After the 2008 subprime mortgage meltdown tanked the U.S. and global economies, Congress wrote rules to stabilize the financial industry. But the mortgage market has changed radically since then, and the regulations that govern it haven’t kept up, creating a new house of cards that could easily collapse.
Regulations that govern the mortgage market haven’t kept up with changes in lending. Maryna Konoplytska/Dreamstime via TNS
My organization, The Greenlining Institute, researched this issue for a new report, A Fair Financial System: Regulating Fintech and Nonbank Lenders, and what we found was disturbing.
Did you know that two-thirds of home mortgages in the United States are not underwritten by banks? They’re written by internet-based financial technology, or fintech, firms – whose share of the market has increased more than sixfold since 2009. Because fintech lenders don’t have physical branches or take deposits, they aren’t subject to most federal and state regulations that govern banks.
That opens the door to all sorts of risks and predatory practices, some of which particularly endanger communities of color and low-income borrowers, putting the whole economy at risk.
These “nonbanks,” as they’re sometimes called, target communities that have been historically denied access to financial products and services from traditional banks, so they may have more customers who are people of color and earn low to moderate incomes.
And they aren’t subject to the federal Community Reinvestment Act, a vital anti-redlining law that requires banks to meet the credit needs of the communities they serve. In fact, there’s no overarching law governing fintech lenders at all, so regulators know much less about how fintechs operate than they know about banks.
We do know that fintechs tend to have relatively little cash on hand and lots of debt. How precarious are they should the housing market falter? We don’t know. And we need this data to avoid another housing crash like that of 2008.
Inadequate regulation means we have little information about the fintechs’ lending patterns, or whether they discriminate. The enormous data gaps mean we can’t know whether these borrowers are being treated fairly.
Meanwhile, traditional banks have been closing branches in Black and Latinx neighborhoods, effectively discarding their Community Reinvestment Act obligations and leaving the field wide open for the mostly unregulated fintechs to lend to historically marginalized communities.
A combination of weak regulation and predatory, discriminatory lending sent us spinning into the Great Recession 13 years ago. It’s time to update our financial regulations to make sure it doesn’t happen again.
On the federal level, that means modernizing and expanding the Community Reinvestment Act to include fintechs, and modernizing regulations across the board to make sure these new, fast-growing firms don’t unfairly target communities of color and pose a risk to the whole economy.
But even before Congress acts, states can and should move on their own. Several states already have their own Community Reinvestment Act or similar laws – the latest was adopted last year, in Illinois – and those that don’t should enact such laws now. States can also require data transparency and accountability.
We deserve a financial system that works for all, regardless of race or income. And we need to know that financial institutions – whether or not they call themselves banks – operate in a safe, nondiscriminatory manner. We cannot risk another financial disaster that hits vulnerable communities hardest. It’s time for the rules to catch up with reality.
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