1.3- Events Leading to the Implementation of the Federal Laws and need for Consumer Protection in the Mortgage Industry

Safeguarding the interest of the Public in the  purchase of goods and services against unfair practices in the marketplace is known as Consumer Protection. Consumer Protection laws are intended to prevent businesses from engaging in fraud, deceptive or specified unfair practices in order to gain advantage over competitors or to mislead consumers. The idea is to focus on consumer rights so that they are able to make better choices and to be able to pursue complaints against businesses that violate consumer protection laws. Entities that provide consumer protection include government organizations such as the Federal Trade Commission (FTC) in the United States, self governing organizations such as the Better Business Bureau (BBB) in United States, Canada, England etc. and non-Governmental Organizations (NGO's) that advocate the consumer protection laws and help to enforce them, such as the consumer protection agencies and watchdog groups.

Following is a brief history of the Mortgage Industry and events leading to the Implementation of Federal Laws and need for Consumer Protection

1900 - early 1930's-
From the early 1900's thru the 1930's, buying a home was a much different process. Back then, the buyer would have to make a huge down payment with a balloon payment due after a a very short term.

The Federal Reserve System (FRS) created in 1913 was the first step taken towards the modern mortgage industry. This step established a framework for the government involvement in mortgage lending. The Federal reserve established a charter for banks allowing them to make real estate loans.

The Federal Home Loan Bank Act of 1932 was created to allow Federal Home Loan banks to lend money to savings and loans, credit unions and savings banks so that they could also finance home mortgages.

The Banking Act of 1933 further assisted in creating the Federal Deposit Insurance Corporation (FDIC) to Insure deposits and to protect consumers against bank default. In addition, FDIC allowed banks to continue to have a source of funds to make more home loans.

The National Housing act was signed by President Franklin D Roosevelt on June 27th, 1934. The Federal Housing Administration (FHA) was created by the Act. The (FHA) was created to help the housing Industry recover from the Great Depression. Originally, FHA was not intended to fund loans but to provide mortgage insurance to banks to protect banks against losses incurred by home loans. As a result, FHA allowed lenders to commit more funds to home mortgage loans.Today, FHA is the largest insurer of mortgages in the world. 

The Federal National Mortgage Association (FNMA or Fannie Mae) was created that increased the liquidity in the market and allowed for more money to become available for lenders.

After WW11, the demand for housing boomed. The US Department of Housing and Urban Development (HUD) was then established to provide financial incentives to renovate and build homes within certain urban areas. Later, HUD expanded its influence over many areas of the housing market.

FNMA was privatized in 1968 and became a government sponsored entity (GSE). Government National Mortgage Association, (GNMA or Ginnie Mae) was created at the same time to secure government issued mortgages (like FHA loans). The two entities allowed loans to be secure and enabled them to be sold in the secondary market for profit.

The Federal Home Loan Mortgage Corporation (Freddie Mac, FHLMC) was created to work hand in hand with Fannie Mae.

The Community Reinvestment Act was enacted by Congress in 1977, which analyzes a bank's success or failure to reach out to the lending communities it serves.

In 2008 and 2009, The Great Recession was caused in large part by the housing market. Due to subprime lending in the United States, a housing bubble was created that lacked liquidity. The housing bubble peaked in July 2006. When the housing bubble burst, home prices across the United States reported record breaking price drops. Subprime lenders had been giving out mortgages to people that did not qualify due to lack of regulation. Predatory techniques were used and home loans were given to unqualified buyers to purchase homes that they could not afford. As a result, many homeowners defaulted on their mortgages across the country.

As a result, the Federal Government passed the Dodd-Frank Wall Street Reform Act of 2010 (Dodd-Frank), which put into place many regulations. It created the Consumer Financial Protection Bureau (CFPB) to begin proposing new federal regulations, supervise the mortgage industry and enforce federal law in hopes that nothing like the Great Recession of 2008 and 2009 would ever happen again.