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Good news for consumers: Feds curb bank excesses and strengthen mortgage requirements

Most Americans were greatly affected by the Great Recession. As consumers, they’d like to see that the excesses that led to the financial meltdown won’t happen again.

Money_stackAlthough it’s been five years since the recession, federal agencies are now fining banks for actions leading up to the financial crisis and for the way mortgages and foreclosures were handled.

And now, finally, federal agencies are writing rules to limit excessive risk taking by investment banks and to eliminate irresponsible practices by mortgage servicers.

Two sets of rules by the federal government will help American consumers greatly.

Banking

Five federal agencies on Tuesday issued final rules developed jointly to carry out rules to restrict the way banks sell securities.

Banks will be prohibited from trading certain securities, derivatives, and commodity futures for themselves, with some exemptions. The final rules also limit banks investing in, and having other relationships with, hedge funds or private equity funds.

The rules required by Dodd-Frank Wall Street Reform and Consumer Protection Act, called the "Volcker Rule" after former Federal Reserve chair Paul Volker who proposed the restrictions, were a year late. Volcker said the rules are needed to restore stability to Wall Street after the 2008 financial meltdown, arguing that banks that benefit from federal deposit insurance and discount borrowing shouldn’t be permitted to take risks that could trigger a taxpayer-funded government bailout.

Pres. Barack Obama said as the government took steps to rescue the economy and put Americans back to work, it also put in place tough rules of the road to make sure a crisis like that never happened again. 

"As part of this Wall Street reform, we fought to include the Volcker Rule – a rule that makes sure big banks can’t make risky bets with their customer’s deposits," Obama said. "The Volcker Rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system and demand a new era of accountability from CEOs who must sign off on their firm’s practices."

For details on last-minute attempts to strengthen and weaken the rules, see The New York Times article "Rules That Curbs Bank Risk-Taking Nearing Approval."

Banks covered by the rules will be required to comply by July 21, 2015.

Mortgages

The Consumer Financial Protection Bureau is issuing rules to protect consumers when they buy and maintain their mortgages. The rules:

  • Require simpler forms and new mortgage disclosures: a loan estimate the consumer gets when applying for a mortgage and a closing disclosure when the consumer is ready to close on the mortgage.
  • Protect consumers from irresponsible mortgage lending by requiring that lenders make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans.
  • Protect homeowners facing foreclosure.
  • Address practices that incentivized steering borrowers into risky or high-cost loans.
  • Strengthened consumer protections for high-cost mortgages,
  • Institute a requirement that escrow accounts be established for a minimum of five years for certain higher-priced mortgage loans.
  • Protect borrowers and make it easier for them to get help. Consumers can reach a HUD-approved housing counselor by calling 888-995-4673.

The rules go into effect Jan. 14.

Copyright 2013, Rita R. Robison, Consumer Specialist

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