As Non-Bank Lenders Return, So Do Their Regulatory Opponents
If you’ve been experiencing flashbacks to 2008 recently, you’re not alone. Ten years after the last global financial crisis, the economy is looking strong again—the job market is booming—but market analysts are wondering how long we have until the next downturn. And some observers believe things are more precarious than most of us realize, thanks to the return of a certain pre-Recession phenomenon.
I’m referring to the reemergence of non-bank mortgage lenders. According to a recent article in The Washington Post, the growing market share of non-bank firms such as Quicken Loans, PennyMac, and LoanDepot “is raising concerns among analysts, academic researchers, and government officials about what could happen if the housing market collapses again.”
Non-banks currently comprise 6 of the 10 of largest mortgage lenders in the United States. These organizations, the article explains, have steadily proliferated in the last few years due to the fact that they face less regulatory pressure—and offer greater flexibility to consumers—than traditional financial institutions:
“Non-bank lenders are gaining market share in large part because traditional banks are scaling back their presence in the mortgage market. New consumer protections and more rigorous underwriting standards have made it more expensive to offer mortgages by adding paperwork and increasing the liability of lenders. Many banks are limiting loans to borrowers with nearly perfect credit or taking other steps to shrink their mortgage business. Some banks, including Capital One, are getting out of the residential mortgage market completely.
Enter non-bank lenders, which stand ready to make loans to people with less than perfect credit. Non-bank lenders are not subject to the same rigorous, and expensive, oversight that the Dodd-Frank act imposed on traditional banks in the aftermath of the housing crash. Scrutiny of most non-banks is further reduced by virtue of their being privately owned, and technology has helped level the playing field in mortgage lending.
In addition, non-bank lenders are helped by mortgage guarantees offered by federal agencies such as the Federal Housing Administration and the Department of Veterans Affairs, which promise to pay back investors if borrowers default. The guarantees not only reduce the risk to lenders, but also contribute to lower rates for borrowers.”
Guarantees notwithstanding, skeptics of non-banks express concern over the firms’ potential vulnerabilities in the event of a market decline. The failure of a non-bank, they argue, could put its borrowers (many of whom are black and Latino and lack access to bank-financed homeownership) in jeopardy and even generate costs for taxpayers if Ginnie Mae stepped in.
As a result, it appears that consumer advocates are having flashbacks, too—to the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act and the early days of the Consumer Financial Protection Bureau. And a number of advocacy groups are calling for—you guessed it—increased regulatory oversight:
“Some consumer groups are concerned that non-bank mortgage lenders are not receiving enough surveillance because they are privately held companies. They say the lenders, which are regulated at the state level, should be monitored more closely.
‘They have much less oversight’ said Jaime Weisberg, senior campaign analyst for the Association for Neighborhood and Housing Development, an umbrella organization for 100 nonprofits serving low- and moderate-income residents of New York City. ‘They don’t have safety and soundness exams like banks do.’”
Read “Non-bank lenders are back and even bigger than before.”
None of us are hoping for a repeat the 2008 financial crisis any time soon—which is why lenders of all stripes use Compli to proactively ensure and demonstrate their Fair Lending compliance. Learn more.
