The early 2000s were marked by increased deregulation of the housing and mortgage industries. This helped to create a housing bubble that burst, resulting in millions of foreclosures and the great recession. As a result of the recession and the actions of unscrupulous lenders, U.S. Senator Chris Dodd and Representative Barney Frank sponsored a law called the Dodd-Frank Act. This law was passed and enacted in 2010 to improve financial stability in the U.S. economy, make the financial system more transparent, hold the financial system accountable, protect American consumers from abusive practices, and end the idea that some banks are too big to fail. The Dodd-Frank Act also created the Consumer Financial Protection Bureau (CFPB) and imposed new requirements on banks and hedge funds. The Securities and Exchange Commission (SEC) was also granted greater authority to regulate credit-rating agencies and certain types of stock derivatives. The Dodd-Frank Act also protects whistleblowers who report their employers for violating its provisions.
The Great Recession
The financial crisis led to the Great Recession, which started in 2007 and lasted a couple of years. Over many years, Congress relaxed rules and regulations for the financial industry because of a belief that they could self-regulate. The relaxation of financial regulations led certain financial institutions to pursue profits with little oversight, and many engaged in abusive practices. As a result, unscrupulous lenders made trillions of dollars worth of mortgage loans to borrowers who were high risk. This caused construction companies to build an increasing number of homes and more high-risk borrowers to take out mortgages. This cycle caused the housing bubble, which subsequently burst and resulted in the recession.
The high-risk mortgages were repackaged into mortgage-backed securities, a risky form of investment. However, credit-rating agencies rated most mortgage-backed securities as low risk since foreclosure rates had been traditionally low. Investors from around the world purchased mortgage-backed securities. Banks and other financial institutions had significant exposure to bad mortgages. When the housing bubble burst, the value of homes backed by risky mortgages fell dramatically. In many cases, the homes were not worth as much as the loans against them. A foreclosure crisis followed when the property values fell and homeowners stopped making payments on their mortgages. Millions of investors lost money, and financial institutions sought bailouts or went bankrupt. The Dodd-Frank Act was passed to prevent this situation from happening again.
What the Dodd-Frank Act Does
The Dodd-Frank Act did all of the following:
- Established a rule that forbids banks from making speculative investments and risky assets with the bank’s money
- Increased regulation and oversight of the financial industry to identify risky financial practices
- Increased oversight and regulation of the insurance industry
- Increased oversight and regulation of credit-rating agencies to increase the accuracy of credit ratings and protect users by monitoring their practices
- Provided more authority to the SEC to regulate high-risk financial products that were common before the Great Recession
- Created the Consumer Financial Protection Bureau to regulate consumer financial services and products and ensure that consumers are fairly treated by financial institutions
- Provided protections for whistleblowers to protect insiders who come forward to report unethical or illegal conduct of financial institutions and insurers
How the Dodd-Frank Act Helps Consumers
The Dodd-Frank Act helps consumers by improving the stability of the economy. Financial crises caused by unscrupulous lenders can have national and global repercussions and lead consumers to lose billions of dollars. Consumers are also directly helped by the CFPB. It provides financial education, pursues action against predatory lenders, and empowers people to make informed financial decisions. The CFPB’s enforcement actions have recovered billions of dollars against unscrupulous and predatory lenders, helping consumers get debts canceled and recover compensation from wrongful lenders.
Dodd-Frank Whistleblower Protections
The Dodd-Frank Act protects whistleblowers who report securities fraud to the SEC. Before this law, whistleblowers who came forward with reports about securities fraud were not protected against retaliation. This meant many people were afraid to come forward because of the potential of losing their jobs. The Dodd-Frank Act’s anti-retaliation provisions make it illegal for employers to retaliate against employees for reporting securities fraud under the act. If an employer retaliates against an employee for blowing the whistle, the employee can pursue a wrongful termination claim to pursue back pay, front pay, job reinstatement, emotional distress damages, attorney’s fees, and other damages. Employers can also face significant penalties for retaliating against whistleblowers.
People who blow the whistle by reporting securities fraud under the Dodd-Frank Act to the SEC also have incentives for coming forward. Employees who report fraud against the government under this law can receive between 10% to 30% of the penalties the government can recover based on their information when the government can recover $1 million or more. However, a company’s fraud does not have to be against the government to qualify for incentives under this law and can be perpetrated against consumers or investors.
Talk to Swartz Swidler
If you have inside information that your financial employer is engaging in securities fraud against the public or the government, you should speak to the knowledgeable whistleblower attorneys at Swartz Swidler. We can help you understand whether you have grounds to file a whistleblower lawsuit. Contact us today to request a free case evaluation at 856-685-7420.