New financial legislation post-recession

In the United States, the Great Recession officially ended in 2009; however, the effects of a crumbling financial market will likely be felt for many years to come among many vulnerable American individuals and families, especially African Americans. Legislative changes were needed to address future crashes of major American and global financial institutions. The Great Recession also ushered in a new period of financial regulation in the United States and in other parts of the world. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law by President Barack Obama on July 21, 2010, to restore at least some of the US govermnent’s regulatory power over the financial industry.

The Dodd–Frank Act

The Dodd-Frank Act was momentous in that it provided a host of far-reaching recommendations focused on rectifying the causes of the 2007-2009 financial crisis. The Dodd-Frank Act created new guidelines for how large financial institutions should be managed and it also included wide-ranging prescriptions, from mortgage lending to shareholder voting to derivatives clearing. Few congressional Republicans supported it, partly because Dodd-Frank revealed major flaws in the US financial system. The Act is a major piece of legislation designed to address unscrupulous lending that locked consumers - many in very vulnerable populations - into complicated loan practices and concealed costs. Lack of enforcement of the rules resulted in excess and abuse, resulting in American citizens being left to fend for themselves when a huge financial institution failed. Dodd-Frank enabled the federal govermnent to assume control of banks that were considered to be on the verge of financial downfall, by employing different consumer safeguards intended to protect investments and thwart predatory lending - that is, where banks provide high-interest loans to borrowers who most likely will have difficulty repaying the loans (Goodwin, 2010).

When he signed Dodd-Frank into law, President Obama felt that he might condense some of the faults by defining them in three broad categories: (1) his first focus was on inadequate prudential supervision and regulation, adding that “our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy”; (2) he then referred to bailouts, government loans, payments, or guaranties that “left taxpayers on the hook if a big bank or financial institution ever failed”; (3) finally, he noted the impact of harsh financial practices on vulnerable consumers, including instances where “lenders locked consumers into complex loans with hidden costs” (Goodwin, 2010). The Dodd-Frank act seems promising in terms of addressing a future widespread financial crisis; however, an important question concerning consumers is how new banking guidelines and tighter restrictions affect vulnerable American populations, especially African Americans as they continue to pursue their dream of home ownership and wealth building. However, after his inauguration, President Donald Tramp and some members of Congress made several efforts to eliminate significant segments of the Act that would essentially eradicate some of the new guidelines designed to protect Americans from another recession (Goodwin, 2010).

The Dodd-Frank Act accomplished the following:

  • • It imposes more stringent prudential standards - including tougher requirements for capital, leverage, risk management, mergers and acquisitions, and stress testing - on bank holding companies and other financial firms whose failure could threaten the stability of the US financial system;
  • • It gives the Federal Reserve more authority to scrutinize the activities of nonbank companies;
  • • It requires more transparent trading and clearing of derivatives and, through the so-called “Volcker rale,” prohibits insured depository institutions, like commercial banks, from dealing in derivatives for their own account;
  • • It requires banks, lenders, and others, whenever they securitize an asset, to hang on to a portion of the credit risk; and
  • • To help ensure regulators don't lose sight of the big picture, it establishes the Financial Stability Oversight council, whose membership includes the heads of all the financial regulatory agencies. The Council gives regulators a forum to compare notes, scan the nation’s financial system for signs of trouble, and identify financial firms that could threaten US financial stability.
  • (Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,929-Z, 124 Stat. 1376,1871,2010; Goodwin, 2010; Chen, 2019)
 
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