Five years ago Tuesday, in the wake of the worst financial crisis since the Great Depression, the Dodd-Frank bill to reform Wall Street became the law of the land.
The 849-page law largely operates behind the scenes, setting out who will regulate Wall Street and how the government unwinds failing banks.
But two important aspects of Dodd-Frank were aimed squarely at making borrowing and investing safer for everybody. What have these parts of the law accomplished so far? Here’s a closer look:
The Consumer Financial Protection Bureau
Beyond the bank rules, this new agency is the best-known result of the Dodd-Frank law. It was championed by Harvard law professor Elizabeth Warren, who argued that the government should do more to keep consumers’ money safe when they borrow or bank, much as the Consumer Product Safety Commission tries to protect Americans from faulty toaster ovens or power tools. At that time homeowners were facing high payments on houses they suddenly couldn’t sell, often as result of new, complex kinds of mortgages and very aggressive lending practices. So the idea of the CFPB quickly gained steam in Washington. Warren ultimately didn’t get the nod to lead the agency, but she was subsequently elected to the Senate.
The CFPB has endured some growing pains. But the bureau also appears to be making headway in its mission. So far this year, the CFPB has succeeded in writing new rules requiring mortgage lenders to verify borrows can repay loans. It’s also gone after retail banking practives, ordering Citibank to pay $700 million for allegedly deceptively marketing of credit card add-on services.
The CFPB has fielded more than 600,000 consumer complaints against financial companies ranging from mortgage lenders to debt collectors. Last month the bureau began publishing the texts of more than 7,000 of these to highlight frequent problems. Up next: an overhaul of the confusing mortgage documents home buyers get and broader rules governing overdraft fees. However, some consumer advocates are worried these may not turn out to be strict enough.
Standards for investment advisers and brokers
Dodd-Frank also included a key provision that is supposed to protect investors from getting bad advice. Here action has been slower.
The new law gave the Securities and Exchange Commission the option to impose on financial advisers something called a “fiduciary” standard. A fiduciary has a duty to act in clients’ best interests when they recommend investments like mutual funds. While that may seem like a no-brainer, in fact, today many advisers are required only to recommend investments that are “suitable” for the investor, based on factors like age and risk tolerance.
The law stopped short of saying the SEC had to adopt this standard. While the past two SEC chairmen have indicated they would like to move forward, a full-court press by Wall Street lobbyists has successfully stalled those efforts.
The fiduciary standard isn’t dead. The Labor Department has taken up the mantle and is attempting to impose the rule for people advising on investment decisions like IRA rollovers. The Obama Administration has indicated support for the DOL’s effort, but as recently as last month, Republican-led Congress moved to prevent the Labor department from implementing the rule.