Yellen Eyes Nonbank Mortgage Lenders, Warns of Potential Failure

(Bloomberg) — Treasury Secretary Janet Yellen said US regulators are monitoring risks stemming from nonbank mortgage lenders, and cautioned that a failure of one of them is possible in the case of market strains.

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“FSOC is very focused on that because nonbank mortgage companies lack access to deposits, which banks have,” Yellen said at the Senate Banking Committee Thursday, referring to the Financial Stability Oversight Council. The FSOC groups the main US financial regulators.

Nonbanks have become a major presence in the mortgage market, but rely on short-term funding instruments to fund their operations. They also aren’t allowed to access the Federal Reserve’s emergency lending facility, known as the discount window. Online lenders like Quicken Loans and Rocket Mortgage have seen rapid growth in recent years.

“They’re reliant on short-term financing that may be a lot less stable than deposits, and in stressful times, their credit lines can be pulled,” said Yellen, responding to questions from Democratic Senator Catherine Cortez Masto of Nevada. “There is concern that in stressful market conditions we could see the failure of one of these.”

Regulators have been warning that nonbanks’ footprints across finance have significantly expanded, though oversight hasn’t kept pace. Officials have said that unforeseen risks may be lurking as the firms have grabbed more market share, while their ties to traditional lenders have become more complex.

Read More: Nonbank Lenders’ Dominance of Mortgage Industry Costs Homebuyers

Fed Oversight

In November, the FSOC laid out a pathway for placing firms other than banks under strict Federal Reserve oversight, a major regulatory threat to nonbank mortgage lenders, hedge funds and investment companies.

That blueprint kick-started a process that could result in the designation of specific mortgage-lending firms as systemically important — a label that would then require greater regulatory obligations. But the panel has yet to announce it’s begun that process. Previous designations of nonbanks by the FSOC took about a year and half.

Read more: US Lays Path for More Financial Giants to Get Fed Oversight

The FSOC’s nonbank mortgage-servicing task force will publish a report on the staff’s recommendations about how to proceed as soon as March, according to people familiar with the discussions. The people added that the full panel won’t move forward on the process until that report is published.

Financial trade groups including the Investment Company Institute, Managed Funds Association and Mortgage Bankers Association, have all urged regulators to tread carefully on any assertion of greater discretion over nonbank mortgage lenders, and on using a shorter timeline to designate a firm as systemically important.

Meanwhile, advocates argue that the FSOC’s powers allow for regulators to demand more granular details from nonbanks in a bid to learn how exposed they are to a wide range of risks. Engaging in this process doesn’t automatically assume a firm would be designated.

(Updates with task force report due as soon as March, in third-to-last paragraph.)

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