When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law last month, the legislative and executive branches of the U.S. government enacted the most sweeping changes in financial reform legislation since the 1930s. The new law will impact both businesses and individuals. Below are a few of the highlights.
Consumer protection. The law creates a new Bureau of Consumer Financial Protection. By consolidating responsibilities that are currently held by several government agencies, the new bureau will oversee financial products such as mortgages, credit cards, gift cards, student loans and payday loans.
In addition, Dodd-Frank specifies that mortgage applicants must prove they can afford insurance, taxes and assessments in addition to their mortgage payments, better ensuring they do not take on more debt than they can afford. Prepayment penalties will be limited or prohibited, and consumers must be shown their credit score if their loan application is denied. The law mandates the Federal Reserve to study reasonable fees for debit card transactions on retailers, which is intended to allow retailers to pass saving on to consumers and provide discounts for using cash or a debit card rather than a credit card.
The current FDIC protection on deposits has been made permanent under the new law. Federal deposit insurance coverage was temporarily raised to $250,000 from $100,000, and will now permanently remain at the higher limit.
Business oversight. Dodd-Frank exempts small companies with less than $75 million in market capitalization from the requirement to obtain an external audit on the effectiveness of their internal controls. However, disclosure of management’s attestation on internal control over financial reporting is still required. The SEC must study whether it can reduce the burden of the external audit requirement for companies with market capitalization between $75 and $250 million.
Financial institution oversight. Dodd-Frank creates the Financial Stability Oversight Council as a new systemic risk regulator. The council will be chaired by the Secretary of the Treasury and include 10 existing regulators including the Federal Reserve, FDIC and SEC among others. The council may develop rules for the larger financial firms that it determines to potentially threaten the financial system and in extreme situations, has the power to break up those firms.
The Dodd-Frank Act came as a direct result of the deep recession experienced two years ago. To learn more about how this new law may impact you or your business, please contact your financial advisor.