The Dodd-Frank Act is a federal law that enacted regulation of the financial industry by the United States government. Known fully as the Dodd-Frank Wall Street Reform and Consumer Protection Act, it was passed in 2010 as a response to the financial crisis to create a regulatory process limiting risk through the enforcement of transparency and accountability. Its ultimate goal is to prevent the U.S. economy from undergoing another financial crisis like the one that negatively impacted our country in 2008.
The Great Recession that began in 2008 resulted in part because of minimal regulation and increased reliance on large banking institutions. The Consumer Financial Protection Bureau (CFPB) was born out of Dodd-Frank, with a goal to prevent high risk business practices that negatively affect consumers as well as providing truthful disclosures about mortgages and credit scores. One of the Act’s goals was to safeguard customers from abuses by large financial corporations that were contributors to the crisis. “Loose lending practices” was a key mishandling that directly affected homeowners, resulting in almost 8 million homes falling into foreclosure.
Thanks to Dodd-Frank, high-risk loan products, like negative amortization mortgages, are now prohibited. Borrowers must document their employment and debt levels. Lenders must disclose all the costs involved in each loan, and, perhaps most important because it was the fundamental factor in the financial housing crisis, lenders must verify a borrower’s ability to repay the mortgage. The new restriction is that a borrower’s debt does not exceed 43 percent of their income. Dodd-Frank has resulted in potential homeowners, even those with outstanding income and credit, having to jump through a lot more hoops to obtain a mortgage. The average FICO score for loan qualification soared to the highest in history.
Lending procedures became so constricting under Dodd-Frank that Ben Bernanke, Federal Reserve Chairman from 2006 to 2014, encountered issues refinancing his own residence.
Ten years later, borrowers continue to deal with the strict qualification process and high level of required creditworthiness. In 2017, the United States Treasury Department declared that the law has “failed to address many drivers of the financial crisis, while adding new regulatory burdens.” Congress voted on the Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2115) (also known as the Crapo bill) in mid-March 2018 to loosen some of Dodd-Frank’s mortgage constraints. One provision would allow community banks or credit unions with less than $10 billion in assets to offer mortgages outside of the qualified mortgage rule as long as they keep the loan in-house versus selling it, thus making it a qualified mortgage.
Small community banks with $10 billion or less in assets are fundamental to our nation’s economy. According to the American Enterprise Institute (AEI), these small financial institutions provide 44% of lending to the country’s farmers. In addition, nearly 50% of all small business loans in America and more than 15% of all residential mortgages are issued by small banks.
In order to become law, the Crapo bill must be reconciled with the Financial CHOICE Act, passed by the U.S. House of Representatives in 2017. The House version seeks to roll back Dodd-Frank even further, with a specific focus on the Consumer Financial Protection Bureau. To date, the future of Dodd-Frank is still remains to be seen but there is optimism that the Crapo bill will be enacted during 2018.