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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
A set of regulatory changes to the U.S. savings and loan banking system and the real estate appraisal industry is called The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), in response to the savings and loan crisis of the late 1980s this act was passed in 1989.
A few major changes enacted with this law:
To make sure that real estate appraisals are performed adequately FIRREA has formed certain regulations like requirements for completed and accurate documentation for the training of appraisers and their supervisors.
To resolve the status of the nation’s failed savings and loan institutions it has temporarily created the Resolution Trust Corp.
By creating the Savings Association Insurance Fund and the Bank Insurance Fund abolishing the Federal Savings and Loan Insurance Corporation.
What is Financial Institutions Reform, Recovery, and Enforcement Act
Many of the nation’s savings and loan institutions started the practices of risky investment leading to a crisis, and FIRREA was the government’s response to this crisis.
The savings and loans, or “thrifts” were community-based businesses concentrating on passbook savings and mortgages were different from the big multi-service banks.
As the real estate investing requirements were not strict enough, and federal regulation was lenient enough that the problem wasn’t discovered until it was too late.
In the early 1980s the savings and loans invested heavily in risky mortgages, went bust.
Between 1986 and 1995 close to half of the savings and loans went out of business, when the Resolution Trust Corp. completed its job of disposing of the remaining assets for the purpose of reimbursing depositors.
After FIRREA
With the passage of FIRREA, by 2013, less than 1,000 savings and loans remained in operation. Now savings and loans are virtually indistinguishable from banks.
To create a more efficient, productive, and effective base to build the industry along with safeguarding future transactions was the reason the act got formed.
Leading to dramatic changes to the savings and loan industry and its federal regulation, including deposit insurance.
Other initiatives by FIRREA
To make homeownership more accessible for low- and moderate-income families FIRREA gave additional responsibility and funding to Freddie Mac and Fannie Mae.
The Bank Insurance Fund (BIF) was also created by FIRREA. The FDIC was to manage both of these funds, but the two funds were consolidated by the Federal Deposit Insurance Reform Act of 2005.
The bank holding companies were also allowed to acquire thrifts by FIRREA.
FIRREA and Real Estate Appraisals
New capital reserve requirements were established by FIRREA and it also increased public oversight of the real estate appraisal process.
FIRREA established the Appraisal Subcommittee (ASC) within the Examination Council of the Federal Financial Institutions Examination Council.
FIRREA needed agencies to publicly issue the ratings of the Community Reinvestment Act (CRA) and to write performance evaluations, using facts and data to support the agencies’ conclusions.
FIRREA as a powerful tool
Initially when launched FIRREA, was seen as a bailout for failed savings and loan banks. Now it has become a powerful anti-fraud tool to prosecute banks that are making intentional bad loans.
In cases of fraud within federally insured banks, FIRREA allows the Department of Justice (DOJ) to sue for civil penalties.
There are 14 criminal statutes, making it a broad tool capturing any kind of fraud. For instance – bank fraud, false statements, mail fraud, and wire fraud.
The DOJ can ask for penalties equal to the total gain or loss resulting from the fraud.
Penalties of up to $1.1 million per violation are authorized by FIRREA. For continuing violations, the maximum penalty increases to up to $1.1 million each day or $5.5 million for every violation, depending on which is less.
Conclusion
New regulations for savings and loan institutions and real estate appraisal professionals were introduced by FIRREA
When risky real estate investments resulted in a collapse in the savings and loan industry in 1989 this regulation act was introduced. Along with other things, standards and rules for appraisals were set by FIRREA.
