Moody's: Consumer's Bureau is "Medicine" for Banks' Ills

Despite efforts by banks to kill or weaken the government’s newest consumer watchdog, the new agency will actually help banks be more profitable in the long run, according to a new report by Moody’s, a large credit rating company.

Banks should “prepare to take their medicine,” Moody’s wrote.

New rules regarding mortgages and other types of loans “will ultimately make banks safer by steering them away from riskier products such as subprime mortgages,” which caused the 2008 economic crisis, Moody’s found.

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Another benefit: the Consumer Financial Protection Bureau will regulate the largest non-bank financial institutions, too. During the housing boom, companies like independent mortgage brokers created new products like no-document “liar loans” and interest-only mortgages, highly risky loans aimed at generating loan origination fees and sucking equity out of houses owned free-and-clear, often by low-income and minority homeowners.

As these practices spread, many larger banks eventually felt they needed to start offering these risky loans to stay competitive in the mortgage market. By writing rules that apply to banks and non-banks alike, the new bureau “will likely eliminate or at least significantly mitigate the competitive pressures that caused banks to engage in a ‘race to the bottom’ with non-banks via poor consumer lending practices,” Moody’s found.

The bureau will help banks in the long run, but it will increase costs in the meantime, Moody’s writes. Banks with large mortgage and mortgage-servicing operations will see their compliance costs grow.

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Image: Melanie Tata, via Flickr.com