In recent years, nonbank lenders have captured a growing share of the mortgage market. According to federal government statistics, the market share of independent mortgage companies in 2014 rose to 47% for home purchase loans and 42% for refinance loans.
At the same time, nonbank mortgage lenders, like other sectors of the financial services industry, have come under scrutiny from federal regulators in the years since the financial crisis of 2008. New legislation, such as the Dodd-Frank Act, was passed and the Consumer Financial Protection Bureau was established to protect consumers and prevent financial abuses.
Diverse mortgage market
The Community Home Lenders Association, a national nonprofit organization that represents nonbank mortgage lenders, warns that overregulation of nonbank lenders could lead to increased industry concentration that can hurt consumers. CHLA Executive Director Scott Olson believes a diverse, competitive mortgage industry is the best way to keep mortgage prices affordable.
In a recently published paper entitled, “Banks vs. Non-banks: A Regulatory Comparison,” CHLA outlined a detailed side-by-side comparison of the consumer and financial protections for both bank and nonbank mortgage lenders. The purpose of the study was to dispel myths that nonbank lenders are not adequately regulated.
The report found nonbank mortgage lenders face financial regulations, which in some cases are even more stringent than for commercial bank lenders.
“All nonbank mortgage lenders are subject to CFPB exams and supervision. But Congress exempted all banks with total assets of less than $50 billion — more than 99% of all banks — from this scrutiny by the CFPB,” Olson said.
In the study, the CHLA also found other areas where nonbank mortgage lenders face more regulations than their banking counterparts, including testing requirements for Secure and Fair Enforcement for Mortgage Licensing Act.
“Loan originators who work at nonbanks are required to be licensed, required to pass a comprehensive SAFE Act test, take many hours of pre-licensing courses, and take eight hours of continuing education in SAFE Act courses,” Olson said. He noted loan originators at regular commercial banks are exempt from those same educational and licensing requirements.
Olson said nearly all mortgage and financial service professionals — from real estate brokers and appraisers to insurers and securities professionals — must pass certification exams.
The CHLA comparison study also found the great majority of nonbank mortgage lending is in government loans, which are subject to strong net worth and operational requirements governing both mortgage loan origination and servicing, and which apply virtually identically to nonbanks and banks. Nonbank mortgage lenders are subject to state net worth and liquidity standards and exams in every state they do business in, according to the study, and unlike banks, the deposits of nonbank mortgage lenders are not guaranteed by the FDIC and federal taxpayers, and they don’t engage in other risky product lines.
Olson said he believes some of the public misconceptions about nonbank lenders go back to the housing and financial crisis of 2008.
“At first, Congress decided to exempt them [commercial bank mortgage originators] because they thought the problem was primarily with brokers and to some extent nonbank lenders,” Olson said. “If you look at the SAFE Act and the Dodd-Frank provisions, a lot of it, early on, was driven by the perception that mortgage brokers were the biggest problem, and they are not banks.”
However, after the collapse of Lehman Brothers, it was learned that banks also were responsible for many of the bad lending practices at the time, he said.
Olson would like to see all the testing, pre-licensing, certification and continuing education requirements expected of nonbank professionals be extended to commercial bank employees who sell mortgages. CHLA has pushed for this idea for several years. Olson would like to see all loan originators pass the SAFE Act certification test, which addresses rules about how loan originators who work with banks will qualify borrowers.
If all banking professionals were held to the same educational or competency requirements, Olson said it would improve fairness in the industry, and consumers would also be better off if all mortgage banking professionals were held to the same standards.
However, commercial banks disagree that more testing requirements and regulations are needed for their employees.
“Banks already had a heavy amount of regulations and that has only increased since the Dodd-Frank Act passed,” said Amanda Averch, director of communications for the Colorado Bankers Association.
Averch said banking regulations have evolved since the 2008 financial crisis and many new government regulations were mandated for commercial banks and more are expected to come down the pike.
While banks and nonbanks often have different regulations and testing requirements, Averch said it’s done so appropriately and in accordance with SAFE Act guidelines.
“Banks are still required to submit certain required information when registering a mortgage loan originator — meaning we do register, but do it in a different way,” she said.
Freelance writer Elise Oberliesen contributed to the writing and research of this article.