WASHINGTON ― U.S. banks still wrestling with legal troubles springing from the subprime mortgage crisis are lobbying the new consumer agency for strong legal protection for future home loans.
The Consumer Financial Protection Bureau is finalizing a proposal to entice banks to offer straightforward loans ― without interest-only payments and excessive fees ― by providing a legal shield. The question is whether to give banks full protection, known as a “safe harbor,” or a more limited legal shelter.
“It is critically important that the final rule provide a safe harbor,” Bank of America Corp. wrote in a July 22 letter. “If the final requirements instead increase the liability exposure of creditors … the result will be increased costs and further reduction in credit availability to the very consumers that the reforms were designed to protect.”
The Federal Reserve issued a proposed rule on the matter earlier this year, but then punted it to the consumer agency, which now has jurisdiction. The agency, which was created by the Dodd-Frank oversight law, opened its doors on July 21.
This rule will be one of the first big tests of how tough the consumer agency will be on mortgage markets.
The proposal has already launched a flurry of letters from large banks such as Wells Fargo & Co, JPMorgan Chase & Co. and Bank of America Corp.
Those banks and others are hobbled by stalled foreclosures nationwide due to legal questions and multibillion-dollar lawsuits from investors such as American International Group Inc. that claim the quality of securities backing the mortgages was misrepresented.
The banks argue the safe harbor for future high-quality loans would promote lending and assure investors who buy mortgage-backed securities that legal battles are not on the horizon.
On the other side of the issue, consumer advocates charge banks want to take away one of the few legal tools available to borrowers who believe a lender pulled a fast one on them.
“The bureau’s position on this rule will be an indicator of its ability to work independently of the bank lobby,” said Alys Cohen, a staff attorney for consumer advocacy group the National Consumer Law Center.
The consumer agency is expected to issue a final regulation by early next year.
An agency spokeswoman declined to comment.