To better understand the mortgage business and how it is regulated, it helps to become familiar with the various mortgage regulators.
- Department of Housing & Urban Development
- Federal Desposit Insurance Corporation
- Federal Home Loan Bank System
- U.S. Federal Reserve
- U.S Department of the Treasury
- Office of the Comptroller Of The Currency
- Office of Thrift Supervision
Department of Housing & Urban Development (HUD)
HUD stands for the Department of Urban Housing and Development. They are the U.S. federal agency responsible for the enforcement of housing laws and address the housing needs of U.S. citizens.
In the mortgage industry, HUD performs the following:
- Supervision of the Federal Housing Administration.
- Oversight of the operations of Fannie Mae and Freddie Mac.
- Direction of the Government National Mortgage Association.
- Enforcement of RESPA and fair housing regulations.
HUD is primarily responsible for setting and maintaining the ethics and accountability standards for the housing and mortgage industry, in order to ensure mortgage companies and entities serve borrowers properly and ethically.
Federal Deposit Insurance Corporation (FDIC)
Federal Deposit Insurance Corporation, commonly referred to by its acronym FDIC, directly supervises over half of the banking institutions in the U.S. That’s over 5,300 banks and savings banks.
State charted banks, which are not nationally-chartered commercial banks, are not required to but do have the option of joining the Federal Reserve Banking System. The FDIC is the primary regulator of these state-chartered banks who choose not join the Federal Reserve system.
Federal Home Loan Bank System (FHLB)
Federal Home Loan Bank System, or FHLB as it is referred to in the mortgage industry, regulates the nation’s savings associations, now referred to as thrifts. Like the Federal Reserve, it has 12 federal districts.
The Office of Thrift Supervision (OTS) oversees and regulates the member banks of the FHLB. The OTS can operate in all 50 states, as opposed to being licensed in each state individually. This means it takes precedence over state laws.
The FHLB and OTS are important in the mortgage industry because thrifts play a valuable role in the single-family residential loan market. They base their lending on the amount of savings they have accumulated.
U.S. Federal Reserve
In 1913, President Woodrow Wilson signed the act that established the Federal Reserve, commonly referred to as The Fed. It is composed of 12 Federal Reserve Banks that each serve one of 12 districts.
The Fed supervises and regulates member banks in each of these districts. All nationally-chartered commercial banks are member banks of the Federal Reserve.
How the Federal Reserve may regulate member banks:
Federal Reserve District Banks (FRDB) can manipulate its reserve requirements. A reserve requirement is the percentage of the bank’s overall funds that it must have on deposit with its FRDB. Raising or lowering this reserve requirement increases or limits the amount of money circulating in the economy.
FRDBs can adjust the discount rate. A discount rate is the interest charged to a bank’s loan. Banks borrow from their Federal Reserve District Bank by pledging commercial paper as collateral. Whenever a bank borrows from The Fed they pay interest on that loan, i.e. a discount rate. Many banks base their prime rate (the interest they charge on loans for the most trustworthy borrowers) on the discount rate they themselves are paying on a loan from the The Fed. The higher the discount rate, the higher the prime rate, and the higher the rate for all borrowers in general. This results in less credit being available locally. Lower discount rates result in the reverse: more credit being available and a lower rate for individual borrowers.
The Fed determines the Federal Reserve Rate. Sometimes the Federal Reserve will loan money to a member bank without any collateral. The interest charged on these types of loans, called short-term or overnight loans, is the Federal Reserve rate. This FR rate is another standard by which banks can measure or set the interest rates they charge their borrowers.
The Fed can manipulate the supply of money in the economy via its open-market operations. Open-market operations include purchasing and selling government securities in lots. Selling these lots of securities effectively slows down the economy, while purchasing securities adds money to the economy. More money in the economy means more funds and credit are available for home loans and real estate.
Finally, The Fed is responsible for overseeing and maintaining compliance with the Truth in Lending Act and Title I of the Consumer Protection Act of 1968, throughout the mortgage industry.
U.S. Department of the Treasury
Like the Federal Reserve, the U.S. Treasury Department bears some of the responsibility for maintaining economic balance in the country. How well this department manages the government’s income versus its debt directly affects how much money is available in the economy and the interest rates on loans.
When the Treasury does not have enough money to keep governmental agencies running, it must offset these shortages by borrowing money. The Treasury Dept. borrows money by issuing and selling securities.
Types of Securities:
- Treasury Bonds – Debts that are long-term- will be paid off in 10 years or more.
- Treasury Notes – Debts of indeterminate length, usually between 2 and 10 years.
- Treasury Bills – Short term debts- those that will be paid off relatively quickly.
The U.S. Treasury and the Federal Reserve work hand-in-hand to regulate the amount of money in the economy. When the Treasury Department issues securities, money is taken out of the economy. As the department repays these securities, additional money becomes available.
The Treasury Bond (long-term security) is a common benchmark for setting interest rates on a 30-yr mortgage.
Office Of Thrift Supervision
The Office of Thrift Supervision or OTS is the primary regulator of all federally and state-chartered thrifts. This includes certain banks and loan institutions. including savings banks and loan associations. It is financed by the fees and dues paid by the institutions it regulates, and has four regional offices.
Office of the Comptroller Of The Currency
The Office of the Comptroller Of The Currency or OCC is an agency under the Treasury Department. The OCC supervises over 2,500 national banks to ensure compliance with all federal banking regulations. It also supervises the licensed branches of foreign banks. A national bank is any financial institution under the domain on the OCC.
National banks make up about 28% of all commercial banks in the U.S. and hold 57% of the total amount of assets in the banking system. The OCC encourages practices and policies that avoid abusive, deceptive, or unfair banking practices.