Phil Cannella has been saying for years that the regulators aren’t regulating banks and financial firms, which is what allowed them to cause the mortgage bubble that crashed the U.S. economy in 2008. Now, five years after the crisis began, regulators are finally putting requirements into place that will help stem the tide of faulty mortgages that brought the housing market to its knees. These new restrictions, introduced by the Consumer Financial Protection Bureau (CFPB), require banks to determine if the people to whom they are making loans will actually be able to repay those loans. Evidence has shown that many banks intentionally made loans that they knew wouldn’t be repaid in order to ramp up the market for Collateralized Debt Obligations (CDOs) and other obscure subprime mortgage products which packaged loans into securities that could then be sold to investors.
What investors weren’t told was that the mortgages packaged in their CDOs were basically guaranteed to fail. Financial firms like Goldman Sachs took a short position on these products, meaning that they stood to make a lot of money betting that the value of CDOs would go down. So when the housing market crashed, the financial firms got richer while the investors who bought CDOs lost everything. Not to mention that the homeowners whose mortgages were included in the CDOs lost their homes to foreclosure in many cases. And all this was made possible by the fact that banks made home loans to people who would not be able to repay them.
Now CFPB regulations will force banks to make sure borrowers will be able to pay them back before making loans. Reaction to these regulations has generally been positive and think tanks like the Center for Responsible Lending believe they will offer consumers some protection from the deceptive practices banks have used in the past.
So after years of calling for more effective regulations, it looks like Phil Cannella may finally be getting his wish. Of course, whether or not these regulations will actually work the way they were intended to remains to be seen. In a perfect world, this would put a stop to the unethical lending practices of major banks, but in reality, as Phil Cannella knows all too well, banks have proved quite adept at maneuvering around regulations.
