INSIGHT: Six Changes to the Consumer Finance Landscape Ten Years After the Financial Crisis

It’s been just over ten years since Lehman Brothers declared bankruptcy and the contemporaneous financial crisis forever changed the consumer finance landscape. The transformation of the industry has already impacted the way financial institutions provide products to consumers, and more change are yet to come. Over the last decade, there are a number of key developments and critical trends poised to shape the future.

The role of the traditional bank has changed. Since 2008, the percent of mortgage loans originated by traditional banks has fallen dramatically as non-bank mortgage lenders have grabbed increased market share. By 2016, non-bank mortgage lenders such as Quicken Loans, Inc., Freedom Mortgage Company, LoanDepot.com, and Caliber Home Loans, Inc. originated about half of the mortgages (up from just 20 percent in 2007). This trend appears to be continuing. Caliber, which entered the market in 2013, has seen its originations grow every year since and is now among the top ten originators. Quicken Loans, which launched Rocket Mortgage in 2016, is not only the largest online lender but also originated more mortgages in 2017 than any lender other than Wells Fargo according to a recent report (Quicken in fact originated more loans than Wells Fargo in last quarter of 2017).

Non-bank loan servicers are also taking market share from traditional banks. Large banks now service less than half of the country’s mortgage loans. Back in 2008, Ocwen Loan Servicing serviced 322,515 loans and had 4,146 employees. Today, Ocwen services almost four times as many loans and employs 7,600 workers, according to their SEC filings. This growth, along with similar growth at such servicers as Nationstar (now known as Mr. Cooper) and other specialty servicers, will likely continue, with traditional banks transferring servicing rights to these specialized loan servicing companies.

These dramatic shifts in the mortgage loan markets are due, in no small part, to the scrutiny on consumer lending and the increased regulatory burden that followed the financial crisis. The fines incurred by lenders post-crisis were massive, and the legal risks and regulatory burden became too much for most traditional banks to bear. Other institutions, that were not subject to caps on growth or stringent government monitoring, stepped in when the traditional banks were more constrained.

Today’s significant players in the consumer finance markets, both traditional and non-traditional banks, have been required to increase their internal risk and compliance structures, and evolve to meet new demands, such as new CFPB rules to address service transfer of loans and new state licensing requirement for non-bank servicers.

As non-banks compete for market share, they compete with traditional banks by offering new technologies and underwriting methods. They promise faster loans, with less paperwork and more transparency, often online. These new entrants to the market are luring customers and becoming competition to the traditional bank model. The traditional banks will need to invest in technology and innovation to reclaim their role in the lending market. We can expect to see a focus on developing online loan applications, approvals and closings and apps for fast, easy and secure mobile banking.

Cultural shifts among consumers, lenders and servicers. The fallout from the financial crisis has made companies that provide consumer finance products more risk adverse—not just in business decisions but in litigation strategies as well. These companies have invested heavily in internal controls and have grown their internal compliance teams significantly. Many lenders and servicers can now rely on their significant in-house regulatory guidance capabilities. Despite these and other efforts to repair brand and reputational harm that many institutions suffered after the financial crisis, newer non-traditional lenders continue to prey upon consumer distrust of traditional banks. These non-traditional lenders market themselves as “reinventing” the mortgage process with consumer focused marketing and have adopted names such as “Ally” and “Mr. Cooper” that suggest a friendlier financial institution. We can expect to see a more consumer-centric approach going forward, from nonbanks and traditional banks alike, hoping to create a more favorable consumer experience in the lending and servicing areas.

Even more new entrants look to enter a broad array of consumer finance markets. At least two powerhouse institutions are now investing in the US consumer finance industry- Goldman Sachs & Barclays. Goldman Sachs established a consumer lending business, Marcus, in late 2016. It has since originated more than $3 billion in loans and serves about 1.5 million customers. Goldman Sachs’ President and now CEO, David Solomon, recently explained that the company is interested in building on the bank’s Marcus platform to expand into consumer banking areas such as checking accounts, payment solutions, credit cards, mortgages and auto loans, and insurance products. Barclays is also expanding its US presence. It launched Barclaycard US in 2004, after acquiring Juniper Financial Corporation, as one of the earliest digital-only banks, though it only offered credit card services, savings accounts and CDs. It has since grown into a significant US card issuer, with $26 billion in card loans and $12 billion in online deposits. Barclays is now planning to leverage the data it has to move more heavily into consumer retail banking and is reportedly focused on super prime customers. The progress, though, has been measured – neither company jumped into the consumer space quickly or too aggressively. Indeed, recent reports suggest the growth of the retail banks are moving slower than had initially been anticipated.

Litigation related to the financial crisis continues. Lehman’s bankruptcy a decade ago has spawned litigation which financial institutions are still grappling with today. Banks face claims for contractual indemnification or repurchase relief, including a new wave of indemnification claims by Lehman Brothers Holdings Inc. filed last month against dozens of residential mortgage originators. LBHI claims those companies sold defective mortgage loans in breach of their representations and warranties, which LBHI securitized and sold to third party investors; it now seeks to recover money damages for the indemnification claims. Default actions against borrowers are still lingering in courthouses around the country. As these matters age, the statute of limitations is often raised as a possible defense and the law relating to the statute of limitations for foreclosure actions is developing in a number of jurisdictions. The law varies among jurisdictions but significantly shapes how these older default actions proceed and the banks’ chances of recovering aged debts. Many of the foreclosure actions that are litigated today involve defaults on modifications or refinancing agreements offered following the financial crisis. The impact of the protracted foreclosure litigation process is also reflected in “zombie property” legislation that has been proposed by a number of local governments in an attempt to pass the responsibility to banks to pay for properties that become a nuisance to a neighborhood after a borrower has let it deteriorate.

The CFPB’s shifting role. The CFPB was created in reaction to the 2008 financial crisis. Ten years later big changes are underway at the Bureau. Acting Director Mick Mulvaney splits his time between the Bureau and the Office of Management and Budget, which he also directs. He has publicly explained that the CFPB’s era of regulation through enforcement is over but that the Bureau will continue to go after entities that break the law. Enforcement activity has indeed slowed since Acting Director Mulvaney took the helm. The Bureau recently announced it is considering whether it should define “abusive acts” within the meaning of the Dodd-Frank Act, which grants the Bureau enforcement authority over “unfair, deceptive and abusive acts.” In the wake of a more restrained CFPB, state enforcement agencies, some of which purport to serve as “mini-CFPBs”, have begun to position themselves to fill the enforcement void.

Changes at the GSEs may be on the horizon. Fannie Mae and Freddie Mac remain in conservatorship, ten years after the financial crisis. Changes appear to be afoot – at Fannie Mae, the General Counsel has recently moved on, and the CEO was slated to retire at the end of the year, but stepped down on October 15, 2018. His counterpart at Freddie Mac has also announced he will depart in the second half of 2019. The Trump administration has proposed privatizing the agencies and those in the industry will be watching closely to see how the post-conservatorship entities will impact the industry. On the one hand, they have played an important role in making housing affordable and back approximately 60% of US mortgages. But that benefit to the industry is accompanied by significant regulatory and compliance burdens.

Conclusion

Ten years after the demise of Lehman Brothers, the consumer finance field has changed dramatically. New entrants to the market have seized significant market share. Expect to see more developments as mid-size banks merge and traditional banks liquidate assets. All players in the field, old or new, must stay abreast of an ever-growing number of federal, state and local laws and regulations. Compliance will continue to be a focus going forward, and companies will begin to understand the priorities of their regulators. Consumer focused initiatives will continue to roll out as well, as companies seek to build back consumer trust and their company brands, as well as the implementation of technology enhanced solutions which make the customer experience faster, easier and more user-friendly. The changes outlined above have already impacted the way financial institutions provide products to consumers today, and more change is yet to come.

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Allison Schoenthal is the Head of Hogan Lovells Consumer Finance Litigation Practice and is based in New York. She has over a decade of experience representing banks, trusts, lenders, and government-sponsored enterprises.