At least eight different federal agencies exist to regulate the activities of mortgage lenders. Supervision that spreads across many regulatory authorities is a prescription for an unregulated, laissez-faire environment. This atmosphere is conducive to predatory lending.
This is exactly what happened. It took an entire decade, but mortgage lenders and mortgage brokers made hundreds of thousands of loans to people who would never qualify under the watchful eye of the regulatory agency.
Breaking the Bank
The basic responsibility of any financial service arena is to prove solvency, supply credit and protect the consumer. Much like the medical guideline "first, do no harm," lenders have the responsibility to save the consumer from himself.
Instead, new financial products and packages hit the mortgage market, and they brought in many new potential homeowners applying for loans. The emergence of these new products paved the way for lenders who did not work inside of a bank.
These originators could expedite the mortgage process for the borrower. These brokers/originators would place those mortgages with a willing bank. It is unlikely that the chosen bank is in the neighborhood. It might not even be in the state.
Watching the Lenders
Until the meltdown that began late in 2007, an assortment of federal and state regulatory agencies had the responsibility for oversight of mortgage lenders. They all came under the big top of the U.S. Department of the Treasury.
When the financial sector extended into a secondary mortgage market, loans became assets worthy of investing and trading. Mortgages were bundled into funds that traded on the major stock exchanges. The Securities and Exchange Commission (SEC) is the regulatory agency for the stock exchanges. Even insurance companies became part of the mortgage industry.
Federal Regulatory Agencies
When the predatory loans with adjustable interest rates began to adjust, banks began the foreclosure process. It was obvious this industry required closer regulation. Talks reopened suggesting a complete overhaul of those regulatory agencies and their operations. The Department of the Treasury controls cash flow in the country and became the natural choice to supervise mortgage lending. Reforms to streamline the regulatory agencies are starting to appear, and not a moment too soon.
President Obama has a three-point plan that addresses three areas of concern:
1. Appoint the Federal Reserve as regulator of system-wide economic risk
2. Create a Consumer Financial Protection Agency
3. Consolidate supervision of the banks
Consolidation
Consolidation would create a streamlined regulatory process that centralizes all the financial sectors under one umbrella. This is a partial list of those federal regulatory agencies currently overseeing mortgage lenders under the Office of the Comptroller of the Currency (OCC), a unit of the Department of the Treasury:
1. Office of Thrift Supervision (OTS; unit of Department of the Treasury)
2. Federal Deposit Insurance Corporation (FDIC; supervises insured institutions)
3. Federal Reserve Board (FRB; principal agency supervising financial health)
4. National Credit Union Administration (NCUA; regulates federal credit unions)
5. Federal Trade Commission (FTC; resolves issues involving credit reporting agencies)
6. Farm Credit Administration (FCA; regulates financial entities lending within the Farm Credit System including the Federal Agricultural Mortgage Corporation--Farmer Mac)
7. Department of Housing and Urban Development (HUD)
It is easy to see how regulation procedures could become lax. There are too many regulatory agencies, and they are tripping over each other's feet. Officials from President Obama's administration believe this lack of strength on the part of federal regulatory authorities was critical to the advent of financial crisis.
The Umbrella
Details about the soon-to-be-created Consumer Financial Protection Agency (CFPA) are slowly emerging from Capitol Hill. The CFPA could formulate and issue guidelines for mortgages that are standard loans. The loans should have no penalties or traps.
Terms presented in plain language would be easier to understand. CFPA could ban practices by mortgage brokers who respond to company issued incentives. Those incentives translate into cash for brokers with the highest volume of mortgages.
A proposal presented by the Department of the Treasury is under consideration. It suggests the CFPA be the umbrella agency regulating mortgage lenders. This would replace the patchwork of regulators now covering this industry.
