‘Fintechs’ and California’s mortgage market: We need a fix

In 2008 an imploding home mortgage market tanked our economy, causing tremendous hardship in California and throughout the country. Radical changes in the mortgage market since then demand action from California legislators. We simply can’t wait for Congress to act.

When Californians think about home mortgages, we typically think of banks. But the top three mortgage lenders in California aren’t banks, they’re financial technology or “fintech” lenders. Typically known as nonbanks, they generally operate online only, have no branches and take no deposits.

At the Greenlining Institute, we recently took a detailed look at these fintech lenders, and we came away worried.

Ffintechs, with no branches and no neighborhood presence, aren’t covered by the Community Reinvestment Act.

Fintechs, with no branches and no neighborhood presence, aren’t covered by the Community Reinvestment Act.

Nationally, fintechs write two thirds of all home mortgages, a whopping 660% increase in market share since 2009. But our financial regulatory system, created for a world dominated by banks, hasn’t kept up. That could set us up for a world of hurt.

For example, because of a lack of transparency and reporting requirements, we don’t know how this shift in the industry is impacting redlined communities and borrowers of color. Banks must follow a federal law called the Community Reinvestment Act, designed to combat redlining and push them to invest in the communities they serve. But fintechs, with no branches and no neighborhood presence, aren’t covered by the CRA.

We know they advertise specifically to communities of color, but do they treat these borrowers fairly? Or do fintechs steer them to higher interest rates and riskier loan products? We don’t know, because the rules that would give us critical information don’t apply to them.

Overall, fintechs tend to have relatively little cash on hand and a lot of debt,

This is all the more concerning because banks have been closing branches in low- and moderate-income communities, effectively offloading their CRA obligations and leaving a void for the fintechs to fill. We need to know if they’re filling it fairly. Bank closures and a lack of nonbank investments in low to moderate income communities through the CRA results in approximately $50 billion-to-$100 billion not being invested in those communities every five years in projects like affordable housing that could benefit the entire state.

There’s also reason to worry about the impact of fintechs on the financial system. Overall, they tend to have relatively little cash on hand and a lot of debt, but again the lack of information leaves us flying blind as to how stable or unstable they are.

Ideally, Congress should rewrite the Community Reinvestment Act to include nonbank lenders, and make sure that these businesses are adequately regulated. But we can’t afford to wait for a Congress largely paralyzed by partisan gridlock. California must act on its own.

Nonbank lenders are able to avoid federally mandated examinations, but since they are subject to state regulations to receive lending licenses, California’s Department of Financial Protection and Innovation can request additional information. The DFPI should step in to fill the current data gap and require fintech lenders to provide data needed to conduct a fair lending test similar to the one conducted by federal regulators for traditional banks.

And California can pass its own version of the CRA, mandating all lenders, banks and nonbanks alike, to serve low- and moderate-income communities. Several states already have similar laws. The latest, the Illinois Community Revitalization Act, was enacted earlier this year.

Our nation needs a financial system that works for everyone, regardless of wealth or income. That’s the only way to erase the racial wealth gap and to ensure a stable economy for us all. Since the federal government is unlikely to reform its rules quickly enough, California must act to protect our communities.
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Editor’s Note:  Rawan Elhalaby is the senior economic equity program manager and Muhammad Alameldin is  the economic equity fellow at The Greenlining Institute. They co-authored A Fair Financial System: Regulating Fintech and Nonbank Lenders.