Consumer Protection

Aids Provided By The Consumer Protection Act And Dodd-Frank Wall Street Reform

Legal

The Dodd-Frank Wall Street Reform and the Consumer Protection Act are both considered to be the massive pieces of financial reform legislations passed by the former Obama administration in 2010. This was primarily done in response to and to deal with the effects of the great financial crisis of 2008.

The facts and features of Dodd-Frank Wall Street Reform are:

  • The reforms were named after the sponsors US Senator Christopher J. Dodd and US Representative Barney Frank.
  • There are numerous provisions in this Act that are explicitly spelled out over about 2,300 pages.
  • These reforms are being implemented over the past decade with intent to reduce the various risks in the US financial system.
  • The act also established a large number of new government agencies that are given the responsibility to oversee the different aspects and various components of the Act.
  • The Act extends various aspects of the banking system as well.

As of now, President Donald Trump has sworn to repeal this Act and on May 22, 2018, the House of Representatives also voted to roll back a few significant pieces of Dodd-Frank Wall Street Reform.

The break down

While breaking down the Dodd-Frank Wall Street Reform and the Consumer Protection Act you will see that the primary monitors are The Financial Stability Oversight Council and Orderly Liquidation Authority.

  • They monitor the financial stability of the major firms or the companies that are deemed as ‘too big to fail’ because their failure could have a huge negative impact on the entire economy of the nation.
  • Apart from that, the Act also provides for restructurings or liquidations through the Orderly Liquidation Fund. This is the money provided to support the dismantling of several financial companies that are placed in receivership and those that prevents tax dollars from being used to support such firms.
  • These councils have the regulatory authority as well as the power to break up the banks that are considered to be too large as to pose a significant systemic risk. It also has the power to compel them to raise their reserve requirements.

Similarly, the responsibility of the new Federal Insurance Office is also separated and designated to identify and monitor all insurance companies that are also considered as “too big to fail.”

Role of the CFPB

The role of the Consumer Financial Protection Bureau, CFPB is also distinguished as they are supposed to prevent any predatory mortgage lending. This reflects the fact that the extensive sentiment that the subprime borrowers in the mortgage market was the fundamental cause of the 2008 catastrophe.

  • The primary intent of the CFPB is to make the consumers understand the terms of a mortgage to make things easier for them before they finalize the paperwork. This will prevent the mortgage brokers or the lenders from earning higher commissions on closing loans or to charge higher fees and higher rates of interest by the lenders.
  • The law also prevents the mortgage originators from steering any potential borrower to a specific type of loan that will eventually result in a higher payment for the originator.
  • Apart from that, the CFPB also oversees other types of consumer lending that includes credit and debit cards as well.
  • In addition to that the CFPB also addresses all consumer complaints raised from time to time.
  • The law also says that all money lenders apart from the automobile lenders should disclose information, terms and conditions of the loan in a form that is easy to read and understand for the consumers.

While most of the money lenders follow these rules strictly but there are still a few that may take the benefit of your ignorance about the money lending laws by following a few dishonest practices. It is for this reason you visit sites such as https://www.libertylending.com/ or any other third party review sites to make the right choice of lender.

The useful components

The components of the Dodd-Frank Wall Street Reform and the Consumer Protection Act are all useful for the borrowers especially though several rights and risks of the money lenders are also protected by these Acts.

One of the most significant components of Dodd-Frank is the Volcker Rule in the Title VI of the Act. According to this rule there are lots of limitations and restrictions imposed to the banks and financial institutions such as:

  • It restricts the ways in which the banks can invest
  • It limits speculative trading
  • It eliminates proprietary trading
  • It effectively separates the commercial functions and investment of a bank
  • It strongly curtails the ability of any financial institution to employ and risky trading techniques and strategies
  • It oversees the servicing of the banks to their clients as a depository.
  • It does not allow the banks to be involved with private equity firms or hedge funds as these are too risky a business and
  • It prevents the financial institutions to trade proprietarily if there is no sufficient reason or profit in order to minimize the chances of conflict of interests.

Ideally, with so many restrictions imposed on the banks and financial institutions, the Volcker Rule is openly a push back to the direction of the Glass-Steagall Act of 1933. This was the law that first accepted the intrinsic dangers of the financial entities while extending their commercial as well as investment banking services.

The CPA contains specific provisions for regulating the different derivatives such as the credit default swaps. This was the widely blamed contributor to the 2008 financial crisis. These exotic financial derivatives when traded over the counter pose a significant amount of risk to the economy at large due it extensive size of market as opposed to any centralized exchanges such as commodities and stocks.

These Acts set up the centralized exchanges for such swaps trading and in turn reduce the chances of any counterparty default. It also provides specific swap trading information through greater disclosure to the public. This eventually increases transparency in these markets.

In short, these Acts along with the Volcker Rule regulates the financial firms to prevent them from failing and wreak havoc on the broader economy.