Chapter 7 Federal Regulations and Financial Institutions Related to the Mortgage Market © OnCourse Learning.
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Chapter 7
Federal Regulations and Financial Institutions
Related to the Mortgage Market
© OnCourse Learning
Chapter 7 Learning Objectives
Understand how the federal government regulates mortgage lenders
Understand which agencies are responsible for which institutions, activities and markets and the basis for their authority in regulating the mortgage market
Understand the concept of systematic risk within the financial market.
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Overview of Systematic Risk Within the financial markets systematic risk exists
when a large share of the firms in the market face financial failure simultaneously
Systematic economic conditions affect all or most firms E.g. widespread decline in housing values
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What Do Financial Regulators Do?
Regulate types of financial institutions The Fed and the FDIC regulate commercial banks with
federal charters FDIC regulates state chartered banks (may or may not
be regulated by the Fed) The Federal Housing Finance Authority (FHFA) regulates
government sponsored enterprises (GSEs)
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What Do Financial Regulators Do?
Regulate types of risk (systematic and nonsystematic) The Financial Stability Oversight Council (FSOC) has the
duty of preventing, as much as possible, systematic risk Regulating systematic risk = requiring adequate capital
Regulation of institutions engaged in mortgage lending simplified by the Dodd-Frank Act, which eliminated some regulatory agencies
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The Basel Accords An international framework for adequate capital
guidelines promoted under the Bank of International Settlements (BIS)
The guidelines link the risk of assets to the capital requirements
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The Basel Accords Currently not mandated for US institutions
US regulators use a version of the Basel Accords and the provisions under the Dodd-Frank Act (DFA)
DFA has:Stricter guidelines for systematically significant firms
Requires capital standards on consolidated basis for financial holding companies
Requires making capital standards countercyclical – increasing (decreasing) standards in economic expansion (contraction) periods
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Banking Regulators Commercial banks have two different types of charters
Federal (national banks) State
CBs are federally insured and fall under FDIC supervision Primary regulators:
Federal banks: The Office of the Comptroller of the Currency (OCC)
State chartered banks: The Fed. Credit unions: National Credit Union Administration (NCUA)
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Banking Regulators Concerned with the quality of the loans made by
regulated institutions Default risk Interest rate risk Maturity mismatch
If regulators find that an institution is exposed to excessive risk, they can order sale of risky loans and take steps to correct risky balance sheets
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Office of the Comptroller of the Currency (OCC) Established in 1863 as a part of the Department of
Treasury Supervises federally chartered banks
Failure to respond to OCC’s concerns may result in a suspension of a bank’s national charter.
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Office of the Comptroller of the Currency (OCC) Primary regulator for federally chartered thrifts Has a primary interest in the national mortgage
market The Code of Federal Regulations (CFR) ascertains the
real estate-related regulations applicable to OCC and other regulators
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Federal Deposit Insurance Corporation Created in 1933 Provides deposit insurance to lending institutions
Deposits are insured up to $250,000
Since 2008 insures unsecured debt of banks, thrifts and certain holding companies and business accounts, regardless of dollar amounts.
Manages the insurance fund, supervises financial institutions, and manages failed institutions
Primary regulator of state chartered banks (non-members of the Fed) and all state-chartered thrifts
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The Federal Reserve System Established in 1913 Charged with providing stability to the banking sector
through managing bank reserves Has authority to regulate the safety and soundness of
member banks Primary regulator of systematically significant (too big
to fail) financial institutions
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National Credit Union Administration Established by the Federal Credit Union Act in 1934 Since 1970 regulates federal credit unions and the
state credit union that elect federal deposit insurance Administers National Credit Union State Insurance
Fund to insure the deposits of member institutions Has the authority to enact administrative orders
regarding persons employed by the credit unions
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Bureau of Consumer Financial Protection (BCFP) An independent agency within the Fed, created by the
Dodd-Frank Act Create protection for consumer loans including
residential mortgages Oversees consumer-related financial transactions
including deposits, mortgages, credit cards, debt collections, real estate settlement procedures and financial data processing
Enforces consumer protection laws17© OnCourse Learning
Federal Financial Institutions Examinations Council (FFIEC) Established in 1979 to coordinate federal regulation of
lending institutions Charged with making regulations uniform and
harmonious Coordinates regulation among the states
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Regulation of Mortgage and Derivative Securities The Fixed Income Clearing Corporation (FICC) clears
trades of MBSs and derivatives under the direction of the CME Clearing House (CMECH)
The MBS Division (MBSD) of the FICC provides automated trading, trade confirmation, risk management, and pool notification to the market
The US SEC regulates MBSD
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Regulation of Mortgage Loan Originators Agency problems in the relationship between
mortgage loan originators (MLOs) and the secondary mortgage market Originators have the incentive to originate as many loans as
possible. By selling loans to the secondary market – little regard for
safety of the loans
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Regulation of Mortgage Loan Originators The S.A.F.E. Act (Secure and Fair Enforcement for
Mortgage Licensing Act) of 2008 Established federal registration requirements for individuals
that act as residential MLOs Employed by institutions, regulated by federal regulations All MLOs required to register with the National Mortgage
and Licensing System and Registry
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