The Dodd-Frank Act: How Does It Affect You?
Thursday, September 20, 2018, 6:00 PM | Leave Comment
The Dodd-Frank Act — also known as the Dodd-Frank Wall Reform and Consumer Protection Act — is a federal law that places stricter regulations on the financial industry and is enforced by the United States government.
The legislation was created to limit risk by promoting accountability and transparency for banking systems.
Due to the Great Recession of the early 2000s, one of the main goals of the act was to subject banks to harsher regulations.
How?
By creating the financial stability council to address major issues affecting the financial industry. That way, the government could possibly prevent another recession from happening again within the coming years.
So, by keeping the banking systems under a watchful eye, the act could possibly eliminate the dependence and borrowing of future taxpayer-dollars to bail out banking institutions.
The one question most people should be thinking about, however, is how does this affect us as consumers?
Although there are a number of ways this act can affect us, there are three worth noting:
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Homeowners Can Be Put in a Vulnerable Position
Generally speaking, state and local taxes (SALT) are, by constitutional law, different from federal taxes. That, however, doesn’t mean that homeowners won’t be affected by existing mortgage rules. As of 2010, the new legislation expands an exemption that allows mortgage companies to purposely avoid escrowing taxes and insurances on home mortgages that are high in cost.
This means that homeowners are now expected to make larger payments upfront — instead of relying on the bank to cover some of the cost. The rule was enforced to make sure that homeowners could do two things: afford their loans and afford additional cost for things like property taxes, state taxes, and federal taxes.
As a result, the new requirements that homeowners have to hurdle could be crippling the housing market. How? Well, because potential homeowners — especially young ones — may not know exactly what they’re getting themselves into nowadays price-wise.
Once you take into consideration different factors like taxes and insurance, people might discover how hard it is to actually come up with the money needed to make payments. In the most extreme cases, that could mean homeowners losing their property to the government or being forced to pay for insurance protection they didn’t ask for. This would mean that mortgage lenders would have more authority than the homeowners, which could really impact them financially.
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Racial Tension Might Escalate
Since the Dodd-Frank Act requires banks to gather personal information from individuals before they’re approved for loans, certain individuals could be victimized. While these requirements were installed to prevent racial discrimination in the housing market from occurring, the truth is it can actually do the exact opposite.
According to the Huffington Post, before the Dodd-Frank Act came into play, evidence had shown that homeowners who belonged to different races had similar credit scores to their white counterparts. In some cases, these same individuals were also able to purchase homes in upper-class neighborhoods.
Thanks to the Dodd-Frank Act, however, homeowners are now required to enter their race. Instead of putting things like “Asian American,” for example, potential homeowners have to enter whether they are Chinese, Japanese, Vietnamese, or Pacific Islander.
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Home Value in Rural America May Not Be Accurate
Another possible flaw in the legislation involves property value in rural America. Since most homes located in rural areas don’t appraise for much, it can prevent potential homeowners from being eligible to borrow money from lenders. That means if the appraised value of the land the property sits on is lower-than-buyers’ purchasing price, the bank will refuse to lend the homeowner any money for their recent purchase.
Unfortunately, because there’s no uniform rule that says otherwise, banks are able to get away with this and deny homeowners without penalty. That said, as homeowners, you always want to make sure that you aren’t asking for more than you can handle. The best way to do so is by not borrowing more than your home is worth.
In the end, while the Dodd-Frank Act has undoubtedly changed the way banking systems and other financial institutions operate within the United States, it’s not clear yet how long this law will stay in place. Only time will tell.
Throw us a like at Facebook.com/doable.financeThis article is written by Avery Phillips
