DealBook: Moody’s Sees Benefits for Banks From Consumer Bureau

Michael Houghton for The New York TimesRichard Cordray, President Obama’s choice to lead the new Consumer Financial Protection Bureau.

The new Consumer Financial Protection Bureau has ignited fear on Wall Street. But many banks may eventually benefit from the regulator’s careful watch, according to a new report by Moody’s Investors Service.

The bureau, Moody’s said, could be the “medicine” that tames the financial industry’s risk-taking ways. Over the long haul, safer lending practices “could limit future credit and litigation costs for the firms,” said Moody’s, one of the largest credit rating agencies.

The consumer bureau, which formally opened its doors last week, can write new rules for financial firms, examine their books and issue enforcement actions. A chief component of the Dodd-Frank financial regulatory law, the agency will focus on mortgages and credit cards, among other financial products.

“The stricter policing of consumer lending products and services will ultimately make banks safer by steering them away from riskier products such as subprime mortgages,” the report said.

While the bureau will oversee the nation’s 110 largest banks, it also can take aim at some less-regulated corners of the finance industry, including tens of thousands of payday lenders and mortgage companies. This authority, which kicks in once the Senate confirms a director to lead the agency, is a potential big win for the banks.

“Once the bureau gains purview over nonbanks as well, it will level the playing field by applying the same controls and constraints to nonbanks as to banks,” according to the report.

President Obama last week nominated Richard Cordray, the bureau’s enforcement chief, to the director spot. Republicans have indicated they will oppose the nomination.

Once the consumer bureau does receive a leader — and oversight over the nonbank lenders — it “will likely eliminate or at least significantly mitigate the competitive pressures that caused banks to engage in a ‘race to the bottom.’”

Of course, as the bureau threatens to crimp banking fees and overhaul lax mortgage servicing standards, bank profits could sink.

“Certain elements of the C.F.P.B. are credit negative for large U.S. banks, in particular those with substantial mortgage operations,” Moody’s said. “Such firms are likely to be confronted by new national standards and attendant compliance-related costs related to mortgage servicing.”

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