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During the financial crisis, in April 2007, federal banking regulators encouraged banks to approach homeowners in trouble to work-out a new deal. Federal banking agencies also published a “Statement on Subprime Lending” in June 2007 on the risks of offering non-traditional mortgages to subprime borrowers. 

Not surprisingly, many of the predatory mortgage-lending practices associated with subprime mortgages were later banned. Congress passed two acts: the Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to resolve problems that caused the financial crisis. Some noteworthy changes included in the Dodd-Frank Act include: (1) requirement for lenders to ensure that borrowers have the means to repay loans, (2) requirement for lenders to provide a worst-case scenario for ARMs, (3) requirement for capital to be reserved against a minimum of 5% of mortgage loans sold for securitization, which would ensure that banks and bank holding companies lose if they do not underwrite quality loans, (4) requirement for intermediaries in the secondary market (securitizers) to disclose information that would provide investors with enough knowledge of loan quality, and (5) creation of an independent Consumer Financial Protection Bureau (CFPB) to make and enforce laws for the fair, equitable, and non-discriminatory access to credit. The new CFPB would take over the handling of consumer complaints about banks and other mortgage-related businesses from 7 federal agencies and also have the authority to take action against bad lending practices without a law from Congress authorizing such action, if time is of the essence.

The acts addressed noted problems that caused the mortgage and financial crisis. These changes should prevent those problems from reoccurring. Some saw problems with the new requirements. Holstein (2013) believes that 5% minimum capital reserve requirement is too low to be an “effective disincentive.” Many noted that there are still some areas or issues that need to be addressed such as the need to discourage banks from investing in the mortgage-backed securities rated AAA internally so there would be more securities available outside of the banking system (and the full benefit of securitization attained) (Holstein, 2013).

Brauneis, M., & Stachowicz, S. (2007). Subprime Mortgage Lending: New and Evolving Risks, Regulatory Requirements. Bank Accounting & Finance, 20(6), 28-34.

Docking, D. S. (2012). The 2008 financial crises and implications of the Dodd-Frank Act. Journal Of Corporate Treasury Management, 4(4), 353-363.

Holstein, A. D. (2013). How well does Dodd-Frank address regulatory gaps and market failures that led to the housing bubble? Journal Of Business & Behavioral Sciences, 25(1), 21-35.

Taub, J. (2016). The Subprime Specter Returns. New Labor Forum (Sage Publications Inc.), 25(1), 68-77.