More borrowers are choosing non-banks—financial institutions that only issue loans and do not offer savings or checking accounts—to get a mortgage, The Washington Post reports. It’s a major shift in borrower behavior. In 2011, 50 percent of all new mortgage loans originated from the three largest banks: JPMorgan, Bank of America, and Wells Fargo. However, in September 2016, that share plunged to 21 percent.
During that time, non-banks emerged as six of the 10 largest lenders by volume, including Quicken Loans, loanDepot, and PHH Mortgage. In 2011, only two of the 10 largest lenders were non-banks.
“For consumers, it doesn’t really matter whether you get your loan through a bank or a non-bank, although in some ways, non-banks are a little more nimble and can offer more loan products,” says Paul Noring, managing director of Washington, D.C.–based financial risk management firm Navigant Consulting. “The impact is bigger on the housing market overall because without the non-banks, we would be even further behind where we should be in terms of the number of transactions.”
Some traditional banks have backed away from the mortgage business after financial regulations were put in place following the last housing crisis, says Meg Burns, managing director of Collingwood Group. That has opened the market to non-banks. “The regulatory atmosphere changed from a risk management regime to a zero-tolerance and 100 percent compliance regime,” Burns says. “Not only were new regulations implemented, but new regulators like the Consumer Financial Protection Bureau were created. At the same time, the CFPB and other agencies became more assertive in their enforcement practices.”
The greater regulations made banks more cautious about lending, says Jeffrey Taylor, managing partner of Digital Risk, a provider of mortgage processing services and risk analytics. “Now banks only approve ‘perfect’ loans, not ‘good-enough’ loans,” Taylor says. “This created an opportunity for non-banks that focus entirely on mortgages and are less regulated than big banks.”
Indeed, some consumers benefit from non-banks because they tend to offer “more opportunities to borrowers who are not perfect,” says Ricky Sharga, chief marketing officer of Ten-X, an online real estate marketplace. Some lenders are offering “loans to borrowers with lower FICO scores, but [these non-bank lenders] are still not making risky loans,” Sharga says.