the secretary of the treasury. The council has 10 voting members and five nonvoting members. Voting members include the Securities and Exchange Commission, the Fed, the Consumer Financial Protection Bureau (CFPB), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Finance Agency (FHFA), and the Consumer Financial Protection Agency (CFPB). Dodd-Frank also strengthened the role of whistleblowers protected under Sarbanes-Oxley. Keeps Tabs on Giant Insurance Companies Dodd-Frank created the Federal Insurance Office (FIO) under the U.S. Department of the Treasury. It identifies insurance companies that create a risk for the entire system. It also gathers information about the insurance industry. In December 2014, for example, it reported on the impact of the global reinsurance market to Congress. The FIO makes sure that insurance companies don't discriminate against minorities. It represents the U.S. on insurance policies in international affairs. office works with states to streamline regulation of surplus lines insurance and reinsurance. Stops Banks From Gambling With Depositors' Money The Volcker Rule bans banks from using or owning hedge funds for their own profit. It prohibits them from using your deposits to trade for their profit. Banks can only use hedge funds at a customer's request. However, this aspect of the Dodd-Frank Act has been a prominent target for rollback, including multiple proposed and finalized rule changes from agencies like the Fed and the FDIC. Reviews Federal Reserve Bailouts The Government Accountability Office (GAO) can review future Fed emergency loans, and the Department of the Treasury must approve the new powers. This provision addressed critics who thought the Fed had gone overboard with its emergency loans and other "bailouts" to the banks during the Great Recession. Monitors Risky Derivatives The Securities and Exchange Commission and the Commodity Futures Trading Commission regulate the most dangerous derivatives, which are traded at a clearinghouse, similar to a stock exchange. That makes the trading function more smoothly. The regulators can also identify excessive risk and bring it to policymakers' attention before a major crisis occurs. Brings Hedge Fund Trades to Light One of the causes of the 2008 financial crisis was that hedge fund trades had become so complex that they were increasingly difficult for even experienced traders to understand. When housing prices fell, so did the value of the derivatives traded. But instead of dropping a few percentage points, their prices fell to zero. To address this issue, Dodd-Frank requires all hedge funds to register with the SEC. They must provide data about their trades and portfolios so the SEC can assess overall market risk. Oversees Credit Rating Agencies Dodd-Frank created an Office of Credit Ratings at the SEC. It regulates credit-rating agencies like Moody's and Standard & Poor's. Critics of these agencies say they helped fuel the crisis by inaccurately reporting on the safety of some derivatives. Under Dodd-Frank, the SEC can require them to submit their methodologies for review. It can de-register an agency that gives faulty ratings. Regulates Credit Cards, Loans, and Mortgages Dodd-Frank created the Consumer Financial Protection Bureau, which consolidated many watchdog agencies and put them under the Department of the Treasury. It oversees credit reporting agencies and credit and debit cards. It also oversees payday and consumer loans, except for auto loans from dealers. Banking fees are also under the purview of the CFPB. These include fees associated with credit, debit, mortgage underwriting, and more. Although Dodd-Frank didn't ban risky mortgage loans, such as interest-only loans, it sought to protect homeowners by requiring better disclosure of what the loans actually were. Banks have to prove that borrowers understand the risks. They also have to verify borrowers' income, credit history, and job status. Note CFPB also played a role in increasing the FDIC insurance on bank deposits to $250,000. Changes to the Dodd-Frank Act Many banks fought aspects of Dodd-Frank from the beginning, and in 2018, Congress joined them by rolling back some provisions of the law. The Economic Growth, Regulatory Relief, and Consumer Protection Act eased regulations on "small banks" with assets between $100 billion and $250 billion. Under the looser restrictions, these banks no longer had to run stress tests to ensure that they could withstand a major financial catastrophe. The bill received some bipartisan support, but it was opposed by Democratic Minority Leader Rep. Nancy Pelosi. Republicans largely favored the bill, as did President Trump. The Trump administration signaled that it would approve even further rollbacks of Dodd-Frank provisions. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The White House. "President Obama Signs Wall Street Reform: 'No Easy Task.'" Accessed Dec. 5, 2021. Federal Insurance Office, U.S. Department of Treasury. "The Breadth and Scope of the Global Reinsurance Market and the Critical Role Such Market Plays in Supporting Insurance in the United States." Accessed December 5, 2021. Board of Governors of the Federal Reserve System. "Volker Rule." Accessed Dec. 5, 2021.