In the aftermath of the global financial crisis of 2008, the banking sector in the United States became subject to some new regulations established by government legislation. These bank regulations continue to impact the administration and operations of banks and other ancillary financial entities. They also call for increased vigilance and safeguards to protect the government, financial institutions and, most importantly, the people.
- The global financial crisis of 2008 changed the face of banking in the United States by ushering the passage of new regulations.
- The Housing and Economic Recovery Act was created to address the subprime mortgage crisis and allowed the Federal Housing Administration (FHA) to guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers.
- The Emergency Economic Stabilization Act authorized the federal government to bail out financial institutions by buying them or their troubled assets.
- The Helping Families Save Their Homes Act aimed to prevent foreclosures.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act restricted banks' investing and trading and established the Consumer Financial Protection Bureau.
Housing and Economic Recovery Act
The Housing and Economic Recovery Act of 2008 (HERA) was the first in a series of regulatory laws designed to strengthen the U.S. economy. This act was created to prevent home foreclosures through debt counseling and community development programs. Designed to renew confidence in mortgage market-makers Fannie Mae and Freddie Mac, HERA allowed states to refinance subprime loans with mortgage revenue bonds and created the Federal Housing Finance Agency (FHFA). It allowed the Federal Housing Administration (FHA) to guarantee up to $300 billion in new 30-year fixed-rate mortgages for subprime borrowers.
This act also required mortgage lenders and other banking institutions to register with the Nationwide Mortgage Licensing System and Registry through the Federal Deposit Insurance Corporation (FDIC) while broadening the scope of the good faith estimate document to cover a wider group of loan products. Consequently, banks and lenders are required to conduct business with greater transparency towards their customers.
Emergency Economic Stabilization Act
The second legislation was the Emergency Economic Stabilization Act of 2008 (EESA), which authorized the federal government to bail out and purchase several banks and financial institutions that were in danger of complete bankruptcy as a consequence of their investments in tainted mortgage-backed securities. EESA authorized the Treasury to buy up to $700 billion in troubled assets, a figure later reduced to $475 billion.
This legislation serves to regulate the cash flow of these institutions and places them under direct government scrutiny until they are able to declare solvency. This requires banks to increase capital and maintain a lower debt ratio.
Helping Families Save Their Homes Act
The Helping Families Save Their Homes Act of 2009 empowers the FDIC with robust funding—over $100 billion—to help banks and their customers prevent foreclosures. This act also required banks and lenders to collect information about their customers in order to aid the loss-mitigation process through loan modification programs and work toward restoring the creditworthiness of borrowers whose credit was damaged by faulty loan products.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The fourth major bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, emphasizes the regulations governing the collection, management, and review of customer data. The act calls for banks and financial institutions to improve their "know-your-customer" (KYC) procedures and comply with the new regulatory powers of the FDIC.
It also instituted the Consumer Financial Protection Bureau (CFPB) to regulate the capital requirements and financial practices of banks, credit unions, lenders, servicers and collection agencies concerning their executive-level compensation, governance, risk management, derivatives portfolio, and credit ratings. Banks are required to disclose this data to the FDIC and other federal bodies under the oversight of the U.S. Treasury.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 rolled back significant portions of the Dodd-Frank Act.
Unofficially known as the Financial Reform Law, Dodd-Frank also requires banks to comply with federal regulations that aid transparency in lending practices, mitigate institutional risk, improve corporate accountability and prevent a repeat of the global financial crisis.