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Chapter 1
FinTech, the SAFE Act, and the Fed

Advances in Financial Technology (FinTech) have impacted every corner of the

financial world. However, as the leader in real estate, we have the inside track
on how high-tech solutions such as FinTech are affecting the real estate industry.
FINTECH is constantly evolving technologically, using
software to satisfy borrowers’ demand for cheaper, faster,
and easier to understand financial transactions. It is often
referred to as “disruptive technology” because it
forces traditional businesses, like banks, to adopt new methods to keep up with consumer
expectations. Mortgage lending, payment methods, and money transfers are just a few of the
services that older “legacy” type banks are having to streamline and they must constantly
update software to keep up with groundbreaking companies that are already offering these
services through simple, time-saving, inexpensive computer apps. The banks may find
modernizing their services to accommodate consumer demand “disruptive,” but consumers
ultimately benefit from the convenience, ease, speed, and lower price of this new technology.
A more detailed description of FinTech and can be found at the end of the chapter.
As the leading national Real Estate Finance textbook authors we created
FinTechRealEstate.com. We believe FinTech challenging the “status quo” is a
positive event that allows lenders to offer borrowers a better way to obtain
services in a simpler, faster, and cheaper manner.

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CHAPTER OUTLINE
I. THE SAFE MORTGAGE LICENSING ACT (p. 3)
A. MLO Licensing Requirements (20 Hours of Pre-Licensing Education) (p. 3)
B. MLO Continuing Education (8 Hours Annually) (p. 4)
II. FISCAL AND MONETARY POLICIES OF THE U.S. (p. 5)
A. Fiscal Policy (p. 5)
1. U.S. Collects All Federal Taxes (p. 5)
2. U.S. Spends Federal Revenue (Expenditures) (p. 6)
B. Monetary Policy (The Fed) (p. 6)
III. THE POLICY TOOLS OF THE FEDERAL RESERVE (FED) (p. 6)
A. Reserve Requirements (Fed) (p. 8)
B. Interest Rates (Discount Rates) (p. 10)
C. Open Market Operations (OMOs) (p. 11)
D. Expansionary Monetary Policy (Increases Money Supply) (p. 12)
E. Contractionary Monetary Policy (Decreases Money Supply) (p. 12)
F. The Consumer Financial Protection Bureau (CFPB) Handles the Truth in Lending Act
(TILA) (p. 13)
IV. THE FED AND US TREASURY WORK TOGETHER (p. 15)
A. Selling Securities (p. 15)
B. Fighting Recession (p. 15)
V. FINTECH - THE FUTURE OF MONEY (p. 15)
A. Evolution of FinTech Adoption (p. 16)
B. Disruptive Technology (p. 16)
C. E-Wallets (p. 16)
D. Consumer Benefits of FinTech Revolution (p. 18)
VI. CHAPTER SUMMARY (p. 18)
VII. TERMINOLOGY (p. 20)
VIII. CHAPTER QUIZ (p. 20)

The SAFE Act Changed Everything

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) was
designed to enhance consumer protection and reduce fraud by the setting of minimum standards for
the licensing and registration of state-licensed mortgage loan originators (MLOs). In addition to 20
hours of pre-licensing (PE) and 8 hours of annual continuing education (CE) requirements, MLOs
must pass a 125 question National Test called the Uniform State Test (UST). As of the writing of
this book seven states still require an additional state-specific component, as well as the national
UST. MLOs must also be fingerprinted, have a background and credit check performed, and pay
a fee. They are then issued a “unique identifier number” to keep track of their history and ensure
that they are qualified to make loans based on educational training and continuing education. If
mortgage loan originators defraud or carry on shady business practices in one state, the NMLS
does not allow them to pick up and move to another state to continue their bad practices—the
unique identifier number, backed up by fingerprinting, ensures they are not doing business under
another identity in another state.

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I. The SAFE Mortgage Licensing Act

The SAFE Act is a mortgage license requirement mandating that all real estate
lenders have a mortgage loan originator (MLO) license approved by their state
and pass a NMLS national and in some cases state exam.
The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) was passed by
Congress. The SAFE Act is designed to enhance consumer protection and reduce fraud in
the real estate finance industry. The SAFE Act is administered by the Consumer Financial
Protection Bureau (CFPB).
The Consumer Financial Protection Bureau (CFPB) is now the main loan
regulator in the U.S.
The SAFE MORTGAGE LICENSING ACT applies to all persons, in all states and
territories, who, for compensation or gain, take a residential mortgage loan application or offer
or negotiate terms of a residential mortgage loan application and requires them to be licensed
or registered as a Mortgage Loan Originator (MLO). The SAFE Act does not provide for
any exceptions to licensing for individuals conducting the above activities. Real estate
brokerage, loan processing, and loan underwriting activities are not covered. However,
individuals performing loan processing or underwriting activities as independent
contractors need to obtain a license through the Nationwide Mortgage Licensing
System and Registry (NMLS&R—commonly referred to as “NMLS”).
All licensed/registered MLOs are issued a “unique identifier number” so that all
real estate loans can be traced.
The SAFE Act defines a MORTGAGE LOAN ORIGINATOR (MLO) as an individual who 1)
takes a residential mortgage application and 2) offers or negotiates terms of a residential mortgage loan
for compensation or gain.

A. MLO LICENSING REQUIREMENTS (20 Hours of Pre-License Education)

Prior to getting licensed by the NMLS all applicants must:
a. Take 20 hours of pre-license education courses approved by NMLS.
The education must include:
1. 3 hours of federal law and regulations,
2. 3 hours of ethics, which must include fraud, consumer protection, and fair lending,
3. 2 hours of standards on non-traditional mortgage lending, and
4. 12 hours of additional NMLS approved elective education.

b. Provide fingerprints for an FBI criminal background check,

c. Provide authorization for NMLS to obtain a credit report,
d. Input and maintain their personal Mortgage Loan Originator record in NMLS as their
license in each state/territory in which they wish to conduct mortgage loan origination
activity, and

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e. Pass a 125 question National Test, which is the Uniform State Test (UST). All states
require the UST national test, and a few states still require an additional state-specific
component.

All state-licensed Mortgage Loan Originators must meet the following standards:
a. Never had a loan originator license revoked,
b. Has had no felonies in the past seven years,
c. Never had a felony involving fraud, dishonesty, breach of trust or money laundering,
d. Demonstrates financial responsibility and general financial fitness, and
e. Scores 75% or better on a national test created by NMLS.
The test will include:
1. Ethics,
2. Federal law and regulation,
3. Generic state law and regulation, and
4. Federal and state law and regulation pertaining to fraud, consumer protection,
nontraditional mortgages, and fair lending.

B. MLO CONTINUING EDUCATION (8 Hours Annually)

1. Take 8 hours of continuing education annually. The education must include:

a. 3 hours of federal law and regulations,

b. 3 hours of ethics, which must include fraud, consumer protection, and fair lending,
c. 2 hours of standards on non-traditional mortgage lending.

In addition to the eight hours of continuing education, licensure must be maintained

through the NMLS by payment of required annual fees.
Requirements: A pre-license education of 20 hours and 8 hours of annual
continuing education.

Every state has its own agency to contact regarding NMLS requirements. California has two
agencies:
l 1) California is the Bureau of Real Estate (CalBRE) (www.calbre.ca.gov), which
adds an MLO endorsement to a real estate license OR
l 2) California Department of Business Oversight for Mortgage Companies operating
under the California Finance Lending Act (www.dbo.ca.gov)
l Texas is the Texas Dept. of Savings and Mortgage Lending (www.sml.state.tx.us)
l Arizona is the Dept. of Financial Institutions (www.azd.fi.gov)
l New York is the State of New York Banking Dept. (www.banking.state.ny.us)

Contact the NMLS at www.mortgage.nationwidelicensingsystem.org.

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II. Fiscal and Monetary Policies of the U.S.

The total economy of a national government is divided into two basic and different areas:

Fiscal Policy Monetary Policy

Fiscal policy involves the
decisions that a government
makes regarding: 1) amount
of revenue collected through
taxation, and 2) how to spend
that revenue (expenditures).
Monetary policy is the process by
which the monetary authority of
a country (the Fed) controls the
supply of money, often targeting a
rate of interest oriented towards the
growth and stability of the economy.

A. FISCAL POLICY
The FISCAL POLICY is the policy of a government in controlling the amount of taxation and
expenditures, which together make up the budget.
The United States is the biggest generator of business productivity (Gross Domestic
Product). In addition, our federal government buys and spends more on monthly and/or
yearly payroll expenses than any other organization in the world.

1. U.S. Collects All Federal Taxes

In order to pay and budget for all expenditures, the federal government collects:
1. Personal income taxes
2. Death and gift taxes
3. Corporate income taxes
4. Payroll taxes (Social Security, Medicare, and ObamaCare)
5. Other taxes

2. U.S. Spends Federal Revenue (Expenditures)

The following is a list, in order, of U.S. federal expenditures:
1. Health Care
2. Pensions
3. Defense
4. Welfare
5. Interest
6. Misc. Other

Fiscal Policy is not discussed in this textbook. We focus on Monetary Policy

because the Fed directly controls interest rates.

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B. MONETARY POLICY (The Fed)

“Monetary Policy” is how the federal government controls and directs the money
supply of our nation.
Monetary Policy is how we control the cost and availability of using money. It directly
affects the “cost of borrowing money” that is needed for a down payment and for monthly
payments of principal and interest on a home loan (as well as other loans).
MONEY (total money supply) is made up of:
1. coins (metal),
2. paper currency (federal notes), and
3. checking accounts (called demand deposits).
75% of the money supply is in the form of checking, savings, and bonds.
The control and direction of the U.S. money supply is regulated by the Federal Reserve
(Fed), our central bank.
Interest rates greatly affect the cost of real estate loans, which are the backbone
of most real estate transactions.

III. The Policy Tools of the Federal Reserve (Fed)

The FEDERAL RESERVE SYSTEM (Fed) is our central bank, which is administered by an independent
governing board. Figure 1-1 explains how the Fed affects all Americans.

Figure 1-1
The Federal Reserve System (FED) and Its Functions
A. It is the central bank for other U.S. banks that:
1. Provides a source of cash to banks as needed.
2. Makes loans to member banks to help them with short-term liquidity problems. Not
intended to increase the lending ability of the banks.
3. Acts as a clearinghouse for personal and business checks.
4. Serves as the depository for the required reserve deposits of member banks.
5. Supervises the reserve requirements of all depository institutions, both member and
non-member.

B. It is the bank of the U.S. federal government that:

1. Keeps government checking accounts and deposits.
2. Handles the sale of U.S. government bonds for government borrowing.

C. It protects consumers in credit transactions by:

1. Drawing up Truth in Lending regulations.
2. Issuing Equal Credit Opportunity regulations.

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D. It manages the nation’s money supply through:

1. Reserve Requirements.
2. Directing the Discount Rate (Interest Rate).
3. Buying and Selling Through Open Market Operations (most effective and most
frequently used).
While the Federal Reserve System has no direct control over production
of goods and services, it does have a great deal of control over our money
supply.

The primary responsibility of the “Fed” as the nation’s central bank is to control
(influence) the flow of money and credit in the nation’s economy. The recent
chairs of the “Fed” include Janet Yellen, Ben Bernanke, Alan Greenspan, and
Paul Volker.
The Federal Reserve Board’s seven members, including the chairperson, are appointed
by the President and confirmed by the Senate, and serve for 14 years (see Figure 1-2). The
purpose of the long term is to insulate the Board members from political pressure. The
Federal Reserve is further protected from outside influence because it operates on its own
earnings and not on funds allocated by Congress.

Figure 1-2
Federal Reserve System Pyramid

www.federalreserve.gov

Board of Governors 7

Regional Reserve Banks 12

Member Institutions Many

American Public 322 Million

©ETC 2016

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The Fed is “supposed” to be independent from politics so that its policy actions
will not depend on the political administration in office.
The Federal Reserve Act of 1913 set up 12 regional banks, each with its own Regional Board
of Governors (see Figure 1-3).

Figure 1-3 The Federal Reserve System

The regional banks carry out the policies of the System’s Board of Governors and the
Federal Open Market Committee of the Federal Reserve (see Figure 1-4).
California is in the 12th District of the Federal Reserve System.
The control of the Federal Reserve is not complete, because banks can hold excess reserves,
and there are large foreign holders of dollars and dollar credit. The Federal Reserve can
“neutralize” the effect of foreign spending (and currency devaluations) in the U.S. by selling
government securities to absorb this extra money. Large divestiture of these dollars could
serve to devalue our currency. In addition, there are many dollars held in actual currency form
that are not in circulation, as well as dollar credits in various forms of savings and retirement
accounts. The Federal Reserve has no control over the spending of these dollars.
Certain interest rates that are controlled by the Fed have a direct effect on the
supply of money available for investment.
Figure 1-4 also shows the three critical policy tools of the Fed.

A. RESERVE REQUIREMENTS
The RESERVE REQUIREMENT is the percentage of total cash deposits (reserves) in a bank that
must be keep aside as a financial safe guard and not lent out. By changing reserve requirements,
the Federal Reserve can limit or expand the lending of funds. Banks must set aside this
portion (the percentage set by the Fed) of their checking deposits in reserve; the rest is
available for lending. As new deposits come in, a portion of these must also be set aside as
reserves. Because banks have most of their money out in the form of loans, they do not have
anywhere near enough cash to cover all of their deposits at once.

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Figure 1-4
The Federal Reserve System

12 Federal Reserve Banks

Board of Governors (FRBs)
7 members (including the chairperson) Each with 9 Directors who
are appointed by the President of the appoint President and other
United States and confirmed by the officers of the FRB
Senate 3 Year Term
14-Year Term
Elects 6 Directors to Each FRB

Over 5,000
Federal Open Market Committee Member Commerce Banks
(FOMC)
7 members of Board of Governors Select
plus President of FRB of New
York and Presidents of four other Federal Advisory Council
FRBs 12 members (Bankers)

Three Critical Policy Tools of the Fed

Review and
Sets Within Determines
Limits
Establishes
Directors

RESERVE DISCOUNT OPEN MARKET

REQUIREMENTS RATE OPERATIONS

1 2 3

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www.federalreserve.gov

The Fed, by regulating (up and down) the reserve percentage a bank is required to
maintain, controls the increase or decrease in money that is lent out. This is little understood
by the general public. Some people have heard that a bank can create money, but few really
understand how the process works.
The bank creates about $5 of total bank deposits for every $1 left in the bank if
the reserve requirement is 20%.
When a bank receives $1,000 from a depositor, it is required to keep, say, 20%, or $200
in cash and can lend out the remaining $800. The next step in this example would be the
person who borrowed the $800 now deposits it in the bank. So now the bank can lend out
80% of the new deposit, or $640. The next step is the deposit of the $640 back into the bank.
Now the bank can lend out 80% of this deposit, or $512. If you carry this out further, the
requirement that banks must keep 20% of all deposits and lend out 80%, the bank ends up
creating $5,000 from the initial $1,000 deposit.

B. INTEREST RATES (DISCOUNT RATES)

At a low rate of interest, people will not have a great incentive to save money. On the other
hand, at a high rate of interest people will be motivated to save. As interest rates increase,
people will save rather than hold excess money in the form of currency or checking accounts.
Interest rates strongly affect the demand for money.

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There are two separate interest rates controlled by the Federal Reserve:
1. Federal Funds Rate – The FED sets a target interest rate for banks to borrow the excess
reserves of other member banks. These are usually overnight loans to meet reserve
requirements.
2. Discount Rate – This is the rate charged by the FED to a bank for a direct loan. The
discount rate is usually higher than the federal fund rate.
By changing the direction of interest rates, the Federal Reserve can encourage or
discourage borrowing, affecting contraction or expansion of the economy.
Rate changes are expressed in Basis Points. Each BASIS POINT is 1/100th of a percentage
point or .01%. The federal funds rate affects the PRIME RATE, which is the interest rate a bank
charges its most creditworthy borrowers for short-term loans. The prime rate is generally about
300 basis points (3%) above the federal funds rate. Bank loans are often expressed like
prime rate plus 3, which would be three percent above the bank’s federal fund’s rate.
Interest rates directly affect the real estate industry. Most homebuyers require loans,
and the amount of monthly payments varies according to the interest rate prevalent at
the time a loan was obtained. So, in high interest rate periods, the number of home sales
will be low, but sales will generally go up when interest rates fall. Higher interest rates
also result in higher mortgage payments, meaning fewer people will be able to qualify for
the same loan amount they would have when interest rates were low. Buyers, therefore,
begin purchasing less expensive homes. As interest rates go up, adjusted rate mortgage
loan payments also go up, requiring borrowers to make higher payments on the same loan
amount. This effect raises monthly payments and makes people less likely to contemplate
purchasing real estate.
Historically, the real estate housing market is “interest rate sensitive.” Generally,
home sales and prices go down when interest rates go up, and up when interest
rates fall.

C. OPEN MARKET OPERATIONS (OMOs)

OPEN MARKET OPERATIONS (OMOs) consist of the buying and selling of government
securities (bonds) by the Federal Reserve’s Open Market Committee; it puts money into or takes
money out of circulation.
By its open market operations in buying government securities from the public,
the Federal Reserve puts money into circulation. By selling government securities,
the Fed takes money out of circulation.
Federally chartered banks must join the Federal Reserve System and carry insurance
coverage from the Federal Deposit Insurance Corporation (FDIC). State chartered banks
can obtain FDIC coverage even if they are not members of the Fed. Because of the failure
of many uninsured state banks, states require their banks to obtain FDIC coverage. There
are no longer panic withdrawals by depositors because member banks have reserves and
are federally insured (FDIC - $250,000 per depositor). Depositors have faith in the banking
system under normal circumstances.

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Buying bonds from investors increases the money supply in the U.S. and selling
bonds to investors reduces the money supply in the U.S. This is perhaps the most
important tool in the Federal Reserve’s arsenal.
The FEDERAL OPEN MARKET COMMITTEE (FOMC) carries out open market
operations. The importance of this committee may be gauged by the fact that seven of the
twelve members of the committee are the Board of Governors themselves. The other five
members consist of one member from the Federal Reserve Bank of New York and four
other members who serve in rotation from the other eleven district banks.
By trading securities, the Fed influences the amount of bank reserves, which affects the
FEDERAL FUNDS RATE, which is the interest rate at which depository institutions lend balances
at the Federal Reserve to other depository institutions overnight.
The Fed has the power to issue currency. They do not print the money themselves
but order the printing of money. This is called the “power of currency issue.”

D. EXPANSIONARY MONETARY POLICY (Increases Money Supply)

An “expansionary monetary policy” of the Federal Reserve:
1. reduces the federal reserve discount rate,
2. reduces reserve requirements, and/or
3. buys government bonds.
30-year fixed-rate mortgages recently went down to 3.65%, the lowest in 44
years. Many economists believe mortgage interest rates will remain relatively
low for the next decade.
By reducing the rate of interest it charges to member banks, the Fed induces banks to
increase their lending; a lower cost for money would increase demand. By reducing bank
reserve requirements, it would make more money available for borrowers; and by buying
up government bonds; it puts more dollars into circulation, thus stimulating the economy.
If the Fed increases the money supply, it causes lower interest rates and it costs less to
borrow money. Lower interest rates induce consumers and businesses to borrow more,
increasing their consumption and increasing business activities.
A decrease in the money supply means fewer dollars with which to buy goods. This
causes prices to stabilize or fall. Production decreases, which increases unemployment. The
unemployed lose purchasing power, which further reduces demand for goods. A decrease
in the money supply is a contractionary monetary policy used to fight inflation, but it can
also lead to a recession.
The Federal Reserve can lend to entities as a last resort lender in unusual circumstances
involving an emergency when failure to obtain credit could seriously affect the economy.

E. CONTRACTIONARY MONETARY POLICY (Deceases Money Supply)

A “contractionary monetary policy” of the Federal Reserve:
1. increases the discount rate,
2. increases reserve requirements,
3. sells government bonds.

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The Federal Reserve strives for a money supply that will keep unemployment rates down
to an acceptable level, but keep prices from rising rapidly. It tries to balance inflation and
unemployment.
Milton Friedman believed that the Great Depression was exacerbated by a lack of
money growth. He believed it started as an unspectacular downturn, but was needlessly
accelerated by foolish and erratic monetary policies. He placed the blame squarely on
the Federal Reserve Board. Friedman believed in a slow, steady, and predictable increase
in the money supply. Ben Bernanke apparently follows this belief. Because the Federal
Reserve’s policies are not the sole factor in determining our money supply, its task is
often difficult. In addition, the goals of combating inflation and striving for a high level
of employment call for contradictory measures. Increasing the money supply to combat
recession is likely to cause inflation, and reducing the money supply to fight inflation is
likely to increase unemployment.
The two major monetary goals of the Federal Reserve are the following:

1. To keep the economy at, or near, full employment, and

2. To reduce the inflation rate until price stability is achieved.

Former Fed Chairman Alan Greenspan attempted to achieve both of these goals by
fine-tuning the economy with changes in the discount rate. By raising or lowering the rate,
Mr. Greenspan established a policy of peremptory changes to avoid both inflation and
recession. This can be a very difficult balancing act. Janet Yellen is trying to do the same.

F. THE CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) HANDLES

THE TRUTH IN LENDING ACT (TILA)
With the creation of the Consumer Financial Protection Bureau (CFPB), the Fed is no
longer directly involved in supervising the Truth in Lending Law. The TRUTH IN LENDING
ACT (TILA) requires lenders to inform borrowers of the total costs of obtaining a loan. This
act, which covers interest rates and terms, is also known as Regulation Z. The CFPB is now
directly responsible for supervising TILA as well as the regulation of most financial transactions
in the United States. More about TILA and the CFPB will be discussed in later chapters.

Economic theory tells us there are two ways to conduct monetary policy:
1. Target the money supply to achieve the desired rate of growth of the
money supply and price stability;
2. Target interest rates by setting them at a level, which will produce the
desired growth and price stability.

While this is an oversimplification, these are the general principles the Federal Reserve
follows. If the economy is shocked by major changes in demand, however, then the role of
the Fed becomes more controversial. While it is relatively easy to agree on goals, it is much
harder to agree on specific policies to meet these goals. Economists differ widely as to how,
when, and to what degree the Federal Reserve should use the instruments of monetary
control at its disposal.

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History of the Collapse of the Secondary Market – 2008

• Bear Stearns stock brokerage was acquired by J.P. Morgan Chase in March 2008 for
$1.2 billion. The sale was conditional on the Fed’s lending Bear Sterns $29 billion on
a nonrecourse basis.
• IndyMac Bank of California, America’s leading Alt-A originator in 2006 was placed into
conservatorship by the FDIC on July 11, 2008, citing liquidity concerns. A bridge bank,
IndyMac Federal Bank, FSB, was established under the control of the FDIC. It was
sold to a group of investors and is still in business.
• Fannie Mae and Freddie Mac were both placed under the conservatorship of
the Federal Housing Finance Agency (FHFA) in September 2008. These two
GOVERNMENT SECURED ENTERPRISES (GSEs) guarantee or hold mortgage
backed securities(MBS), mortgages and other debt with a value of more than $5 trillion.
• Merrill Lynch brokerage was acquired by Bank of America in September 2008 for $50
billion.
• Lehman Brothers stock brokerage declared bankruptcy on September 15, 2008, after
the Secretary of the Treasury Henry Paulson, citing moral hazard, refused to bail it out.
• AIG Insurance Corporation received an $85 billion emergency loan in September 2008
from the Federal Reserve, which AIG is expected to repay by gradually selling off its
assets. In exchange, the Federal government acquired a 79.9% equity stake in AIG.
• Washington Mutual (WaMu) was seized in September 2008 by the USA Office of Thrift
Supervision (OTS). Most of WaMu’s untroubled assets were to be sold to J.P. Morgan
Chase.
• In November 2008, the U.S. government announced it was purchasing $27 billion of
preferred stock in Citigroup, a USA bank with over $2 trillion in assets, and warrants
on 4.5% of its common stock. The preferred stock carried an 8% dividend. This
purchase follows an earlier purchase of $25 billion of the same preferred stock using
TARP funds.

The TROUBLED ASSET RELIEF PROGRAM (TARP) was a U.S. government program
to purchase assets and equity from financial institutions in order to strengthen the financial
sector. Enacted in 2008, it was one of the measures taken by the government to address the
subprime mortgage crisis (discussed in the following chapter). A government BAILOUT is
the act of loaning or giving capital to a failing corporation in order to save it from bankruptcy,
insolvency, or total liquidation and ruin.
Most of the corporations who were the beneficiaries of TARP repaid what
they borrowed, plus interest. The government, in the end, did not lose money
but made money.

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“The appeal of a simple rule is obvious. It would simplify our job at the Federal Reserve, make
monetary policy easy to understand, and facilitate monitoring of our performance. And, if
the rule worked, it would reduce uncertainty... but, unfortunately, I know of no rule that can
be relied on with sufficient consistency in our complex and constantly evolving economy.”
– Paul Volcker, Former Chairman of the Board of Governors of the Federal Reserve System.

IV. The Fed and the U.S. Treasury Work Together

A. SELLING SECURITIES
The Federal Reserve and the Department of Treasury work together to borrow money
when the government needs to raise cash. The Fed issues U.S. Treasury securities and
conducts Treasure securities auctions, selling these securities on behalf of the Department
of the Treasury. Treasure securities include:
1. Treasury bills (less than 1 year),
2. Treasury notes (1 to 10 years), and
3. Treasury bonds, (10 to 30 years).

B FIGHTING RECESSION
When times are tough the Fed and The Department of Treasury help to formulate and put
in place economic polices intended to stimulate the economy by reducing interest rates and
making more money available to banks and consumers.
By issuing tax rebates, the Department of the Treasure is responsible for taking money
out of the Federal Reserve and putting into the hands of consumers, who , in turn spend
the money. This results in increased sales of consumer goods and increased employment
to create these goods.

V. FinTech - The Future of Money

FinTech (financial technology) uses advanced software technology to replace the
often repetitive employee functions once needed to provide the basic financial
services involved in obtaining a mortgage loan, which is the backbone of real
estate finance. FinTech is “disrupting” many traditional banking and mortgage
lending services. This is not a bad thing for consumers as it allows them faster,
cheaper, and easier access to lending services.
The digital age has brought with it disruptive changes that have affected consumers and
businesses alike by saving time and money.
Mobile computing allows anyone with a smartphone, tablet, or laptop the convenience to
connect to the Internet anytime and anywhere. While this access affects all business finance
models, it is the authors’ intention to inform readers about FinTech in general, but specifically
how it affects real estate finance.
Potential home loan borrowers can now search the Internet for loans, click a few buttons,
and get pre-approved for a loan in hours rather than days or weeks. At a moment’s notice, real
estate professionals, including salespeople, brokers, mortgage brokers, and mortgage bankers
can help their clients get access to home loan lenders.
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Despite the “writing on the wall,” big banks have been reticent to change quickly. Retail
banking, the mortgage and personal loan process, and day-to-day transactions are making
efforts to keep pace with ever-changing technology, making technology the biggest threat
banks face today.
The future of banking has become online and mobile. Digital banking is so efficient
that 30% of all banking teller (cash and checking) employees will be gone forever
by 2025, according to the Comptroller of the Currency.

A. EVOLUTION OF FINTECH ADOPTION

As with other new technologies, FinTech is currently going through the early stages of
adoption (see Figure 1-5).

Figure 1-5

Inventing Experimenting Adapting Proliferating/Consolidating

B. DISRUPTIVE TECHNOLOGY
DISRUPTIVE TECHNOLOGY radically displaces established methods of doing business. It renders
products of traditional businesses (like banks) obsolete, forcing them to reconform their business
models. In order to compete with faster and more efficient software-driven “disruptive
technology,” many employees are being laid off. Wells Fargo, for instance, has to compete
with faster and cheaper so-called “one-click” online lenders, and as a result many jobs will
be lost because computerized underwriting programs can do the job of many employees.

C. E-WALLETS
Who would have predicted that the payment section of technology companies like Amazon
(AMZN), Apple (AAPL), Google (GOOG) and Facebook (FB) would become threats to the
established banking system? Apple Pay and Google e-Wallet are experimenting with ways
to use technology to efficiently process large amounts of data to make customer-merchant
transactions easier, cheaper, and more secure. PayPal, an eBay (EBAY) company, processes
over $315 million in transactions daily, and over $1 billion a year from its mobile app

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alone. Startups Square and Venmo are making payments easier for individuals and small
business owners, allowing them to compete with larger players.
Is it any wonder that new FinTech is considered “disruptive” when 45% of banks
rated technology companies as their highest profitability threat?
Traditional banking and lending companies’ resistance to change have allowed Apple
and Google to acquire and develop new ventures quickly in order to keep ahead of the
ever-changing world. Competition has streamlined these companies’ ability to innovate
into new and diverse sectors of the economy. Large financial institutions have difficulty
changing their business models quickly. But an even larger problem may be not adapting
at all, allowing startup technology companies to take over payment services operated
under financial regulation and performed from or via a mobile device. See Figure 1-6 for
examples of popular services.

Figure 1-6 Digital e-Wallets

MOBILE PAYMENT, also referred to as mobile money, mobile money transfer, and mobile
wallet generally refer to payment services operated under financial regulation and performed
from or via a mobile device. The following are examples of popular services.

Apple Pay
Apple Pay is a mobile payment and digital e-wallet service by Apple
Inc. that lets users make payments using the iPhone, iPad, and Apple
Watch-compatible devices.

Android Pay
With Android Pay, instead of pulling out your wallet, you can simply unlock
your phone, place it near a contactless terminal, and pay for your merchandise
with one tap. You don’t even need to open an app.

Walmart Pay
The launch of Walmart’s mobile payments service, Walmart
Pay, is one of many signs that the mobile payments
landscape is shifting. As one of the first US retailers to
branch out on its own and create a “merchant branded”
payment and loyalty application, Walmart is paving the way for other retailers like Target to
simplify payments and provide new ways of enhancing the consumer shopping experience.
Wells Fargo Bank is now offering an e-Wallet app that allows customers to
purchase goods and services where payment is taken directly out of their bank
accounts. It bypasses both credit cards and debit cards without added fees.

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D. CONSUMER BENEFITS OF FINTECH REVOLUTION

Banks and appraisers face a marketplace that is ripe for disruption. The banking and
lending payment systems in the U.S. and the rest of the world are in dire need of overhaul.
Some of the positive elements of software driven FinTech include:

1. Increased Speed: Whether it’s instant payment technology or online loan applications
that can be processed in hours instead of days, FinTech speeds up many transactions.
2. Lower Cost: Because time is money and fewer employees are required, transactions
are now less expensive.
3. More Security: Encryption technology continues to improve, allowing for more
consumer confidence.
4. Efficiency: Greater proportion of payments originated and received electronically
enable innovative payment services that deliver improved value to consumers and
businesses.
5. International: Consumers and businesses can send and receive convenient, cost
effective, and timely cross-border payments with no multiple transaction fees.

VI. CHAPTER SUMMARY

The SAFE Mortgage Licensing Act was designed to enhance consumer protection and
reduce fraud in the real estate industry. It applies to all persons, in all states and territories,
who for compensation or gain, take residential mortgage loan application, and/or negotiate
terms of a residential mortgage. It requires them to be licensed or registered as a Mortgage
Loan Originator (MLO). The Nationwide Mortgage Licensing System and Registry
(NMLS) is tasked with licensing and supervising MLOs. Each MLO has an NMLS unique
identification number so that each real estate loan can be traced.

In order to become an MLO, an applicant must complete 20 hours of pre-licensing

education and pass a 125 question National Test, called the Uniform State Test (UST).
A few states continue to additionally require applicants to take and pass a state-specific
test component in addition to the national UST. MLOs are also required to complete 8
hours of continuing education each year.
A fiscal policy is how a government controls taxation and spending. A monetary policy is
how the Fed controls and directs the money supply of the U.S.

The Federal Reserve (the Fed) is the nation’s central bank whose primary responsibility is
to influence the flow of money and credit in the nation’s economy. The Board of Govenors
(including the Chairperson) are appointed by the President and confirmed by the Senate.

The Federal Reserve System is divided in to 12 districts, with California being in the 12th.

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The FED controls the U.S. banking system by three main policy tools:

1. controlling the reserve requirements,

2. directing discount rates (interest rates), and
3. buying and selling U.S. bonds and securities by open market operations (OMOs).

The Fed often puts in place economic polices (expansionary or contractionary) designed
to stimulate the economy by reducing interest rates and making more money available to
banks and consumers, as well as bailing out government sponsored enterprises like Fannie
Mae and Freddie Mac, as well as private corporations.

The Consumer Financial Protection Bureau (CFPB) regulates all consumer loans and
enforces the Truth in Lending Act (TILA). TILA requires lenders to inform borrowers of
the total cost of obtaining loans.

Whether it is creating policies for responsible transactions by requiring licensing and

training for mortgage loan originators or bailing out failing entities in order to prop up our
economy, the federal government has a vested interest in maintaining a healthy economy.
Real estate is a major contributor to the U.S. economy (20%).

The future of banking has become online and mobile. Digital banking is so efficient that
30% of all banking teller (cash and checking) employees will be gone forever by 2025,
according to the Comptroller of the Currency.

FinTech (financial technology) uses advanced (and mobile) software to replace the often
repetitive employee functions once needed to provide the basic financial services involved
in obtaining a mortgage loan, which is the backbone of real estate finance. As such, FinTech
is “disrupting” many traditional banking and mortgage lending services. This is not a bad
thing for consumers as it allows them faster, cheaper, and easier access to lending services.

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VII. TERMINOLOGY

Checking Fiscal Policy

Consumer Financial Protection Bureau MLO Unique Identifier Number
(CFPB) Monetary Policy
Deposits Mortgage Loan Originator (MLO)
Discount Rate (Interest Rate) Mortgage Licensing System & Registry
Disruptive Technology (NMLS)
e-Wallet Open Market Operations (OMO)
Federal Funds Rate Prime Rate
Federal Open Market Committee Reserve Requirements
Federal Reserve Bank Board SAFE Mortgage Licensing Act
Federal Reserve System Troubled Asset Relief Program (TARP)
FinTech Truth in Lending Act

VIII. CHAPTER QUIZ

1. The SAFE Mortgage Licensing Act (SAFE Act):
a. applies to all persons, in all states and territories.
b. requires licensing registration by NMLS as a Mortgage Loan Originator (MLO).
c. applies to residential mortgage loans only.
d. all of the above.

2. The SAFE Act is administered by the recently created:

a. HUD.
b. Federal Reserve.
c. Consumer Financial Protection Bureau (CFPB).
d. Department of Justice.

3. Nationwide, all licensed/registered MLOs:

a. are issued a unique identifier number.
b. must take 8 hours of Continuing Education annually.
c. must pay required annual fees.
d. all of the above.

4. Prior to getting licensed and registered by the NMLS, all applicants must:
a. pass FBI criminal background check.
b. pass a 125-question national (UST) test.
c. take 20 hours of pre-licensing education courses approved by NMLS.
d. all of the above.

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5. The Federal Reserve System controls all of the following, except:

a. the discount rate.
b. the federal funds rate.
c. open market operations.
d. Regulation Z.

6. Open Market Operations are controlled by:

a. the US Treasury Department.
b. sales and purchases of US Treasury Bonds by the Federal Reserve.
c. sales of mortgages to the Federal Reserve.
d. none of the above.

7. Which one of the U.S. Treasury securities used to finance the U.S. and our national debt are
for the longest period of time?
a. Treasury bonds
b. Treasury notes
c. Treasury bills
d. None of the above

8. The Central Bank for the United States is:

a. Citi Bank.
b. Bank of America.
c. the Federal Reserve.
d. Pentagon Credit Union.

9. Because of new advances in digital technology, banking jobs will decrease by what percentage
by 2025?
a. 30% to 40%
b. 10% to 20%
c. 5% to 10%
d. There will be no jobs lost

10. Which of the following is the rate of interest banks charge their best customers?
a. Discount rate
b. Prime rate
c. Federal funds rate
d. Choice rate
ANSWERS: 1. d; 2. c; 3. d; 4. d; 5. d; 6. b; 7. a; 8. c; 9. a; 10. b

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