Zillow's mortgage entry shows why fintechs must be regulated: NAFCU

Fintechs must be held to the same standards as regulated financial institutions, a letter from the National Association of Federally-Insured Credit Unions stated that used Zillow's acquisition of a mortgage lender as the example.

"This emergence of fintech in the financial services marketplace presents new opportunities," the NAFCU letter addressed to Rep. Maxine Waters, D-Calif., the chairwoman of the House Financial Services Committee, and Rep. Patrick McHenry, R-N.C., its ranking member, stated.

"However, it can also present new threats and challenges as entities emerge in an environment that can be unregulated or underregulated. As such, NAFCU believes that Congress and regulators must ensure that when fintechs compete with regulated financial institutions, they must do so on a level playing field where smart regulations and consumer protections apply to all actors in that space."

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The letter specifically referenced Zillow's acquisition of Mortgage Lenders of America, which was completed in November. Unregulated fintech companies can exploit supervisory gaps to obtain a competitive advantage, the letter said, although it added credit unions do not view those companies in adversarial terms.

"We urge the committee to keep a watchful eye on developments such as this, where fintechs could end up competing under different regulations and fewer consumer protections than regulated depository institutions," according to the letter, which was signed by Brad Thaler, NAFCU's vice president of legislative affairs.

While nonbank lenders are subject to rulemaking and enforcement by the Consumer Financial Protection Bureau, that is not the in the same way that banks or credit unions are supervised, Thaler added.

The Office of the Comptroller of the Currency created a fintech charter, but state banking regulators contend it does not have the authority to do so.

There are also data security concerns with fintechs, the NAFCU letter declared.

"For example, a fintech company that permits consumers to consolidate control over multiple accounts on a single platform elevates the risk of fraud and may not be subject to cybersecurity examination in the same way that credit unions are under the Gramm-Leach-Bliley Act," the letter said. "This is one reason why NAFCU strongly believes that Congress must establish a strong national data security standard akin to the GLBA's requirements for financial institutions that applies to all entities that handle consumer financial data. We hope that this issue will be on the committee's agenda this year as well."

Prior to the MLOA purchase, Zillow was licensed as a mortgage broker — although it did not originate any loans — in 40 states and the District of Columbia, because of its Connect, Custom Quotes and lender co-marketing products.

The primary reason it gave for acquiring MLOA was to finance purchases for properties sold from its Zillow Offers unit.