WASHINGTON–A new study by the Federal Reserve Board suggests the growth of nonbanks has improved customer satisfaction with mortgage services.
The research found that as nonbanks increase their market share in a county, the complaint ratio of the county decreases.
According to the Federal Reserve, the research further found nonbanks are better for minority communities as they are better poised to alleviate discrimination in the quality of services minorities receive from their mortgage providers.
The study, The Rise of Nonbanks and the Quality of Financial Services: Evidence from Consumer Complaints, was authored by Ahmet Degerli, an economist with the Federal Reserve Board, and Jing Wang, an assistant business professor at the University of Missouri.
“Our findings suggest that future policies and regulations of nonbanks should consider the effect of market shares on service quality,” the authors said in a statement. “Our findings echo [a similar 2016 study] in that the non-traditional part of the financial sector has the potential to improve the efficiency of the financial system.”
Leaders in Complaints, & Yet…
While the authors extol the benefits of non-banks in mortgage lending, they acknowledge those same lenders are also the subject of more complaints.
“Despite the fact that nonbanks have a higher complaint ratio than traditional banks on average, we find that nonbanks significantly improve their service quality as their market share increases, contributing to the reduction in the complaint ratio at the county level,” the authors said. “For this improvement in service quality, we provide evidence consistent with two explanations. First, as nonbanks increase their market share, they develop a specialty in servicing lower-income borrowers. Second, as nonbanks increase their market share, they make more investments in technology. Moreover, as nonbanks’ market share grows, traditional banks increasingly focus on higher-income borrowers, and their complaint ratio decreases as well.
“We also find that the improvements in service quality are more likely to benefit marginalized borrowers, such as minorities, who are more likely to receive low-quality financial services,” the continued.
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