One of the nation’s top bank regulators says the banking system is safe, but worries about risks at non-bank financial institutions, particularly mortgage servicers. The remarks from Federal Deposit Insurance Corp. Chair Jelena McWilliams come days after regulators freed the last “too big to fail” non-bank from extra regulation.
Jelena McWilliams, chair of the Federal Deposit Insurance Corporation, told a banking conference Tuesday that post-crisis regulatory reform helped make the banking system safer but could have pushed risky activity to non-bank lenders. Those lenders, McWilliams feared, are not regulated by the FDIC or the other two banking regulators: the Federal Reserve and the Office of the Comptroller of the Currency.
“The question is: If we have reduced systemic risk in the banking sector, where did it go? It did not just disappear, it is not ether now,” McWilliams said.
‘It’s not Prudential that I’m concerned about’
McWilliams’s comments come as she and the rest of the Financial Stability Oversight Council, a committee of financial regulators, unanimously voted to strip Prudential Financial (PRU) of its “systemically important financial institution” title. In its report, the council said the largest life insurer in the U.S. is no longer a risk to financial stability because it has more liquidity that it used to and lacks the exposure to be of concern.
Responding to a question from Yahoo Finance on the side of the conference, McWilliams said she voted to remove Prudential’s label because “their systemic risk profile is very, very low.”
“It’s not Prudential that I’m concerned about,” she said. “It’s where are we putting this activity by regulating at the banks at the level that we have regulated it in the past.”
McWilliams added that she sees a problem in the fact that eight out of the 10 largest mortgage servicers in the country are non-banks.
Quicken Loans, which offers its popular Rocket Mortgage product, became the largest residential mortgage lender in the United States in February 2018, edging out traditional banks like Wells Fargo (WFC). The company, which has no branches, uses its online platform to originate its loans and relies on wholesale funding to support its lending.
Alluding to the 2008 crisis, McWilliams said the non-bank mortgage lenders worry her because of the possibility of foreclosure. She also expressed concern that a lot of mortgages end up with the two government-sponsored enterprises: Fannie Mae (FNMA) and Freddie Mac (FMCC).
McWilliams said she would much prefer if regulators allowed traditional banks to expand their financial offerings so that activities within the financial system would be supervised.
“My preference is to bring more activity inside the bank,” she said.
One area where McWIlliams is trying to encourage banks to be more active: small-dollar lending. After the financial crisis, the FDIC and other regulators discouraged banks from offering small-dollar loans that often have high-interest rates, such as “deposit advance” products that are repaid automatically by the next electronic deposit to the borrower’s account.
McWilliams said those regulations pushed those small-dollar loans to unregulated payday lenders, adding that she would be interested in trying to reverse some of those previous policies.
“Have we done more damage than good? And we will be looking to solicit more information on that,” McWilliams said.