Chapter 7 Federal Regulations and Financial Institutions Related to the Mortgage Market © OnCourse Learning.

Chapter 7

Federal Regulations and Financial Institutions

Related to the Mortgage Market

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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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Federal Financial Regulators Related to Mortgages

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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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Capital Standards for Federally Regulated Depositary Institutions

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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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