Fintechs, Mortgages, and Consumer Consequences

Alexandra Tipton- In today’s digital world, consumers expect everything to be at their fingertips – including their banking and financial services. This desire has led to a rise in financial technology (“fintech”) companies ranging from stock trading apps, such as Robinhood, to money transfer apps, including PayPal and Venmo. However, some consumers are looking to do more than trade stocks and transfer money digitally, they also want to be able to obtain a mortgage through a digital platform.
Following the Great Recession, traditional mortgage lenders faced increased scrutiny on how they conduct business. This led to the use of alternative financing methods and the rise of “nonbanks” entering the mortgage market. But what is a nonbank? The Consumer Financial Protection Bureau defines a “nonbank” as “a company that offers or provides consumer financial products or services, but does not have a bank, thrift, or credit union charter.” This definition includes certain players in the mortgage market as long as offering mortgage products is the only bank function they provide. For example, nonbank lenders do not offer services that are typically associated with banks, like checking and savings accounts. Instead, nonbank mortgage lenders offer a variety of mortgage options to borrowers. These have been increasing in prevalence. By 2016, 48% of all mortgage loans were issued by nonbank mortgage lenders, while the five largest US banks only accounted for 21% of all mortgages originated. Not all these nonbank mortgage lenders are fintech companies, but many of them are.
From a consumer’s perspective, there are many advantages of using a nonbank fintech for your mortgage – potential borrowers can do everything from approval, to underwriting, to closing from the comfort of their home. This is an especially great choice for tech-savvy borrowers and borrowers with busy schedules. Additionally, this gives more people access to homeownership.
Given the increase in the proportion of consumers who use nonbank fintech companies, what regulations are these companies subject to? We know traditional banks face many regulations – including anti-money laundering regulations, capital requirements, lending restrictions, and securities regulations – however, nonbanks seem to be less scrutinized. Despite this, there are still efforts to regulate the nonbank mortgage lending sector.
The Consumer Financial Protection Bureau (“CFPB”), which was created by the Dodd-Frank Act, is required to supervise nonbank mortgage lenders. The CFPB has authority to write rules, issue guidelines, conduct examinations, and require reports from companies. Furthermore, the CFPB has the duty to take action to prevent unfair, deceptive, or abusive acts or practices, and may identify practices that fall into these categories.
Additionally, the CFPB provides oversight over nonbank lenders to ensure they are complying with other provisions that traditional banks must adhere to. For example, nonbanks must comply with the Truth in Lending Act (TILA), which requires lenders to provide loan cost information to borrowers. TILA’s goal is to protect consumers against inaccurate and unfair practices. Nonbank lenders must also comply with the Equal Credit Opportunity Act, which prohibits lenders from discriminating against any individuals when granting credit. These regulations help to ensure consumers are protected by federal consumer finance laws.
Another effort to regulate nonbank mortgage lenders includes those of the Conference of Bank State Supervisors (CSBS). This is a state-driven initiative to streamline multistate licensing and supervision of both traditional banks and nonbanks. By improving oversight through enhanced cooperation between federal and state regulators, the CSBS’s goals include consumer protection and economic growth.
Should nonbanks be subject to more regulation? Despite the consumer protection oversights, nonbanks lack regulations in other areas – especially compared with the amount of regulation and oversight that traditional banks have. Should nonbanks’ regulation be closer to that of traditional banks? Federal Reserve Governor Michelle Bowman thinks so. In November 2020, Bowman suggested the regulations that define how nonbank mortgage lenders operate needs to be reconsidered. Bowman’s main concern regarding nonbank lenders is because of their reliance on warehouse lines of credit offered by banks, they cannot go to the Federal Home Loan Banks or the Federal Reserve System for assistance. Additionally, Bowman notes that nonbanks cannot use deposits as a funding source. Both of these concerns are in contrast with traditional banks and Bowman seems to think that if nonbank regulation were closer to that of traditional banks, it could potentially help curb problems.
Although there are regulations currently in place for nonbank mortgage lenders, heightened scrutiny seems possible in the future. As growth in the fintech sector persists, nonbanks will continue to enter the market, which means there will likely be an increased need for regulation to effectively manage them and protect consumers.

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