Key Takeaways

• The federal government regulates the mortgage industry through a number of acts passed by Congress.¹
• Regulation Z in the Truth in Lending Act arms consumers with the information they need to make informed decisions about interest rates, fees, and credit terms.²
• RESPA prohibits real estate agents from receiving kickbacks and prevents lenders from demanding that borrowers use a preferred title insurer.³

The Basics of Mortgage Regulation

Mortgage lenders must follow rules set by the federal government. These rules require lenders to treat borrowers fairly and equitably. Simply put, the federal government regulates the mortgage industry and does this through a variety of agencies and a host of congressional acts.¹

Both the Truth in Lending Act (TILA) and Regulation Z were designed to help protect consumers in their relationships with lenders. Under the regulations, lenders are required to disclose information about their products in a way that allows consumers to make meaningful comparisons. Prior to the act, consumers faced a barrage of confusing and misleading terms.²

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

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.⁴

One of the more significant pieces of regulation is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed following the subprime meltdown that contributed to the 2007-2008 financial crisis. Dodd-Frank aimed to deal with some of the problems that led to the subprime crisis, such as predatory lending practices and lax mortgage qualifying standards.⁵ Congress relaxed provisions under Dodd-Frank in 2018, including easing escrow requirements for depository institutions or credit unions.⁶

The financial crisis also led to government bailouts of Freddie Mac and Fannie Mae, which were put into conservatorship. The Federal Housing Finance Agency (FHFA) oversees both to ensure the agencies continue to offer support for the mortgage market without the need for further government intervention.⁷

The passing of Dodd-Frank put more protections in place for consumers, but changes in 2018 relaxed some portions of the act.⁸

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 within 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.⁹

RESPA

This act 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.³

Who Enforces Mortgage Regulations?

The Consumer Financial Protection Bureau (CFPB), an independent government agency, was created to provide a single point of accountability to enforce financial and consumer protection laws.¹⁰ The Federal Reserve also supervises the banking industry, which extends to mortgage lenders.¹¹ The U.S. Department of Housing and Urban Development (HUD) oversees Federal Housing Administration (FHA) programs which have provided $1.3 trillion in mortgage insurance to home buyers.¹² The Federal Housing Finance Agency oversees the activities of mortgage market liquidity providers Fannie Mae and Freddie Mac.¹³

Examples of Mortgage Regulation

Depending on the violation, consequences of violating mortgage lending regulations vary wildly. If for example a lender is found to be in willful violation of the Truth In Lending Act (TILA) they can actually be imprisoned for up to one year but the most common consequences are monetary penalties. TILA violations tend to carry fines up to $5,000.¹⁴

Lenders, Realtors, and Appraisers can also be held liable in civil courts for violating mortgage regulations like the Equal Credit Opportunity Act (ECOA). The ECOA prohibits discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or good faith exercise of any rights under the Consumer Credit Protection Act.¹⁵

In December 2021, a Black couple in California sued their appraiser after she valued their home at $995,000, which seemed far below the median market value for that area. The couple decided to have a White friend greet a different appraiser, and this time placed some pictures of the friend's White family in their home. The next appraisal came in at $1.48 million.¹⁶

Filing a Complaint

Consumers with complaints about mortgage lenders should first reach out to the CFPB via the agency’s website. It provides consumers with numerous tools to address lending complaints.¹⁷ The Federal Reserve,¹⁸ Federal Deposit Insurance Corporation (FDIC),¹⁹ and the National Credit Union Administration (NCUA) also invite consumers to contact them about mortgage lender complaints.²⁰

Have Mortgage Regulations Changed Because of 2020?

So far, the only mortgage regulations that have changed due to the 2020 financial crisis are related to mortgage servicing and forbearance. While changes could still be put in place to adjust mortgage lending regulations, none are currently on the books.²¹

Why Were Mortgage Regulations Put in Place?

U.S. mortgage regulations are on a perpetual see-saw with regulations put in place after a crisis and slowly eroded over time until the next crisis. The Financial Services Modernization Act of 1999 in part deregulated the lending industry. This is frequently viewed as a contributing factor to the subprime mortgage crisis. As a result of the financial crisis many regulations on mortgages were put back in place with the Dodd-Frank Wall Street Reform and Consumer Protection Act. Then in 2018 reforms were passed in Congress, weakening Dodd-Frank.²²

What Would Happen if Mortgage Regulations Didn’t Exist?

If there were no mortgage regulations in place, history has taught us that we would see a rise in predatory lending practices. These practices would fall hardest on people who are at a disadvantage in the lending process, like first time homebuyers who come from non-property owning families and cultures. Those who lack the education to understand complex documents and who don't have people they trust to ask would find themselves signing up for more expensive, more complex loan products than other borrowers who have more savvy and cultural advantages.²³

How do Mortgage Regulations Protect Me?

Mortgage regulations protect all buyers, not just those at a disadvantage in the lending process. Every borrower receives detailed closing disclosures that allow for better understanding of mortgage terms and costs and is given set time periods by law to think over and cancel their loans in addition to numerous other regulations that lead to more transparency and rights for borrowers in the lending process.²⁴

The Bottom Line

For borrowers looking to get approved for a loan, mortgage regulations can seem like unnecessary and tedious hoops to jump through. However, these regulations are in place to protect all of us. They protect individual borrowers from buying properties they can't afford to stay in and they protect the economy as a whole from falling into another housing bubble driven by unscrupulous lending practices. Numerous regulative authorities and checks & balances are currently in place to try to prevent the 2008 crisis from reoccurring.