Regulators are revamping the rules that govern the way banks make mortgage loans. In the process, they’re making it harder for homeowner to sue them.
The rules are designed to bolster the mortgage market but some banking and housing specialists fear investors are losing an important safeguard.
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It’s rare that an entire industry gains protection from consumer lawsuits and banks would seem to be the least likely since they were the primary culprits in the 2008 financial crisis.
Sheila Blair, former chair of the Federal Deposit Insurance Corporation (FDIC) notes that unwise tenets can be let through in the name of easing credit.
The legal protection emanates from the Dodd-Frank legislation in 2010. The Act mandates that mortgages be made affordable but Congress also acknowledged banks might be subject to lawsuits if their mortgages did not comply.
Large financial institutions have faced an onslaught of litigation since the crisis, although most of it has been brought by the government, investors, and corporations rather than homeowners.
The Federal Reserve has offered two approaches to the rule. One is to institute a safe harbor that raises the threshold for litigation. The second increases a borrower’s ability to challenge a mortgage in court.
The question is how seriously regulators should take banks’ threats to cut back lending if they don’t get protection.
There have been very few lawsuits brought by consumers subject to foreclosure of their homes and states with more stringent consumer lending laws have not seen large numbers of lawsuits
filed by borrowers.
Banks are currently making big profits in the mortgage markets, another sign their threats may not be genuine.