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Money Talks

By Dr. Gregg Dimkoff
Professor, Grand Valley State University
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The one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act is approaching quickly. Also known as the Dodd-Frank financial overhaul, it was signed into law by President Obama on July 21, 2010. Can you name a single provision contained in the act? If not, you aren’t alone. Yet, the act will have a greater impact on the U.S. financial sector than any federal law since the early 1930s. It affects virtually every business and consumer in the country.

The law is named after the two Democrats who introduced it in the U.S. House of Representatives (Barney Frank) and in the Senate Banking Committee (Chris Dodd). Its stated purpose 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 the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

The act is categorized into 16 titles, and by one law firm’s count, it requires regulators to create 243 rules, conduct 67 studies and issue 22 periodic reports. It’s a massive tome, consisting of 849 pages. Compare that to the much hated Sarbanes-Oxley Law, consisting of a mere 66 pages, and the Depression era Glass-Steagall Act’s (creating separations between banks and other financial institutions) 34 pages.

Congress and its various sub-committees are making progress adding details to the 16 titles. In fact, good progress abounds. As of April 28, the 16 titles contain approximately 3.3 million words. If double spaced, that’s only about 12,000 pages, or equivalent to 16 copies of Moby Dick, and at 40 hours per week, will take a month to read. Not to worry, however. After the Obama Care fiasco last year, members of Congress will be sure to read every page before voting on the 16 subsections. Oh, wait a minute. The Dodd-Frank financial overhaul act is already law. No additional voting (or reading) is needed. It’s a done deal. The 3.3 million words are just added details.

So how will the 16 titles affect financial markets? Here are just a few changes:

A provision ends too big to fail bailouts of financial institutions. No longer will taxpayers be on the hook to bail out bankrupt banks, life insurance companies and Wall Street firms that are so large, their failure would be catastrophic to the economy. New tough capital requirements and inducements to keep debt levels reasonable will apply, and a new liquidation fund separate from the FDIC will be created by assessing very large financial institutions fees over the next 5-10 years.

The amount of deposits insured by the FDIC and National Credit Union Share Insurance Fund is permanently raised from $100,000 to $250,000. You may recall the limit was raised temporarily to $250,000 during the depths of the recession. This provision makes the temporary increase permanent.

A Federal Insurance Office will be established and located in the Department of Treasury. Its purpose is to monitor, coordinate and make recommendations about any insurance matter including gaps in regulation, insurance company financial health and whether underserved consumers, communities and low and average income people have access to affordable insurance. The impact of this legislation is potentially huge. Throughout the history of the U.S., insurance regulation has been the exclusive responsibility of the individual states. Now the Feds have a big foot in the door.

Another title creates the Bureau of Financial Protection. Among its many objectives is to ensure equitable access to credit and promote financial literacy among consumers.

The act aims to improve consumer access to mainstream financial institutions. It will enable low- and moderate-income individuals to establish one or more accounts in federally insured banks. It also encourages financial institutions to make micro loans, typically under $2,500 and provide financial education and counseling. Here’s a good provision upon which we can all agree: Unused TARP funds must be used to pay back federal debt. That money cannot be used to fund new programs. The same rule applies to funds left over from the American Recovery and Reinvestment Act of 2009.

Another section addresses mortgage reform and predatory mortgage lending. It establishes minimum standards for mortgages, defines high-cost mortgages, and for those high-cost mortgages, requires consumer counseling, forbids balloon payments, bans pre-payment penalties and clamps down on drive-by appraisals.

Financial institution executives will shudder when they learn what’s about to hit the fan. Some of it is good for the industry, and some is good for consumers, but there’s no limit to the mischief Dodd-Frank can, and likely will, create. Want proof of the mischief? Remember the 3.3 million words through April 28? Approximately 62 percent of the rules required by the law — 240 of them —haven’t been written yet. Only 21 are finished. The 3.3 million words and 12,000 pages are just the surface.

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