Several pieces of legislation help to control banks and to regulate their influence on the public. The Glass-Steagall Act of 1933 was legislation that prohibited commercial banks from engaging in the investment business. This was passed because of the failure of nearly 5,000 banks during the Great Depression, the greatest economic collapse in the history of the modern industrialized world. The legislation was later amended as part of the Banking Act of 1935. The Gramm-Leach-Bliley Act of 1999 is legislation that repealed and replaced the Glass‐Steagall Act, allowing commercial banks to again participate in investment banking activities; the legislation also requires that financial institutions explain fully their information-sharing practices to their customers. The act is also known as the Financial Services Modernization Act of 1999. Its purpose is to protect consumers against banks failing because of lending too much money in the form of unbacked loans and to protect consumers from exposure to risk associated with stock market volatility.
The Gramm-Leach-Bliley Act of 1999 requires financial institutions offering financial or investment advice, insurance, or consumer loan services to explain their information-sharing practices to customers. Prior to this legislation, companies were allowed to share information with other companies without consumers' knowledge of what and how the information was being used, which potentially resulted in unsolicited marketing. Before the act was passed, consumers could have faulty information, or businesses could call consumers without their consent to offer them services. It was commonplace for car insurance companies to be able to get personalized quotes with all the information that they needed without customers soliciting the quotes. With identity theft and breaches on the rise, this act is important for consumers who want to protect their private information. The Gramm-Leach-Bliley Act ensures that consumers are aware of exactly what is being shared and with whom.
Another important regulation is Regulation Z. Regulation Z is part of the Truth in Lending Act and is a regulation requiring lending institutions to publish important credit terms, abstain from unfair and misleading practices, and respond to their customers. This helps protect consumers against misleading practices, specifically in the lending industry. The regulation requires the lending industry to publish credit terms, including interest rates and other financial charges, and it also mandates that the lending industry abstain from certain unfair practices and respond to borrower complaints about errors in periodic billings. This helps consumers by ensuring they know about charges they incur. Before Regulation Z, there were no such requirements; a customer could buy a car with 10 percent financing that could at some later time be changed to 20 percent financing. Financing companies did not need to disclose key details, and customers may have agreed to undesirable terms without their knowledge. This lack of transparency was a major obstacle for consumers, and therefore Regulation Z was introduced to ensure that companies were held accountable for their lending practices.
The Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac; the Federal National Mortgage Association (FNMA), or Fannie Mae; and the Government National Mortgage Association (GNMA), or Ginnie Mae, were created to facilitate a stable housing market. The Federal Home Loan Mortgage Corporation (FHLMC) is a private corporation founded by Congress whose mission is to promote stable and affordable housing markets by purchasing mortgages. This allows banks to give out loans they may not otherwise be able to take on because of a lack of funds. It also enables consumers to receive affordable mortgages. The Federal National Mortgage Association (FNMA) is a government-sponsored corporation that buys qualified mortgage loans from financial institutions, issues securities against the mortgages, and sells them as funding sources for home mortgages. The Government National Mortgage Association (GNMA) is a federally owned corporation promoting homeownership by providing lower-priced mortgages in pooled securities, given timely payments to the loan providers. These three corporations ensure that the risk for mortgages is not taken on solely by banks, as had previously been the case.
Prior to 1933, banks assumed all the risks of providing mortgages; this was the main cause of the failure of so many banks. In the film It's a Wonderful Life (1946), customers come in to Bailey Building and Loan to withdraw money because of a fear of bank failures; the customers want to ensure they can withdraw all the money they initially placed there. However, when so many customers come in at one time to withdraw money, this small-town local bank does not have enough funds to give all the people their money. Bailey Building and Loan is forced to close its doors. Similarly, many real banks have failed because customers wanted their money immediately during times of economic hardship. Freddie Mac, Fannie Mae, and Ginnie Mae were created so banks would not fail because of a lack of funds. Banks can now make loans without the fear of losing all of their money. These government organizations are very important to the stabilization of the banking industry.