Following the 2008 subprime mortgage collapse that hit the American and global economies, Congress wrote rules to stabilize the financial industry. But since then, the mortgage market has changed radically, and the rules governing it are not being followed, creating a new house of cards that could easily collapse.
My organization, The Greenlining Institute, has researched this issue for a new report, Fair Financial System: Regulation of FinTech and Non-Bank Lenders, and what we found was alarming.
Did you know that two-thirds of US home mortgages are not guaranteed by banks? They are written by online financial technology companies, or financial technology companies, whose market share has more than quadrupled since 2009. and government regulations governing banks.
This opens the door to all kinds of risks and predatory practices, some of which pose a particular threat to communities of color and low-income borrowers, putting the entire economy at risk.
These “nonbanks,” as they are sometimes called, target communities that have historically been denied access to financial products and services from traditional banks, so they may have more low- or middle-income clients of color.
And they are not subject to the Federal Community Reinvestment Act, a vital anti-redline law that requires banks to meet the credit needs of the communities they serve. In fact, there is no overarching law governing fintech lenders, so regulators know much less about how fintechs work than about banks.
We know that fintech companies tend to have relatively little cash and a lot of debt.
How dangerous are they if the housing market crashes? We do not know. And we need this data to avoid another housing disaster like the one that happened in 2008.
Inadequate regulation means we have little information about the lending models of fintech companies or whether they discriminate against. Huge data gaps mean that we cannot know if these borrowers are being treated fairly.
Meanwhile, traditional banks are closing branches in black and Hispanic neighborhoods, effectively abandoning their Community Reinvestment Act obligations and leaving the field open to largely unregulated fintech companies to lend to historically marginalized communities.
A combination of weak regulation and predatory, discriminatory lending led us to the Great Recession 13 years ago. It’s time to update our financial rules so that this doesn’t happen again.
At the federal level, this means modernizing and expanding the Community Reinvestment Act to include fintech, and modernizing regulations across the board to ensure that these new, fast-growing companies do not unfairly target communities of color and pose a risk to the entire economy. … …
But even before Congress takes action, states can and should act on their own. Several states already have their own Community Reinvestment Act or similar laws – the last one was passed last year in Illinois – and those that don’t should be passing such laws now. Governments can also demand transparency and accountability of data.
We deserve a financial system that works for everyone, regardless of race or income. And we need to know that financial institutions – whether they call themselves banks or not – operate in a safe and non-discriminatory manner.
We cannot risk another financial disaster that will hit vulnerable communities the most.
It’s time for the rules to catch up with reality.