What are non-bank banks?
Non-bank banks are financial institutions that are not considered full banks because they do not offer both loan and deposit services. Non-bank banks can engage in credit card operations or other loan services, provided that they do not also accept deposits.
Many non-bank banks or non-bank financial corporations offer mortgage services, such as first-time home loans and refinancing options. Some non-bank mortgage-focused banks offer simplified loans, and some may consider lending to customers with good to fair credit. Non-bank banks may offer loans but do not provide deposit services, such as checking or savings accounts.
How Non-Bank Banks Work
Many non-bank banks that allow deposits are insured by the Federal Deposit Insurance Corporation FDIC, and restrictions on minimum reserves will apply to these institutions. Non-banking banking services have grown significantly in recent years as non-financial institutions such as retail companies and car manufacturers have entered the lending industry. Because many companies are trying to expand the rules on banking rights, the US government has massively restricted the new charter from non-bank banks since the late 1980s.
Key points to remember
- When it comes to getting mortgages, non-bank lenders, like Quicken Loans, for example, may offer an easier way to get a mortgage than a traditional bank, especially for customers with credit is less than stellar.
- Payday loan providers are viewed as non-bank banks, but many people see them as predatory lenders.
- Peer-to-peer lenders and private equity firms are considered non-bank banking institutions.
Payday loan providers as non-bank banks
Suppliers of payday loans are also considered to be non-bank banks. A payday loan is a short-term, high-risk loan that is often taken from a borrower’s next paycheck. Many payday lenders charge excessively high interest rates for these loans, making it very difficult for borrowers to repay principal and interest in an emergency. Payday lenders will often defer loans to subsequent paychecks if a borrower cannot pay debts on time, increasing interest and increasing risk. These loans are often referred to as predatory loans because they benefit people who are already vulnerable and have a reputation for having hidden provisions that charge additional fees.
The Bank Holding Company Act of 1956 prohibits non-bank companies from owning banks as subsidiaries, but they may own other non-bank banks.
Although some payday loans may be available online, most payday loan providers are generally small credit merchants with physical locations that allow on-site credit applications and approval. To complete a payday loan application, a borrower usually provides recent pay stubs. From there, lenders will usually base their loan main on a percentage of the borrower’s expected short-term income, using the borrower’s salary as collateral.
Example of a non-bank bank
An example of a non-bank bank is the Ann Taylor women’s clothing line which offers customers a credit card for purchases. With the Ann Taylor Credit Card, customers can earn five reward points for every dollar spent in-store or online. In addition, cardholders will receive $ 20 reward cards for every 2,000 points earned, as well as a $ 15 birthday gift. With online access, cardholders can update their profile, pay their bills and view their statements on a desktop or mobile device. Other retail companies, such as J.Crew and Nordstrom’s, offer similar rewards to their cardholders.