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Published On: Sat, Jun 21st, 2014

Whistleblower Programs: What You Need to Know About the Dodd-Frank Act

The financial crisis of 2008 rocked the financial world. Many firms went out of business, and even an insurance giant, AIG, was implicated in a massive financial faux pas that cost investors millions of dollars. As a response to this, the government created Dodd-Frank, a piece of legislation aimed at shoring up the financial sector. Here’s how it intends to do it.

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The Establishment of SEC Office Of Credit Ratings

Proponents of the Dodd-Frank Act believe that credit rating agencies were giving unreasonably high ratings to otherwise shaky financial firms. These high ratings allowed financial services companies to engage in risky investment behavior. The SEC Office of Credit Ratings is designed to oversee the credit rating agencies to ensure that they provide meaningful and reliable credit ratings for the institutions that they evaluate.

The Volcker Rule

The Volcker Rule is designed to limit speculative trading as well as propriety trading by banks. The Volcker Rule also limits and regulates the trading of derivatives, like credit default swaps (CDS). This presents and interesting problem, however. Since banks need to be able to borrow short and lend long, and they are already hampered by extensive federal regulations, some critics believe that this will make it all but impossible for banks to turn a profit.

Regulators see it differently. They believe that if companies hire a whistleblower hotline vendor, and keep a regulatory official on staff, that the risks of lost profit are not outweighed by the gain in public trust and stability of the financial markets.

Simplified Language On Credit Applications

Simplifying the language on loan and credit applications has been a major sticking point with banks and credit card companies for years. But, now, there’s a reason for banks to adopt it. Actually, there’s a requirement for them to do so. Under the law, banks, except automobile lenders, must disclose information in a form that is easiest for consumers to read and understand.

Most businesses are probably familiar with the regulation when they apply for credit cards or a line of credit (LOC). The simplified terms and conditions are now standard practice.

The Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau was set up under the Act to prevent predatory mortgage lending. During the run up to the financial crisis, it was common for mortgage brokers and banks to offer consumers something called “NINJA” loans – also known in the industry as “liar’s loans.”

They were loans that did not require a verification of income or assets. This made it easier for lenders to approve loans, but it also allowed consumers to take on more debt than they could reasonably handle.

These loans also sometimes obscured details of the loan repayment. For example, one exotic loan product, called an Option ARM, consisted of an adjustable payment and interest rate. Each month, customers could choose between one of four different payments: the minimum payment, the interest-only payment, the 15 year amortized payment, and the fully amortized 30-year payment.

These loan options were not always clear and, sometimes, the amortization periods weren’t clear. On the minimum payment option, for example, the loan would grow for the first 7 to 10 years before decreasing – known as “negative amortization.”

The Dodd-Frank Act aims to stop this type of lending in the future. Whether it can accomplish its stated goals remains to be seen.

What It Means For Whistle Blowing

Theoretically, under the law, the Dodd-Frank Act should help whistle blowers by putting the law on their side. But, corporations, especially banks being squeezed by the law, may turn a blind eye to any internal problems. One such “test case” is already proving the Act to be ineffective – Asadi v GE Energy.

Guest Author :

Brandon Yates is a businessman of many years. Now semi-retired, he likes to blog each day about a business topic to keep his head in the business world of today and help others learn, too.

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  1. group trainer says:

    Do you have any video of that? I’d care to find out some additional information.

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