The Dodd-Frank Act

When was the start of the recent financial crises? Fitzpatrick IV and Thompson (2011) asserted that “many observers point to the summer of 2007 as the starting date for the financial crisis that would bring down most of the U.S. investment banking industry” (p. 1). However, there are many conditions that led up to the crisis, including housing policies and interest rates. Besides banks, government, homebuyers, and rating agencies had a role in the financial crisis, which led to the federal government actions to pass the Dodd-Frank Act to solve and avoid another crisis in the future.

During the Great Depression of the 1930s, the United States passed the Glass-Steagall Act, which limited commercial speculation (Grant, 2010). In addition,

The Dodd-Frank Act introduced major American regulatory reform such as the end to protect financial institutions that are too big to fail (Lasher, 2014). During the financial crisis, the government was involved in protecting some institutions (e.g., Washington Mutual, Wachovia, etc) while not protecting others (e.g., Lehman Brothers). Additionally, the Dodd-Frank Act established changes requiring “mortgage lenders to ensure that borrowers have the ability to make payments,” which could have led to penalties if the lenders were not in compliance (Lasher, 2014). This provision of the Act can avoid lenders to offer products (e.g., no documentation loans) that could increase foreclosures.

Due to the inconsistency of credit ratings on CDO’s during the financial crisis, the Dodd-Frank Act created a department that oversees rating agencies (Lasher, 2014). The Dodd-Frank Act also established another department (i.e., the Federal Insurance Office) that monitors insurance companies similar to AIG (Lasher, 2014). However, the most important reform to the Dodd-Frank Act was the new requirement of lenders to retain five-percent of the risk in mortgages (Lasher, 2014). That is, mortgage originators cannot avoid risky loans that they approved by selling them to