Congress Should Set Standards for Internet-Based Non-Banks
After the subprime mortgage collapse in 2008 devastated the US and global economies, Congress wrote rules to stabilize the financial sector. But the mortgage market has changed dramatically since then, and the regulations governing it have not followed, creating a new house of cards that could easily collapse.
My organization, The Greenlining Institute, investigated this issue for a new report, “A Fair Financial System: Regulating Fintech and Non-Bank Lenders.” What we found was disturbing.
Did you know that two-thirds of home loans in the United States are not taken out by banks? They are written by internet-based financial technology, or fintech, companies whose market share has more than six-fold since 2009. Since fintech lenders do not have physical branches or take deposits, they do not. are not subject to most federal laws. and state regulations that govern banks.
This opens the door to all kinds of risks and predatory practices, some of which particularly endanger communities of color and low-income borrowers, thereby putting the entire economy at risk.
These “non-banks,” as they are sometimes called, target communities that have historically been denied access to financial products and services from traditional banks, so that they may have more customers of color and low incomes. to moderate. And they’re not 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 is no comprehensive law governing fintech lenders, so regulators know far less about how fintech works than they know about banks.
Fintechs tend to have relatively little cash and a lot of debt. How precarious are they if the housing market weakens? We do not know. And we need this data to prevent another real estate crash like the one in 2008.
Inadequate regulation means we have little information about fintech lending models or whether they are discriminatory. Huge data gaps mean we can’t tell if borrowers are being treated fairly.
Meanwhile, traditional banks have closed branches in black and Latino neighborhoods, abandoning their obligations under the Community Reinvestment Act and leaving the field open for mostly unregulated fintechs to lend to historically marginalized communities.
A combination of weak regulation and predatory, discriminatory lending tipped us into the Great Recession 13 years ago. It is time to update our financial regulations so that this does not happen again.
At the federal level, this means modernizing and expanding the Community Reinvestment Act to include fintechs and modernizing regulations at all levels to ensure that these new, fast-growing companies do not unfairly target communities of color and pose no risk. for the whole economy.
But before Congress even acts, states can and must act alone. Several states already have their own Community Reinvestment Act or similar laws – the most recent was passed last year in Illinois. Those who do not should pass such laws now. States can also require 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 or not they call themselves banks, operate in a secure and non-discriminatory manner. We cannot risk another financial disaster that hits vulnerable communities harder. It is time for the rules to catch up with reality.
Debra Gore-Mann is President and CEO of the Greenlining Institute.
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