Modern Money Lending Laws Results In Market Changes
The laws that governs money lending has not only impacted the consumers but has also resulted in significant changes in the money market at large. There are different banks that now limited their loans and have shifted to providing more conventional loans to borrowers such as the 30-year loans provided at a fixed rate. That means the borrowers will now have to fit in this specific approval box to obtain such a loan.
As for the borrowers, most of them focus more on the loan terms and the mortgage rate instead of the type of lender they choose to obtain a loan to purchase a property or to refinance their homes.
The impact of such changes
However, when you visit the websites of different banks as well as the non-bankers and online money lending sources such as https://www.libertylending.com/ and its likes you will see that the money lending landscape has shifted melodramatically over the past few years.
You will notice that the domination by the big banks in this market is much weaker now as more and more loans are made by the non-banks. These specific types of financial institutions are different from the traditional banks in only one significant way: They do not offer any deposit accounts such as a checking account or a savings account but only make loans.
However, this change in the lending market is due to the flexibility made in the laws of money lending. This change however does not matter much for the consumers as they are benefited even more due to its impact. Somehow and in a greater way it does not really matter whether you get a loan through a bank or a non-bank as long as you get it in terms that are easy and convenient for you.
- In fact, the ways the non-banks function are a little bit more nimble and flexible than the traditional banks that have very strict rules to follow while lending money to the borrowers.
- Moreover, the non-banks can offer more loan products as compared to the traditional banks which us another benefit enjoyed by the consumers now.
- This impact is even bigger and more profound in the housing market overall. This is because without the non-banks they would be even further behind where they should be now in terms of the number of transactions.
According to a study it is found that:
- In 2011, more than 50% of all new mortgages were made by three of the biggest banks in the United States namely, JPMorgan Chase, Bank of America and Wells Fargo.
- However, by September 2016 this share by these three big banks dropped significantly to 21% due to the rise of the non-bank money lenders.
- The study showed that there were only two non-bank money lenders in the list of Top 10 lenders in 2011 while it rose to six in number by 2016.
The result of this study means that the big banks exited the market and there are several reasons for it. Prior to the financial crisis, the last thing a consumer defaulted was mortgages but that changed in 2009 when people started defaulting on mortgages.
Adding to the woes of the banks, not only that they were not prepared to face such fallout but they also had the compulsion to follow the new rules that were coming out. As a result of these factors as well as the growing housing crisis the banks were forced to withdraw from the market.
The changes brought in
There were some regulatory changes made in the money lending laws that changed the atmosphere and setting as well. From a risk management regime it shifted to a zero tolerance regime with 100% compliance. Not only were new rules implemented but several new regulators were created such as the Consumer Financial Protection Bureau and other agencies.
At the same time, these agencies became more assertive regarding their enforcement practices that stepped these up from mere prescriptive rules to those that will pinpoint exactly how money lenders should make a loan decision.
- The primary intent of such changes and laws was to make sure that the borrowers can repay their debts easily and sustain homeownership. This resulted in a narrow approach of the banks following aggressive scrutiny in the face of stiff penalties. This left the banks with a remarkable uncertainty and risk making it very difficult for them to continue lending money.
- The banks are also forced to approve jumbo loans for the individuals having high net worth and kept these as their portfolio loans. The primary intent of offering these loans is to sell other banking services to these high end customers.
- This means that the traditional banks left the subprime borrowers in the dark and helpless. It is during the last real estate boom that the non-bank lenders made the best out of this scenario targeting these helpless subprime borrowers who are in desperate need of money.
It is this vulnerable situation of the subprime borrowers that even encouraged several such non-bank lenders to be reckless and charge them with high interest and other features to make the most profit from them. It is this time when such new regulations in the law was felt necessary.
With the new laws of lending around, the non-bank lenders cannot be as reckless as they were before. They now have to follow these rules strictly that has befitted the consumers in several different ways.
- Few of them offer loans to subprime borrowers even with a lower FICO scores so much so that it can be termed as a bad credit loan.
- Consumers are also benefiting from these non-banks because they offer more openings to the borrowers who are not ‘perfect.’
However, these non-bank lenders are still not making any risky loans because the laws protect them and their interest as well.
On the negative side, with the rise in competition from the non-banks many community banks have to close down which particularly hurts the communities that are underserved geographically.
However, changes in the market is expected due to the market may shift next rise in interest rates and deregulation anticipated under the Trump administration.