In recent quarters, U.S. banks are struggling with legal issues related to mortgage-backed securities issued during the financial crisis. Consequently, the Securities and Exchange Commission (SEC) and other U.S. regulators are proactively trying to recover losses through lawsuits against banks that were involved in malpractices related to selling mortgage-backed securities.
As a safety measure, the Consumer Financial Protection Bureau (CFPB) is working on a proposal to persuade banks to offer straightforward loans by providing a legal protection, so that uncertainty of principal repayments is minimized. The consumer agency is anticipated to issue final regulations by early 2012.
The proposal follows banks’ demand for legal protection as they faced significant legal troubles during the recession. Without any legal protection, banks would hesitate to provide loans. As a result, loans would be expensive and the credit availability to consumers will also reduce.
Large banks such as Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) have submitted letters to the board asking for specifications regarding legal protection in providing loans.
In January 2011, a proposed rule on the related matter was issued by the Federal Reserve. Effective from July 2011, the board transferred the jurisdiction to CFPB with the primary mission of convincing financial institutions, primarily banks and mortgage lenders, for providing consumers with the information they need to make proper decisions about credit, mortgages and loans.
The CFPB was initiated to offer security to consumers from deceptive practices of financial institutions and make financial rules more effective. The banks are in demand of strong legal safety for future high-quality loans.
Implementation of the final rules will clear the picture and help banks in taking decisions related to lending. This would, in turn, help investors as well.
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