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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. © OnCourse Learning 2
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 3 © OnCourse Learning
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) 4 © OnCourse Learning
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 5 © OnCourse Learning
Federal Financial Regulators Related to Mortgages 6 © OnCourse Learning
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 7 © OnCourse Learning
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 8 © OnCourse Learning
Capital Standards for Federally Regulated Depositary Institutions 9 © OnCourse Learning
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) 10 © OnCourse Learning
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 11 © OnCourse Learning
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. 12 © OnCourse Learning
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 13 © OnCourse Learning
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 14 © OnCourse Learning
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 15 © OnCourse Learning
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 16 © OnCourse Learning
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 laws 17 © 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 18 © OnCourse Learning
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 19 © OnCourse Learning
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 20 © OnCourse Learning
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 21 © OnCourse Learning
What is the Obama Administrations Consumer Financial Protection Agency? The Consumer Financial Protection Agency, or CFPA, is a newly proposed independent.
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