Becoming a homeowner is part of the American dream for many people. It represents a big accomplishment, and is one of the biggest investments you'll probably make in your life. But very few of us can actually afford a home outright with cash. Realizing the dream means having to go through the motions of trying to find a lender who finds us worthy enough to advance us a loan. Mortgages are an important part of the financial system. But they haven't always been so cut and dry. They can be complex, and get even more complicated when lenders don't have their clients' best interests at heart. So who regulates the mortgage industry? This article discusses the key players responsible for regulating and keeping lenders accountable.
- The federal government regulates the mortgage industry through a series of acts passed by Congress.
- Regulation Z's Truth in Lending Act protect consumers and requires lenders to make full disclosures about interest rates, fees, terms of credit, and other provisions.
- RESPA prohibits kickbacks as well as demands for large escrow accounts.
The Basics of Mortgage Regulation
Mortgage lenders have to follow certain rules set forth by the federal government. These rules make sure lenders do everything they can to employ service that's both fair and legal, and that they don't take advantage of the general public. So, put simply, the federal government regulates the mortgage industry. It does this through a variety of agencies and a host of Congressional acts.
The federal Truth in Lending Act (TILA) was designed to help protect consumers in their relationships with lenders. Regulation Z is the Federal Reserve Board regulation that implemented TILA. The act requires lenders to disclose information about their products and services to consumers, and aims to protect consumers from misleading practices by lenders. Another key component to mortgage regulation is the Real Estate Settlement Procedures Act (RESPA). This act was enacted by Congress so buyers and sellers are given disclosures about the full settlement costs related to home buying.
Mortgage lending came under heavy scrutiny following the 2008 financial crisis. Prior to the housing market crash, demand for mortgage-backed securities (MBSs) rose as investors became hungry for higher returns from their investments. Hedge Banks began relaxing their lending requirements, advancing mortgages to people with low credit scores—often without any down payments—at high interest rates. When values peaked, rates began to increase, making payments more expensive. Many homeowners were unable to afford their homes, and ended up defaulting, causing the market to crash.
Because of the problems after the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act piled on additional mortgage industry regulations to protect consumers, making regulations tougher against predatory lending and mortgage qualifying standards. Under changes signed into law in 2018, the act, escrow requirements for residential mortgages held by a depository institution or credit union are exempt under some conditions. The Federal Housing Finance Agency is also allowed to set up standards for Freddie Mac and Fannie Mae to consider different scoring methods for mortgage lending.
The passing of Dodd-Frank put more protections in place for consumers, but changes put forth in 2018 relaxed some portions of the act.
Regulation Z's Truth in Lending Act
Implemented by Regulation Z, the Truth in Lending Act was created in 1968 as a way to protect consumers from malicious, shady, or unfair practices by lenders and other creditors. Lenders are required to make full disclosures about interest rates, fees, terms of credit, and other provisions. They must also provide consumers with the steps they need to take in order to file a complaint, and complaints must be dealt with in a timely manner. Borrowers can also cancel certain kinds of loans with a specified period of time. Having all of this information at their disposal gives consumers a way to shop around for the best possible rates and lenders when it comes to borrowing money or getting a credit card.
The Real Estate Settlement Procedures Act (RESPA) regulates the relationships between mortgage lenders and other real estate professionals—principally real estate agents—to ensure no parties receive kickbacks for encouraging consumers to use certain mortgage services. The act also prohibits loan providers from making demands for large escrow accounts, while restricting sellers from mandating title insurance companies.
After the financial crisis in 2008, the Consumer Financial Protection Bureau (CFPB), an independent government agency, has the greatest latitude when it comes to creating and enforcing mortgage industry regulations. The Federal Reserve’s power to regulate the banking industry also extends to the mortgage lending industry. The U.S. Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), regulates FHA lending practices. The Federal Housing Finance Agency regulates the activities of mortgage market liquidity providers Fannie Mae and Freddie Mac.
Filing a Complaint
Consumers with complaints about mortgage lenders should first reach out to CFPB via the agency’s website. It provides consumers with numerous tools to address lending complaints. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) also invite consumers to contact them about mortgage lender complaints.