Non-Debt and Non-Bank Financing for Home Purchase: Promises

American University Business Law Review American University Business Law Review

Volume 10 Issue 3 Article 2

2022

Non-Debt and Non-Bank Financing for Home Purchase: Promises Non-Debt and Non-Bank Financing for Home Purchase: Promises

and Risks and Risks

Shelby D. Green

Elisabeth Haub School of Law at Pace University

, sgreen@law.pace.edu

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University Business Law Review, Vol. 10, No. 3 (2022) .

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437

NON-DEBT AND NON-BANK

FINANCING FOR HOME PURCHASE:

PROMISES AND RISKS

SHELBY GREEN*

“[H]ousing is the dominant source of wealth for most families, just as

its twin — mortgage debt — is the chief liability.”

I. Introduction .................................................................................. 438

II. Risk-Prone Home Purchase and Lending Practices Leading

to 2008 Housing Crisis .......................................................... 444

A. The Housing Markets Before and After the Crisis ........... 446

B. The Regulators Were Watching God ................................ 449

i. Protections for the Hapless Borrower ......................... 453

C. Control of Government-Sponsored Enterprises by

the Federal Housing Finance Agency ............................. 455

III. Rise of Non-Banks in Home Purchase Finance ......................... 456

A. Novel Business Models: A Janus Effect .......................... 457

B. How the Fin-Tech Non-Banks Operate ............................. 459

C. The Regulation of Non-Banks .......................................... 460

IV. Emerging New Models for Home Purchase Finance ................ 462

A. Installment Land Contracts ............................................... 462

B. Rent to Own and Seller Financing .................................... 466

C. Alliances and Joint Ventures Between the

Borrowers and Financers ................................................ 468

i. Fleq .............................................................................. 468

D. Equity Sharing: The Spoils of Appreciation .................... 469

i. How the New Equity Sharing Models Work ............... 469

a. Haus ...................................................................... 469

* The Susan Taxin Baer ‘85 Faculty Scholar and Professor of Law, Elisabeth Haub

School of Law at Pace University, White Plains, N.Y. She is a graduate of Georgetown

University Law Center. She teaches and writes in the areas of property, real estate

transactions, housing, and historic preservation.

1. Carlos Garriga & Aaron Hedlund, Crises in the Housing Market: Causes,

Consequences, and Policy Lessons 1–2 (Econ. Rsch. Fed. Rsrv. Bank of St. Louis,

Working Paper No. 2019-033A, 2019), https://doi.org/10.20955/wp.2019.033.

438 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

b. Noah ...................................................................... 470

c. Unison ................................................................... 471

d. Point ...................................................................... 472

ii. Other Alternative Financing Models .......................... 473

a. P2P Mortgage Loans ............................................. 473

iii. Novel Home Purchase Assistance Programs ............. 474

a. “Alternative” iBuyers ............................................ 474

V. Promises and Risks from Alternative Buying and

Financing Models .................................................................. 475

A. The Lure into the Shadows: Muddy Rights

and Remedies ................................................................. 475

i. Costs ............................................................................ 475

ii. Contracting and Consumer Protections ...................... 477

iii. Novel Forms of Rights .............................................. 478

a. Property or Contract Rights .................................. 479

b. A Mortgage by Another Name ............................. 480

i. Shared Appreciation Mortgage

Comparison .................................................. 481

c. Landlord-Tenant ................................................... 483

B. Remembrance of Looming Systemic Risks ...................... 484

C. Untethered and Operating in the Shadows ........................ 487

VI. Conclusions: Necessary Reforms and Controls ........................ 488

I. INTRODUCTION

The 2008 housing and financial industry crisis brought the world to the

brink of economic collapse. While, in some of my earlier articles,

I told the

story of this woeful time, here, by way of introduction, I will recount briefly

some of the lapses in individual judgment and regulatory oversight by the

main protagonists in the story, only as a backdrop to show how the conditions

were ripe for the advent of novel forms of home purchase finance, the main

focus of this article. I refer to these new forms as non-debt and non-bank

financial companies, or NDNBs.

Novel financial instruments are not new.

Indeed, the adjustable-rate mortgages (“ARM”) and interest-only

mortgages,

that factored so prominently in the events leading to the crisis,

2. See Shelby D. Green, Testing Fannie Mae’s and Freddie Mac’s Post-Crisis Self-

Preservation Policies under the Fair Housing Act, 66 C

LEV. ST. L. REV. 477, 479 (2018)

[hereinafter Green, Testing]; Shelby D. Green, Disquiet on the Homefront: Disturbing

Crises in the Nation’s Markets and Institutions, 30

PACE L. REV. 7 (2009) [hereinafter

Green, Disquiet].

3. Infra text accompanying notes 36–37 for a further description.

4. These concepts are defined more particularly infra text accompanying notes 88–

2022 NON-DEBT AND NON-BANK FINANCING 439

were novel at the time. Superficially, they were beneficial as they made

home ownership manageable because the initial loan repayment amounts

were low and within the borrower’s means. What was troublesome and

perhaps sinister was that they were foisted upon those who could not see that

they would not stay manageable and the debt would increase by those who

knew them well.

All the while, the regulators were not watching the

changes in the market, per se, but only the sharp trajectory in the volume of

transactions, housing prices and rates of homeownership.

In the aftermath

of the crisis, many were skeptical of the public apology by the story’s

protagonists, that is, that their activities were based on an honest taken up

desire to support the cause of advancing homeownership for all — a long-

standing national policy. Nothing in the national policy called for the

wholesale abandonment of underwriting principles, which were designed to

protect both lenders and consumers of mortgage credit. Lenders chose to

ignore the concern of the creditworthiness of mortgage applicants, instead

blindly taking the applicant at her word, as to her income, assets, and credit

history

and made one hundred percent loans on contrived appraisals of

value. The low or no-documentation loans, some with a one hundred percent

loan-to-value ratio, at one point accounted for more than two-thirds of certain

loans made by two of the largest banks — Countywide Financial and

Washington Mutual — that collapsed under the weight of their improvidence

in the crisis.

That default was more likely by a borrower whose dreams of

homeownership were larger than his financial ability, was not unforeseeable.

The homeownership goals thrown up by the improvident lenders began

around the Great Depression when the Roosevelt administration declared the

national goal of the greatest level of home ownership.

That goal would be

90.

5. I discuss the cohort of those holding ARMs infra text accompanying notes 236–

42.

6. See Robert J. Samuelson, Rethinking the Great Recession, WILSON Q., Winter

2011, at 16, 19.

7. See FINANCIAL CRISIS INQUIRY COMM’N, THE FINANCIAL CRISIS INQUIRY

REPORT 160 (2011) [hereinafter FCIC FINAL REPORT], https://www.govinfo.gov/

content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; see also id. at 3, 12. We can see this as

lenders recognized the increased risk of loss by precarious borrowers and accounted for

it through higher interest rates and adjustable rate mortgages. Even more sinister was

that lenders knew that when defaults happened, those losses would fall on those who

purchased the mortgages on the secondary market. For a description of the secondary

market, see infra note 16.

8. See FCIC FINAL REPORT, supra note 7, at xxiii, 107–09. See generally Green,

Disquiet, supra, note 1 at 9 n.9, 10 n.14 (describing how risky loans and government

encouragement of mortgage loans contributed to the crisis).

9. See FDR and Housing Legislation, FRANKLIN D. ROOSEVELT PRESIDENTIAL

LIBR. & MUSEUM, https://www.fdrlibrary.org/housing (last visited Nov. 19, 2021). I

440 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

achieved by a host of federal policies and programs.

The first came in the

form of mortgage insurance offered by the Federal Housing Administration

(“FHA”) — under which the federal government insured the repayments of

mortgage loans made to borrowers of modest means.

The significant

advantage to the borrower was that the maturity of loans was extended from

the traditional five years with a balloon payment at the end, to a twenty-five-

year, fully amortized loan.

And, with a low down-payment,

homeownership came within the reach of many. Other federal policies since

adopted to make home purchase affordable, are found in the tax laws — for

example, the deductibility of mortgage interest

and the exclusion of gain of

up to $500,000 for a couple filling jointly, in the sale of a personal

residence.

At first, the loan originators’ ability to make loans was limited by the rate

of savings deposits they had on hand. But the creation of the secondary

mortgage market

changed these dynamics. In 1949, Congress established

the Federal National Mortgage Association (“Fannie Mae”) and in 1970, the

Federal National Mortgage Corporation (“Freddie Mac”). Both are

federally-chartered, but privately-owned entities (“Government Sponsored

Entities” or “GSEs”) whose mission was to buy up mortgage loans from loan

originators, thereby creating liquidity for more loans to would-be

discuss the rates of home ownership infra text accompanying notes 39–45.

10. See generally Shelby D. Green, The Search for a National Housing Policy: For

the Cities’ Sake, 26 F

ORDHAM URB. L.J. 69 (1998) (examining federal policies and

development of homeownership).

11. 12 U.S.C. § 1709(b). The idea was that by providing mortgage insurance, lenders

would increase their levels of lending. In addition, the federal insurance program

imposed interest rate ceilings, established uniform lending criteria, required lower down-

payments, and introduced longer mortgage terms. The analogous program created for

Veterans, under the then Veterans’ Administration, not the Department of Veteran’s

Affairs, (“VA”), guaranteed loans on behalf of Veterans.

12. Id.

13. The required down-payment for an FHA loan is now 3.5% as opposed to non-

FHA loans which typically require 20%. VA loans can be 100% loans. See 12 U.S.C.

§ 1709(b)(9)(A) (requiring a down-payment of not less than 3.5%).

14. See I.R.C. § 163(h). Until the Tax Cuts and Jobs Act of 2017, interest paid on

mortgage loans of $1 million was deductible, but after, the maximum loan was reduced

to $750,000.

15. Id. § 121.

16. In contrast to the primary mortgage market, consisting of loan originators, the

secondary mortgage market is made up of participants who buy mortgages from loan

originators and sell investments in those mortgages to private and public investors. See

Daniel J. McDonald & Daniel L. Thornton, A Primer on the Mortgage and Mortgage

Finance Market, 90 F

ED. RSRV. BANK OF ST. LOUIS REV., Jan–Feb 2008, at 31, 34–36,

https://files.stlouisfed.org/files/htdocs/publications/review/08/01/McDonald.pdf.

2022 NON-DEBT AND NON-BANK FINANCING 441

homeowners.

Soon, private actors entered the secondary mortgage

market.

While these were all truly laudable programs, something went

wrong as perverse incentives took hold. Loan originators profited from

packaging loans and because the risks of default traveled with the mortgage

now owned by FNMA or FHLMC, or the private purchaser, the originators

made loans to almost anyone — if he could sign the mortgage papers.

A host of factors can be discerned as the major culprits in practices leading

up to the crisis. First, the seeming wholesale abandonment of safe

underwriting practices in favor of short-term profits by loan originators.

Second, there was the indiscriminate purchase by the GSEs and private

actors of poor-quality loans, many based on inflated appraisals of the

property. Third, there was the inevitable default by a borrower, whose ARM

interest rate had increased by several percentage points, but whose financial

circumstances had not. The Financial Crisis Inquiry Commission,

authorized by the U.S. Senate in May 2009, was the result of one of two

things — either the borrowers never could fulfill their obligations under the

loan or never intended to.

The effects on the markets were yet the same

either way.

It was a toxic mix of excess and cupidity, whose impact fell heavily not

just on the actors (the financiers and borrowers), but on the nation and the

world. There were millions of foreclosures with no end in sight.

Homeownership rates took a nose-dive,

businesses shuttered and factories

17. See id. Later, the Government National Mortgage Association (“Ginnie Mae”),

12 U.S.C. § 1716-23(h), was created to purchase loans made to veterans. Ginnie Mae

“guarantees” principal and interest. These GSEs issued debt securities to raise funds for

their purchases.

18. Decades later, private investment companies achieved a large presence in the

secondary market. See O

FF. OF FED. HOUS. ENTER. OVERSIGHT, A PRIMER ON THE

SECONDARY MARKET, MORTGAGE MARKET NOTE NO. 08-3 2–3, 7–8 (2008),

https://www.fhfa.gov/PolicyProgramsResearch/Research/PaperDocuments/20080721_

MMNote_08-3_N508.pdf. At the time that the famed Lehman Brothers collapsed in

September 2008, it was the largest private holder of mortgage-backed securities with

$619 billion in debts. See Lehman Brother-Fall From Grace, CFI, https://corporate

financeinstitute.com/resources/knowledge/finance/lehman-brothers (last visited Nov.

19, 2021).

19. While the purchase agreements often provided recourse against the originator in

case of defective loans, those cases are still shaking out in the courts. See, e.g., In re Part

60 Put-Back Litig., 165 N.E.3d 180 (N.Y. 2020) (enforcing the sole remedy clause in

securitization contract).

20. Id.

21. See FED. DEPOSIT INS. CORP., CRISIS & RESPONSE: AN FDIC HISTORY 2008–

2013 xii (2018) [hereinafter C

RISIS & RESPONSE] (reporting 2.8 million mortgage loans

in foreclosure in the first quarter of 2008, more than four times the number in 2005).

22. See infra text accompanying note 39.

442 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

closed,

retail sales plummeted,

and hundreds of commercial banks

failed.

Alas, it was only after the horses got out that the regulators acted to close

the barn door. The immediate rescue reaction came from the federal

government under the Troubled Asset Relief Fund — a nearly $3 trillion

cash infusion to failing investment banks.

Fannie Mae and Freddie Mac

were also put under conservatorship under the Housing and Economic

Recovery Act of 2008 (“HERA”),

their role as the primary protagonist in

the secondary mortgage markets, curtailed. And lenders had little sympathy

for the beleaguered borrower as filings for foreclosures were almost

automatic. Indeed, a practice of “robo-signing” of default papers arose,

where the same individual from the loan servicer would attest to hundreds of

defaults within the context of a single day, in many cases, without any

verification of the status of the loan, leaving the borrower to sort things out

later in court.

When this practice became known, several of the larger

banks — Chase, Bank of America, Wells Fargo — entered into consent

decrees with the United States Department of Justice, which among other

things, required them to verify defaults and have staff available to speak to

beleaguered borrowers.

On the state level, as courts became overwhelmed

by foreclosure complaints, some adopted moratoria on foreclosures and

mandatory meditation programs.

When the waters began to calm, Congress and state governments set out

to learn what happened and to examine the conditions that created the

nightmare. Among the prominent findings of the Financial Crisis Inquiry

23. See CRISIS & RESPONSE, supra note 21, at xii–xiii (stating that 8.8 million jobs

were lost, having a $10 to $14 trillion economic effect).

24. Robert J. Samuelson, Revisiting the Great Depression, WILSON Q., Winter 2012,

at 36, 38, 41.

25. See CRISIS & RESPONSE, supra note 21, at xiii, xix–xxiii (reporting that the FDIC

closed 500 banks, 12% of all insured banks, at a cost of $73 billion).

26. See infra text accompanying notes 63 and 84.

27. Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, 122 Stat.

2654 (codified at scattered sections of 12, 15, 26, 37, 38 and 42 U.S.C.).

28. Anna Louie Sussman, Ex-mortgage Document Exec Pleads Guilty in ‘Robo-

signing’ Case, R

EUTERS (Nov. 20, 2012, 7:56 PM), https://www.reuters.com/article/

robosigning-plea/ex-mortgage-document-exec-pleads-guilty-in-robo-signing-case-idUS

L1E8ML0C120121121.

29. Press Release, U.S. Dep’t of Just., $25 Billion Mortgage Servicing Agreement

Filed in Federal Court (Mar. 12, 2012), https://www.justice.gov/opa/pr/25-billion-

mortgage-servicing-agreement-filed-federal-court.

30. See, e.g., Foreclosure Mediation Programs by State, NAT’L CONSUMER L. CTR.,

https://www.nclc.org/issues/foreclosure-mediation-programs-by-state.html (last visited

Nov. 19, 2021) (directing the reader’s attention specifically to the Nevada foreclosure

mediation rules).

2022 NON-DEBT AND NON-BANK FINANCING 443

Commission, was that there was an utter lack of ethical principles guiding

either face-to-face transactions or corporate decision making.

As such, the

first regulatory response was to reign in some of the more pernicious deeds

through the Dodd-Frank Wall Street Reform and Consumer Protection Act

of 2010

(“Dodd-Frank”). This comprehensive legislation purported to deal

with systemic risk. There were also amendments to the Truth in Lending

Act of 1968

for greater disclosures about the costs of borrowing and new

standards for mortgage loan origination. Moreover, many states followed

with legislation that aimed to protect borrowers from lending abuses.

Regrettably, Dodd-Frank only offered prospective relief and did not operate

to undo the millions of foreclosures that had already occurred or were in the

pipeline.

Some foreclosed homeowners were relegated to entering into

installment land contracts to buy back their homes.

While I discuss below,

in more detail, the need for and promises of the regulatory constraints

imposed by Dodd-Frank upon lenders, for the moment, as the lead into the

main point of this Article, I will note that perversely, rather than making fair

loans more readily available, the legislative and regulatory responses made

it more difficult for the average borrower to obtain a mortgage loan. As new

stringent underwriting standards became mandatory and as lenders were

required to retain some of the risks, many withdrew from mortgage lending

altogether. Enter the non-banks and non-debt financial companies

(“NDNBs”), these entities, while not entirely new on the homebuying scene,

are gaining ground. They cover the entire homebuying experience — from

selling an existing home to providing down payment assistance to long-term

financing. The great benefit of some of these models is that they offer a way

past the seemingly insurmountable barrier — the twenty percent down

payment — that often puts homeownership out of reach for many. The

31. For a discussion of the FCIC’s findings, see infra text accompanying notes 68–

72.

32. Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-

203, 124 Stat. 1376 (2010) (codified at 12 U.S.C. §§ 5301–5641).

33. 15 U.S.C. § 1601.

34. E.g., N.Y. BANKING LAW § 590 (McKinney 2021); NEV. REV. STAT. § 645B

(2020); M

ASS. GEN. LAWS ch. 255F (2021).

35. Many states, though, enacted foreclosure relief measures, and there were more

than a few suits filed against lenders under the original version of TILA and other

consumer protection laws. See Tami Luhby, Predatory-Lending Lawsuits on the Rise,

CNN

MONEY (Oct. 9, 2009, 7:19 AM), https://money.cnn.com/2009/10/08/news

/economy/Predatory_lending_lawsuits_increase/index.htm; see also

U.S. GEN. ACCT.

OFF., FEDERAL AND STATE AGENCIES FACE CHALLENGES IN COMBATING PREDATORY

LENDING (2004), https://www.govinfo.gov/content/pkg/GAOREPORTS-GAO-04-

280/html/GAOREPORTS-GAO-04-280.htm.

36. See Green, Testing, supra note 2, at 526.

444 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

national median home price in 2020 is nearly $350,000

and a twenty

percent down payment, $70,000, would take a lifetime to save for a

household having the median national income of $62,000. For some,

NDNBs are the only path toward realizing the American dream. For many

— the sophisticated millennials, at ease with technology in everyday affairs,

NDNBs are perfectly fine. But for the cohort that figured so prominently

among the losers in the housing crisis — the less well-educated, less

sophisticated, the more risk averse — the rise in NDNBs is concerning.

Because some of the NDNBs do not implicate traditional mortgages, they

are not subject to the lending regulations aimed to help homebuyers make

informed choices and to protect against abuses, although they could run afoul

of regulations against fraudulent and deceptive practices. But this is a very

broad standard. Even as all the contours of the programs are laid bare, they

may yet pose undue risks to vulnerable consumers that are not mitigated by

any regulation — they portend novel forms of ownership rights that threaten

to disturb the existing taxonomy of property interests that may not be

justified by any discernable societal interests in efficiency and low

information costs. Whether these inventions and new forms of

homeownership assistance serve to facilitate a promise of security and

autonomy or a nightmare in another guise remains to be seen.

This Article explores the phenomenon of the NDNBs in home purchase

and finance that has gained a growing presence in the mortgage marketplace

since the 2008 crisis. Part II offers a deeper discussion of the risk-prone

practices leading to the 2008 housing crisis and the regulatory and industry

responses for recovery. Parts III and IV describe the emerging new models

of home purchase. Part IV explores some of the apparent and hidden risks

in these transactions. Part VI concludes with suggestions for assessing and

managing risks and for reforms.

II.

RISK-PRONE HOME PURCHASE AND LENDING PRACTICES

EADING TO 2008 HOUSING CRISIS

In this Part, I will highlight some of the more striking aspects of the 2008

housing crisis, about which so much has been written.

There seems little

37. Median Sales Price of Houses Sold for the United States, FED. RSRV. BANK OF

ST. LOUIS, https://fred.stlouisfed.org/series/MSPUS (last visited Nov. 19, 2021).

38. E.g., Financial Crises and Recovery: Financial Crises Timeline, PACE UNIV.,

https://libraryguides.law.pace.edu/financialcrisis (last visited Nov. 19, 2021); U.S.

DEP’T

HOUS. & URB. DEV., REPORT TO CONGRESS ON THE ROOT CAUSES OF THE

FORECLOSURE CRISIS (2010), https://www.huduser.gov/portal/publications/Foreclosure

_09.pdf; Patricia A. McCoy, The Housing Mortgage Financial Crisis: Lessons Learned

(Joint Ctr. for Hous. Stud., Working Paper No. HBTL-01, 2013), https://www.jchs.

harvard.edu/sites/default/files/hbtl-01_0.pdf; William R. Emmons et al., The

2022 NON-DEBT AND NON-BANK FINANCING 445

disagreement among the commentators on its consequences — that it left the

nation shaken to its economic core, fearful, and distrustful of the traditional

markets and market makers. Despite rising nearly twenty-five percentage

points from thirty four percent in 1934 to just under seventy percent in 2003,

during the crisis, the rate of homeownership plummeted to 67.5% in just five

years.

Reports revealed a slow climb back up to 67.9% in the second

quarter of 2020.

The effects of the crisis were felt more sharply by certain

populations within our society. For African-Americans, whose

homeownership rates have always lagged behind whites, in the fourth quarter

of 2008, it stood at only 46.8% only to rise to 47% in 2020.

There are

similar disparities for Latino households (historically at 48.5%, but rising to

51.4% in 2020).

For Asian-Americans and Native Hawaiian and Pacific

Islanders, the homeownership rate was (61.4% in 2020).

These numbers

Foreclosure Crisis 2008: Predatory Lending or Household Overreaching?, REG’L

ECONOMIST, July 2011, at 12, 12, https://core.ac.uk/download/pdf/6575498.pdf; Julie L.

Stackhouse, Lessons Learned from the Financial Crises, F

ED. RSRV. BANK OF ST. LOUIS

(Sept. 11, 2011), https://www.stlouisfed.org/dialogue-with-the-fed/lessons-learned-

from-the-financial-crisis.

39. See Dean Baker, Subprime Borrowers Deserve an Own to Rent Transition, 5

CONOMISTS’ VOICE 1, 2 (2008), http://www.bepress.com/ev/vol5/iss1/art5; see also

FF. OF FED. HOUS. ENTER. OVERSIGHT, REPORT TO CONGRESS (2008), https://

www.fhfa.gov/AboutUs/Reports/ReportDocuments/OFHEO_Report_Congress-2008.

pdf.

40. U.S. CENSUS BUREAU, CURRENT POPULATION SURVEY/HOUSING VACANCY

SURVEY, 6 tbl. 14 (2021) [hereinafter CENSUS POPULATION SURVEY], https://www.

census.gov/housing/hvs/data/histtabs.html.

41. The St. Louis Federal Reserve Bank Research Series is the source for

comprehensive rates of ownership by demographics and over time. Homeownership

Rates by Race and Ethnicity: Black Alone in the United States,

FED. RSRV. BANK OF ST.

LOUIS, https://fred.stlouisfed.org/series/BOAAAHORUSQ156N (last visited Jan. 18,

2022). A post-crisis analysis confirmed what many suspected while it was happening.

Helping Families Save Their Homes in Bankruptcy Act of 2009, and the Emergency

Homeownership and Equity Protection Act: Hearing on H.R. 200 and H.R. 225 Before

the H. Comm. on the Judiciary, 111th Cong. (2009). That is, the rate of foreclosure for

African-American and Latinx homeowners over age 50 was nearly double that for white

homeowners in all age groups and roughly double the rate of minority homeownership.

See id. at 71–72 (statement of David M. Certner, Legal Counsel and Legislative Policy

Director, AARP, Washington, D.C.). The precise numbers are stark: Older African-

American homeowners held only 6.8% of all first mortgages, but suffered 14.4% of all

foreclosures; for Latinx homeowners, those numbers were 7.5% and 15.9% respectively.

Id. For homeowners over the age of 50, there was nearly a 17 times greater likelihood

that there loans were subprime. Id.

42. Homeownership Rates by Race and Ethnicity: Hispanic (of Any Race) in the

United States, F

ED. RSRV. BANK OF ST. LOUIS, https://fred.stlouisfed.org/

series/HOLHORUSQ156N (last visited Nov. 19, 2021).

43. Homeownership Rates by Race and Ethnicity: All Other Races: Asian, Native

Hawaiian and Pacific Islander, F

ED. RSRV. BANK OF ST. LOUIS, https://fred.

stlouisfed.org/series/ANHPIHORUSQ156N (last visited Nov. 19, 2021).

446 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

stand in contrast to the rates for whites: 74.8% in 2008, rising to 76% in

2020.

The causes of disparate rates of homeownership are in no small

measure due to discriminatory mortgage lending practices as well as

exclusionary land use practices.

As the crisis set in, the estimated number of foreclosures was predicted to

continue to rise to four to five million in the next two years — absent drastic

intervention

— and later studies by the Congressional Research Office

revealed that many mortgage holders were not inclined to engage in

foreclosure avoidance courses, instead immediately invoking their contract

rights to recourse in the property.

A. The Housing Markets Before and After the Crisis

Although the real estate market is peculiarly subject to booms and busts,

44. Homeownership Rates by Race and Ethnicity: Non-Hispanic White Alone in the

United States, F

ED. RSRV. BANK OF ST. LOUIS, https://fred.stlouisfed.org/series/

NHWAHORUSQ156N (last visited Nov. 19, 2021).

45. Discrimination in mortgage lending, from disparate lending terms to outright

redlining, continues to burden borrowers of color. See Press Release, U.S. Dep’t of Just.,

Justice Department Reaches Settlement with Wells Fargo Resulting in More Than $175

Million in Relief for Homeowners to Resolve Fair Lending Claims (July 12, 2012),

https://www.justice.gov/opa/pr/justice-department-reaches-settlement-wells-fargo-

resulting-more-175-million-relief. Discriminatory zoning only makes the problem more

onerous as rates and terms of lending reflect the demographics of the loan area. See A

DENINNO, THE ROLE OF ZONING REGULATIONS IN THE PERPETUATION OF RACIAL

INEQUALITY AND POVERTY: A CASE STUDY OF OAKLAND, CALIFORNIA (2019),

https://www.lincolninst.edu/sites/default/files/amy_narrative_final.pdf.

46. OFF. OF THRIFT SUPERVISION, MONTHLY MARKET MONITOR 8 (Jan. 22, 2009);

Meeting on Priorities for the Next Administration: Use of TARP Funds under EESA,

Before the H. Comm. on Fin. Servs., 111

Cong. 18 (2009) [hereinafter Use of TARP

Funds under EESA] (statement of John F. Bovenzi, Deputy to the Chairman and Chief

Operating Officer, FDIC). In the midst of the crisis, it was feared that the number of

foreclosures would rise to more than 10 million. See also Emmons et al., supra note 38,

at 12; Federal Deposit Insurance Corporation on Oversight of Implementation of the

Emergency Economic Stabilization Act of 2008 and Efforts to Mitigate Foreclosures,

110th Cong. (2008) (statement of Michael Krimminger, Special Advisor for Policy for

Fed. Deposit Ins. Corp.), https://archive.fdic.gov/view/fdic/1581; Use of TARP Funds

under EESA, supra note 46, at 17 (statement of John F. Bovenzi, Deputy to the Chairman

and Chief Operating Officer, Fed. Deposit Ins. Corp.). The rate of foreclosures rose in

2008 to 1.84% and continued upward to 2.23% in 2010; not leveling off until 2019, when

the rate dipped to .36%. Foreclosure Rate in the United States from 2005 to 2020,

TATISTA, https://www.statista.com/statistics/798766/foreclosure-rate-usa/ (last visited

Nov. 19, 2021).

47. EDWARD VINCENT MURPHY, CONG. RSCH. SERV., RL34653, ECONOMIC

ANALYSIS OF A FORECLOSURE MORATORIUM 9–10 (2008).

48. See Jeffrey P. Cohen et al., The Boom and Bust of U.S. Housing Prices from

Various Geographic Perspectives, 94 F

ED. RSRV. BANK OF ST. LOUIS REV. 341, 360

(2012), https://research.stlouisfed.org/publications/review/2012/09/04/the-boom-and-

bust-of-u-s-housing-prices-from-various-geographic-perspectives.

2022 NON-DEBT AND NON-BANK FINANCING 447

for most of history, the price of homes kept pace with the rate of inflation.

However, from 1995–2006, house prices diverged from other economic

trends and increased dramatically, by eighty percent.

But, this rise was

unsustainable — the leverage by borrowers with questionable credit holding

subprime loans could not form the pillars for long-term stability.

Because

many of the loans were 100% loans, as most of the early payments are

allocated to interest, it would take many years into the loan before the

homeowner would see any equity. When faced with the disruptions in the

market, absent equity, there would be no safe exit by these borrowers.

The prevailing lending practices also drove housing supply, with record

or near-record levels of homes on the market.

High supplies, exacerbated

by high foreclosure rates, would necessarily force down housing prices,

49. In 2001, home prices were at their highest ever and in 2006, home prices were

double what they were ten years earlier. See Becky Sullivan & Ari Shapiro, 10 Years

After Housing Crises: A Realtor, A Renter, Starting Over, Staying Put, NPR (Apr. 28,

2018, 7:03 AM), https://www.npr.org/2018/04/28/603678259/10-years-after-housing-

crisis-a-realtor-a-renter-starting-over-staying-put; see also All-Transactions House Price

Index for United States, F

ED. RSRV. BANK OF ST. LOUIS, https://fred.stlouisfed.

org/series/USSTHPI (last visited Nov. 19, 2021).

50. The “subprime market” is so defined because the median FICO is substantially

below that for prime loans (620 as compared to 723) and the loans carry high loan-to-

value ratios. To control for the high risk of default given these characteristics, subprime

loans typically have adjustable interest rates, often with a balloon payment of principal

and negative amortization, under which the principal of the loan is not reduced on a

schedule, but rather increases over the term. Under the 2/28 loans, the initial rate is

typically very low and fixed for two years; thereafter, the rate adjusts periodically, in

accordance with some index agreed to in the mortgage for the rest of the term.

Depending on what is happening in the economy, the first adjustment could be a shocker

if the borrower’s financial means did not experience the same increases. Cf. Berghaus

v. U.S. Bank, 360 S.W.3d 779, 784 (Ky. Ct. App. 2012) (rejecting claim of predatory

lending and violations of federal disclosure requirements on account of lender’s failure

to disclose “potential for an enormous rate increase”). The related “Alt-A” market was

also suffering. The Alt-A market consists of borrowers who are typically self-employed

and consequently have unpredictable income streams. Even so, as their credit scores are

a bit stronger, lenders made loans with little documentation and often with a high debt-

to-income ratio. See S

UMIT AGARWAL & CALVIN T. HO, COMPARING THE PRIME AND

SUBPRIME MORTGAGE MARKETS 1–2 (2007), https://fraser.stlouisfed.org/files/docs/

historical/frbchi/fedletter/frbchi_fedletter_2007_241.pdf. If lenders hoped for different

results in the case of the Alt-A borrower, they were sorely mistaken.

51. See LEXISNEXIS, SUBPRIME LENDING: AN UPDATE OF THE ISSUES AND

APPROACHES 23 (2007); see also Steven L. Schwarcz, Systemic Risk and the Financial

Crisis: Protecting the Financial System as a ‘System’ 16 (Feb. 12, 2014) (unpublished

manuscript) (on file with the University of California Berkeley School of Law),

https://www.law.berkeley.edu/files/bclbe/Schwarcz_Paper.pdf.

52. See Monthly Supply of Houses in the United States (“MSACSR”), FED. RSRV.

BANK OF ST. LOUIS, https://fred.stlouisfed.org/series/MSACSR (last visited Nov. 19,

2021) (tracking housing supply by month).

448 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

which continued to drop through 2010 only to stabilize beginning in 2011.

These declining prices and stalled markets created the phenomenon of

underwater mortgages; at one point, more than a third of all mortgages in the

country had this characteristic.

As home values plunged and foreclosures

skyrocketed, local governments were taxed to provide emergency shelter and

social services to the displaced former homeowners and to shore up

communities against blight and instability.

Market participants appeared to deliberately target the vulnerable to lure

them into burdensome mortgage transactions, without warning of their

eventual costs.

Subprime loans were the financing forms de jour for

53. See All-Transactions House Price Index for the United States, FED. RSRV. BANK

OF ST. LOUIS, https://fred.stlouisfed.org/series/USSTHPI (last visited Nov. 19, 2021)

(depicting housing prices from 1975–2021).

54. The state of being “underwater” exists when the amount owed on the mortgage

loan is greater than the market value of the home. F

ANNIEMAE, KEYS TO RECOVERY

(2008), https://www.fanniemae.com/media/28871/display; see also A

SHLYN AIKO

NELSON, BAILING OUT UNDERWATER MORTGAGES (2010), https://oneill.indiana.edu/

doc/research/mortgages_nelson.pdf (reporting that the percent of underwater mortgages

in the country reached nearly 40% by 2009).

55. See, e.g., Bank of America Corp. v. Miami, 137 S. Ct. 1296, 1300–02 (2017)

(seeking recovery for increased costs of municipal services after many foreclosures of

subprime mortgages); Oakland v. Wells Fargo, 972 F.3d 1112, 1117 (9th Cir. 2020)

(seeking damages under the Fair Housing Act for reduced tax revenues because of a high

rate of foreclosure of predatory loans).

56. See Christopher Kent, Assistant Governor (Financial Markets) of the Reserve

Bank of Australia, Address to the Housing Industry Association Breakfast: The Limits

of Interest-Only Lending (April 24, 2018), https://www.bis.org/review/r180426f.htm

(discussing the risks of interest-only and negative-amortization loans). It was no surprise

that these loans accounted for the large percentage of delinquencies in the crisis. See

James Bullard et al., Systemic Risk and the Financial Crisis: A Primer, 91 F

ED. RSRV.

BANK OF ST. LOUIS REV. 403 (2009), https://research.stlouisfed.org/publications/

review/2009/09/01/systemic-risk-and-the-financial-crisis-a-primer/ (examining how

subprime loans affected the larger housing market); Christopher Palmer, Why Did So

Many Subprime Borrowers Default During the Crisis: Loose Credit or Plummeting

Prices? 1 (Apr. 14, 2015) (unpublished manuscript), https://files.consumerfinance.

gov/f/documents/P5_-_CPalmer-Subprime.pdf (“The subprime default rate — the

number of new subprime foreclosure starts as a fraction of outstanding subprime

mortgages — tripled from under 6% in 2005 to 17% in 2009. By 2013, more than one

in five subprime loans originated since 1995 had defaulted.”); Ben S. Bernanke,

Chairman, Bd. of Governors of the Fed. Rsrv. Sys., Remarks at the Federal Reserve

Board of Chicago’s 43rd Annual Conference on Bank Structure and Competition: The

Subprime Mortgage Market (May 17, 2017), https://www.bis.org/review/r070522a.pdf

(stating that for subprime “mortgages, the rate of serious delinquencies . . . rose sharply

during 2006 . . . about 11 percent, about double the recent low seen in mid-2005 . . . .

In the fourth quarter of 2006, . . . subprime mortgages accounted for more than half of

the foreclosures.”); M

ORTG. BANKERS ASS’N, NATIONAL DELINQUENCY SURVEY 3

(2007), https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-00%20MBA

%20National%20Delinquency%20Survey.pdf (reporting that in “the fourth quarter of

2007, the foreclosure inventory rate increased 17 basis points for prime loans (from 0.79

2022 NON-DEBT AND NON-BANK FINANCING 449

borrowers of color, in diverse neighborhoods, irrespective of credit

standing.

This was all the more heinous because “yield spread premiums”

were rewards from creditors to mortgage brokers who locked borrowers into

higher-cost loans.

B. The Regulators Were Watching God

In the years leading up to the crisis, the regulators did not see that the rise

in mortgage loan originations — up to $2 trillion in 2007 — would

eventually come crashing down.

Indeed, after the collapse, they shrank to

less than a fraction of that level, to $1.4 trillion, and did not recover until

2012.

The regulators also did not see the tsunami of defaults at the market’s

edge.

When the storm was full upon the nation, the regulators reacted with a

variety of measures — including cash infusions into the market (the

Troubled Assets Relief Program or “TARP”),

interest rate cuts, and

eventually regulatory reforms, most significantly Dodd-Frank.

Before

percent to 0.96 percent), and increased 176 basis points for subprime loans (from 6.89

percent to 8.65 percent)”); S

HARON L. STARK & ZHONG YI TONG, QUARTERLY MARKET

MONITOR QMM 5-09 (OFF. OF THRIFT SUPERVISION) 5 (May 7, 2009).

57. See Emily Badger, The Dramatic Racial Bias of Subprime Lending During the

Housing Boom, B

LOOMBERG CITYLAB (Aug. 16, 2013, 6:54 AM), https://www.

bloomberg.com/news/articles/2013-08-16/the-dramatic-racial-bias-of-subprime-

lending-during-the-housing-boom.

58. See FCIC FINAL REPORT, supra note 7, at xxii; Shelby D. Green, Shadowing

Lenders and Consumers: The Rise, Regulation, and Risks of Non-Banks, 37 B

ANKING &

FIN. SERVS. POL’Y REP., Sept. 2018, at 12, 13; see also Green, Disquiet, supra note 1, at

9 n.9, 10 n.14.

59. ZORA NEALE HURSTON, THEIR EYES WERE WATCHING GOD 235 (1937). In the

midst of a fierce hurricane, the people seemed to stare into the dark, perhaps resigning

themselves to idea that only the almighty could save them.

60. See Samuelson, supra note 6, at 19; Greg Buchak et al., Fintech, Regulatory

Arbitrage, and the Rise of Shadow Banks 11 (Nat’l Bureau of Econ. Rsch., Working

Paper No. 23288, 2018),

http://www.nber.org/papers/w23288.

61. Buchak et al., supra note 60, at 11.

62. Both lenders and borrowers, at best miscalculated, or at worst simply ignored,

their risks. See C

RISIS & RESPONSE, supra note 21, at xxiv–xxv, xxxvi.

63. Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat.

3765.

64. See Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Rsrv. Sys., Speech

at the Women in Housing and Finance and Exchequer Club Joint Luncheon: Financial

Markets, the Economic Outlook, and Monetary Policy (Jan. 10, 2008),

https://www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm

(describing the effects of the housing market on the U.S. economy and response); see

also Glenn Hubbard, Financial Regulatory Reform: A Progress Report, 95 F

ED. RSRV.

BANK OF ST. LOUIS 181, https://files.stlouisfed.org/files/htdocs/publications/

review/13/03/181-198Hubbard.pdf (noting how regulators failed to act to avoid the

450 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

discussing Dodd-Frank in some detail, I will take a moment to comment on

the efficacy of the regulators’ immediate responses. Some say that their most

regrettable error was letting Lehman Brothers fail in September 2008.

Because rather than staunch the hemorrhaging in the market, that bankruptcy

sent out dramatic waves of more panic, which led to the total absence of trust.

No one would lend, which in turn meant no one was spending or hiring,

which ultimately led to the need for the rescue of many other companies.

Moreover, the regulators failed to employ the available regulatory tools to

curb the rising housing market and the credit surge — increased interest

rates, caps on loan-to-value ratios, and greater capital retention by banks.

Instead, by allowing the market to operate unconstrained, the regulators left

market participants susceptible to the slimmest changes in market dynamics.

When the waters calmed and Congress was able to discern the lapses, the

Dodd-Frank legislation that followed the emergency responses was largely

prophylactic in nature. Dodd-Frank resulted from the findings of the

Financial Crisis Inquiry Commission, as part of the Fraud Enforcement and

Recovery Act.

The Financial Crisis Inquiry Report was issued in January

2011, and in scathing terms made plain that had the regulators been watching

things on the ground — the explosive growth in subprime lending,

securitization, and the unsustainable rise in housing prices — the crisis might

not have happened.

In addition, the report noted, as the Federal Reserve

failed to set prudent mortgage-lending standards, banks, both investment and

depositary, bought and sold mortgage securities without scrutinizing them

crisis).

65. At the same time as Lehman Brothers was allowed to fall down, following

measures adopted during the Great Depression, several states enacted moratoria on

foreclosures. See P

EW CHARITABLE TR., DEFAULTING ON THE DREAM: STATES RESPOND

TO AMERICA’S FORECLOSURE CRISIS 3 (2008), https://www.pewtrusts.org/en/research-

and-analysis/reports/2008/04/16/defaulting-on-the-dream-states-respond-to-americas-

foreclosure-crisis; see Frank S. Alexander et al., Legislative Responses To The

Foreclosure Crisis In Nonjudicial Foreclosure States, 31 R

EV. BANKING & FIN. L. 341,

365 (2012). Now and during that earlier frightful period, states passed legislation that

gave borrowers rights to redeem the foreclosed property after sale and limited or

precluded deficiency judgments. See David Wheelock, Changing the Rules: State

Mortgage Foreclosure Moratoria During the Great Depression, 90 F

ED. RSRV. BANK OF

ST. LOUIS REV. 569, 569, 570, 574 (2008).

66. See The Origins of the Financial Crisis: Crash Course, THE ECONOMIST (Sept.

7, 2013), https://www.economist.com/schools-brief/2013/09/07/crash-course.

67. See id.

68. Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat.

1617.

69. See FCIC FINAL REPORT, supra note 7, xi, xv–xxviii (summarizing the findings

and conclusions of the Commission).

2022 NON-DEBT AND NON-BANK FINANCING 451

for their quality; some even knew they were rubbish.

Not seeing the trends,

the federal policy makers — the Treasury, the Federal Reserve Board, and

the Federal Reserve Bank of New York — were ill-prepared to respond in a

meaningful way to arrest or at least to minimize the crisis, instead, they were

resigned to let it burn itself out.

It was not just the regulators who defaulted in their oversight

responsibilities, but corporate boards, who at the first line, abandoned sound

decision-making principles and risk evaluation, prudence and ethics,

ignored the long-view and instead were driven only by prospective gain from

the deal on the table in the moment. This fixation left them ill-prepared even

for the most minor shocks in the market.

Lax loan origination policies,

inflated appraisals, and dishonest ratings of mortgage-backed securities by

the ratings agencies, Moody’s, Standard & Poor’s, and Fitch, (who were paid

to give high ratings) were some of the more pernicious practices that created

a powerful recipe for implosion and collapse.

Dodd-Frank outlawed these practices. The legislation aimed to establish

new morals of the marketplace and to protect consumers and lenders in their

loan transactions.

Recognizing that the work of the then five regulatory

agencies might sometimes overlap or reveal gaps, Dodd-Frank created the

Financial Stability Oversight Council (“FSOC”) to identify “systemically

important financial institutions” (“SIFI”) and to monitor them for practices

as would threaten the financial stability of the industry.

Those institutions

would then be subject to heightened regulatory constraints and disclosure-

based obligations.

70. Id. at xvii–xx.

71. Id. at xxii–xxiii. The report found that investment banks operated on only

veneers of capital. For example, at the end of 2007, Bear Stearns was frantically

borrowing up to $70 billion in the overnight market, when it had only $11.8 billion in

equity and faced $383.6 billion in debt. This “was the equivalent of a small business

with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every

day.” Id. at xx. In the six years from 2001 to 2007, “national mortgage debt nearly

doubled, and the amount of mortgage debt per household rose more than 63% from

$91,000 to $149,500, even while wages were essentially stagnant.” Id.

72. Id. at xxv, 125–26.

73. Before the 2008 financial crisis, consumer financial protection was largely

performed by the U.S. Department of Housing and Urban Development and the Federal

Trade Commission. The Dodd-Frank Act invested much of this authority into a new

Consumer Financial Protection Bureau (“CFPB”), but bank regulators still supervise

many consumer activities of their chartered firms. Fraud Enforcement and Recovery Act

of 2009, Pub. L. No. 111-21, 123 Stat. 1617.

74. See Hilary J. Allen, Putting the “Financial Stability” in Financial Stability

Oversight Council, 76

OHIO ST. L.J. 1087, 1113–20 (2015) (describing the structure and

mandate of FSOC).

75. The process of labeling a company as “systemically important” has been a

fraught one. When the FSOC designated the insurer MetLife as “systemically important”

452 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

Under Dodd-Frank, “too big to fail” would become but a song.

Instead, firms would be monitored for unsafe practices and be required to

disinvest of certain assets — those that posed “grave threat[s] to the financial

stability of the United States.”

Portfolios would be required to be diverse

and institutions would be required to maintain minimum capital levels.

These requirements would be evaluated by regular “stress tests” to ensure

that firms could survive a variety of economic shocks in the market.

There

would be prophylactic limits on consolidations and mergers of companies

reaching certain liability thresholds.

Otherwise, SIFIs would be allowed to

fail and need “living wills” for an orderly liquidation in case of improvident

demise.

No longer would the Federal Reserve make emergency loans to

specific firms, but “only to participants in a program or facility with broad-

based eligibility designed for the purpose of providing liquidity to the

financial system”;

no longer would the Federal Deposit Insurance

in 2014, MetLife challenged the designation in court, and the district court subsequently

struck down the designation, finding the FSOC failed to conduct a cost-benefit analysis.

See Ryan Tracy, MetLife Asks Appeals Court to Uphold Removal of “SIFI” Label, W

ALL

ST. J. (Aug. 16, 2016, 10:38 AM), https://www.wsj.com/articles/metlife-asks-appeals-

court-to-uphold-removal-of-sifi-label-1471355267. While the case was on appeal to the

D.C. Circuit Court of Appeals, the parties agreed to a dismissal.

76. Dodd-Frank Act, 12 U.S.C. § 5331(a).

77. See FDIC, RMS MANUAL OF EXAMINATION POLICIES § 3.2 (2020),

https://www.fdic.gov/regulations/safety/manual/section3-2.pdf.

78. Josh Morris-Levenson et al., Does Tighter Bank Regulation Affect Mortgage

Originations? 6–7 (Jan. 20, 2017) (unpublished manuscript), https://papers.ssrn.com/

sol3/papers.cfm?abstract_id=2941177, explains that minimum levels of capital serve to

enable firms to absorb market shocks and otherwise to control economic losses. The new

regulations require certain banks to hold enough liquid assets to survive periods where

refinancing is not possible. Id. at 7.

79. See Prasad Krishnamurthy, Regulating Capital, 4 HARV. BUS. L. REV. 1, 3 (2014)

(noting that these enhanced capital requirements for SIFIs accord with international

standards). For an in-depth discussion of how stress tests work in practice, see Robert

Weber, A Theory for Deliberation-Oriented Stress Testing Regulation, 98 M

INN. L. REV.

2236, 2290–301 (2014).

80. 12 U.S.C. § 1852(b) (providing that “a financial company may not merge or

consolidate with . . . another company, if the total consolidated liabilities of the

acquiring financial company upon consummation of the transaction would exceed 10

percent of the aggregate consolidated liabilities of all financial companies”); see also

AVIS POLK & WARDWELL LLP, PROPOSED DODD-FRANK LIMIT ON FINANCIAL

INSTITUTION M&A TRANSACTIONS (2014), https://www.davispolk.com/sites/

default/files/05.27.14.DoddFrank.Concentration.Limit_.on_.Financial.Institution.MA_.

pdf (discussing the concentration limit proposal).

81. See Nizan Geslevich Packin, The Case Against the Dodd-Frank Act’s Living

Wills: Contingency Planning Following the Financial Crisis, 9

BERKELEY BUS. L.J. 29,

39 (2012) (explaining the liquidation planning required by Dodd-Frank).

82. Extensions of Credit by Federal Reserve Banks, Loans, 80 Fed. Reg. 78,959

(Dec. 18, 2015) (to be codified 12 C.F. R. pt. 201). See generally M

ARC LABONTE, CONG.

2022 NON-DEBT AND NON-BANK FINANCING 453

Corporation (“FDIC”) offer emergency loan guarantees.

The TARP would

be the first and last bailout.

Instead, the FDIC would move to liquidate

failing financial firms.

By these measures, Dodd-Frank aimed to remove

the incentive to act recklessly with the bravado of impunity.

i. Protections for the Hapless Borrower

Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”)

to adopt rules for the entire lending process — from loan origination to loan

servicing.

The rules would apply to depository institutions and non-banks

RSCH. SERV., R44185, FEDERAL RESERVE: EMERGENCY LENDING (2020),

https://fas.org/sgp/crs/misc/R44185.pdf (examining the use of Section 13(3) of the

Federal Reserve Act).

83. For a discussion of the problematic incentives of emergency loan authority, see

Anthony J. Casey & Eric A. Posner, A Framework for Bailout Regulation, 91 N

OTRE

DAME L. REV. 479 (2015).

84. See Gary Lawson, Burying the Constitution Under a TARP, 33 HARV. J.L. &

PUB. POL’Y 55, 57–58 (2010) for a lively critique of TARP.

85. See CRISIS & RESPONSE, supra note 21, at 190–93 (explaining the process of

bank receiverships); 12 U.S.C. § 5390(n).

86. In the aftermath of the crisis, many states adopted a myriad of protections for

borrowers at the initial contracting stage and when facing foreclosure. These protections

include limits on the terms of high-cost loans and

required counseling in advance of

taking the loan. The failure to comply with these requirements could be onerous for

lenders. See, e.g., LaSalle Bank, N.A. v. Shearon, 850 N.Y.S. 871 (Sup. Ct. 2008)

(canceling the entire debt upon violations of banking law on a high-cost loan). In some

states, settlement conferences are required before a foreclosure complaint may proceed,

with the aim of allowing time to cure a default or averting foreclosure altogether. See

Abigail Lawlis Kuzma, Foreclosure in the Heartland: What Did We Learn?, 49 V

AL.

U. L. REV. 39 (2015); see also 2008 Enacted Foreclosure Legislation, NAT’L CONF.

STATE LEGIS., https://www.ncsl.org/research/financial-services-and-commerce/fore

closures-2008-enacted-legislation.aspx (last updated Jan. 21, 2009) (summarizing

recently enacted foreclosure laws across the fifty states); N

EGOTIATED ALTERNATIVE TO

FORECLOSURE ACT (UNIF. L. COMM’N 2017) see also, e.g., N.Y. BANKING LAW § 6-1

(McKinney 2021). See generally Geoffrey Walsh, State and Local Foreclosure

Mediation Programs: Can They Save Homes?, N

AT’L CONSUMER L. CTR. (Sept. 2009),

https://www.nclc.org/images/pdf/foreclosure_mortgage/mediation/report-state-media

tion-programs.pdf (considering the efficacy of mitigation programs in to prevent homes

from being foreclosed); N

EV. REV. STAT. § 107.086(3) (2021) (discussing mediation);

LON COHEN, CTR. FOR AM. PROGRESS, WALK THE TALK: BEST PRACTICES ON THE

ROAD TO AUTOMATIC FORECLOSURE MEDIATION 2 (2010), https://www.

americanprogress.org/wp-content/uploads/issues/2010/11/pdf/walk_the_talk.pdf

(highlighting the benefits of foreclosure mediation); Aleatra P. Williams, Foreclosing

Foreclosure: Escaping the Yawning Abyss of the Deep Mortgage and Housing Crisis, 7

W. J. L. & SOC. POL’Y 454 (2012) (arguing for regulations to encourage homeownership

and safeguard homeowners); Frank S. Alexander et al., Legislative Responses To The

Foreclosure Crisis In Nonjudicial Foreclosure States, 31 R

EV. BANKING & FIN. L. 341

(2011) (examining states’ legislative response to increased foreclosures during the 2008

crisis).

454 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

alike, to ensure fair lending laws market-wide.

In my view, the most

significant invention of the CFPB is the ability to repay (“ATR”) rule.

Under this rule, lenders must make an affirmative determination of a

borrower’s ability to repay the loan, and not just at the initial rate, but over

the loan’s full term in the case of an adjustable-rate mortgage.

This means

that borrowers must be given a good faith estimate of the monthly payment

amount after it adjusts or resets,

and must be given six months’ notice that

the mortgage changed from fixed to adjustable.

To make the ATR

determination, lenders must review hard evidence of creditworthiness, such

as pay stubs and bank accounts.

Accordingly, “no- or low-doc” loans

cannot be extended.

The CFPB also adopted the “Qualified Mortgage,” a

safe harbor for lenders whose loan meets the ATR requirements

and satisfy

specific conditions meant to reduce risk. The loan:

 may not contain the onerous features (negative amortization,

adjustable rates);

 cannot have a term longer than 30 years;

 cannot charge points and fees that exceed a specific threshold;

and

 cannot be made to borrowers with a debt-to-income ratio greater

than forty-three percent.

For loans that are not qualified, lenders may not assess prepayment

penalties for adjustable-rate and higher cost mortgages nor may they push

87. See Truth in Lending, 73 Fed. Reg. 44,522 (July 30, 2008) (to be codified at 12

C.F.R. pt. 226).

88. 12 C.F.R. § 1026.43(c) (2021); see Patricia A. McCoy & Susan M. Wachter,

Why The Ability-To-Repay Rule Is Vital To Financial Stability, 108 G

EO. L.J. 649, 649

(2020) (asserting that the “ability-to-repay rule acts as a circuit breaker that will help

prevent poorly underwritten loans from fueling a future bubble in housing prices that

creates the risk of financial collapse”).

89. Dodd-Frank, 15 U.S.C. § 1639c(a); 12 C.F.R. § 1026.43(c)(4).

90. 12 C.F.R. 1026.20(d).

91. See id.

92. Id. §1026.43(c)(3)–(4).

93. See id. § 1026.43(c)(3)(i), (c)(4) (noting the verification requirements).

94. Id. § 1026.43(e)(2), (e)(4).

95. Id. § 1026.43(e)(2)(i).

96. Id. § 1026.43(e)(2)(ii).

97. Id. § 1026.43(e)(3).

98. Id. § 1026.43(e)(2)(v); Qualified Mortgage Definition Under the Truth in

Lending Act (Regulation Z): General QM Loan Definition, 85 Fed. Reg. 86,308, 86,

308 (Dec. 29, 2020) (to be codified at 12 C.F.R. pt. 1026) (“For General QM’s, the ratio

of the consumer’s total monthly debt to total monthly income . . . must not exceed 43

percent.”).

2022 NON-DEBT AND NON-BANK FINANCING 455

loans with prepayment penalties even if fixed rate, over ones without.

no case may lenders finance worthless credit or other insurance.

100

New

rules also require homeownership counseling.

101

And, this is telling of the

practices pre-crisis, for loan soundness, the CFPB rules require that the

property is appraised before any deal is closed for higher priced loans,

102

and

that the appraiser adhere to industry standards in preparing a report,

including inspecting the interior of the property.

103

To make the loan process less opaque, the CFPB substituted the long-used,

but sometimes inscrutable federal mortgage forms, the HUD-1 Settlement

(“HUD-1”) and Truth-in-Lending Disclosure (“TIL”) statements, with two

plain-speaking more accessible forms — the Loan Estimate and Loan

Closing Disclosure Statement.

104

The amendments also prohibited deceptive

advertising, banned lenders and brokers from influencing appraisers, and

barred servicers from engaging in unfair servicing practices related to fees

and billing.

105

C. Control of Government-Sponsored Enterprises by the

Federal Housing Finance Agency

The crisis could not have caught on without the support from GSEs.

106

Fannie Mae and Freddie Mac, although government-chartered, acted as any

other profit-seeking entity. At their peak, they amassed investment

99. 12 C.F.R. §§ 1026.43(g)(1)(ii)(A); 1026.43(g)(3).

100. Id. § 1026.36(i). Before Dodd-Frank, it was common to charge steep premiums

for unnecessary credit life insurance and to finance these premiums as part of the

mortgage loan.

101. Id. § 1026.34(5); see id. § 1026.36(a)(5). There are also prohibitions on: 1)

compensation to loan originators by persons other than the borrower, id. § 1026.36(d)(2);

2) the payment of a “yield spread premium” to brokers for selling high-cost loans to

borrowers, id. § 1026.36(d)(1); 3) the steering of borrowers into certain loans, id.

§1026.36(e); 4) the mandatory arbitration and waivers of consumer rights, id.

§1026.36(h); and 5) the making of negative amortization loans to first-time borrowers

without counseling, id. § 1026.36(k).

102. See id. § 1026.35(a)(1) (defining “higher-priced mortgage loan”).

103. Id. § 1026.35(c)(3).

104. See TILA-RESPA Integrated Disclosures, CONSUMER FIN. PROT. BUREAU,

https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-

resources/tila-respa-integrated-disclosures (last visited Nov. 20, 2021) (linking the Loan

Estimate Form and the Closing Disclosure Form).

105. See Green, Testing, supra note 2, at 492; Linda Singer et al., Breaking Down

Financial Reform: A Summary of the Major Consumer Protection Portions of the Dodd-

Frank Wall Street Reform and Consumer Protection Act, 14 J. C

ONSUMER & COM. L. 2,

4–6 (2010).

106. See INT’L MONETARY FUND, GLOBAL FINANCIAL STABILITY REPORT 111, 131

(2011); see also Theresa R. DiVenti, Fannie Mae and Freddie Mac: Past, Present, and

Future, 11 C

ITYSCAPE: J. POL’Y DEV. & RES. 231, 231–33 (2009).

456 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

portfolios of more than $1.5 trillion. Because the portfolios were

undiversified, consisting almost entirely of home mortgages and securities

backed by them, the GSEs were particularly vulnerable in the crisis, as more

than twenty percent of these mortgages were in default.

107

HERA was

enacted to avert their impending collapse. HERA created the Federal

Housing and Finance Agency (“FHFA”), to oversee and essentially control

GSE’s business activities and determine what other activities they would be

allowed to engage in, what assets to hold, and what capital to reserve.

108

sooner than it was created, the FHFA placed Fannie Mae and Freddie Mac

in “voluntary” conservatorship to shield them from claims and to monitor

their activities.

109

III.

RISE OF NON-BANKS IN HOME PURCHASE FINANCE

The post-crisis regulatory constraints on banks, seem to have

provided the opening for “shadow banking,”

110

that is, financial transactions

by “non-banks.”

111

The precarious fiscal state of commercial banks, along

with Dodd-Frank’s heightened capital requirements crippled many banks’

ability to lend.

112

Many retreated from the loan origination market

altogether, thinking that the industry was too costly,

113

especially because of

new regulations requiring lenders to have some skin in the game by holding

onto some of their loans on their balance sheets and the new liquidity

requirements.

114

These constraints seemed to make loan origination

107. GLOBAL FINANCIAL STABILITY REPORT, supra note 106, at 12; see also Green,

Testing, supra note 2, at 480.

108. Green, Testing, supra note 2, at 483 (describing the expansive role of the FHFA

to prevent the GSEs from accumulating debt).

109. In Testing, I recount how after the conservatorship was imposed, the missions

and policies of Fannie Mae and Freddie Mac changed — from that of making housing

available to the greatest number, to a matter of self-preservation, with sometimes heart-

rendering impacts on the hapless borrowers, whose mortgages were bought and

foreclosed by the GSEs. See id. at 495.

110. “Shadow banking” has alternative meanings. In some contexts, it refers “to the

funding of loans through securities markets instead of banks — or to the funding of banks

through securities markets instead of deposits.” E

DWARD V. MURPHY, CONG., RSCH.

SERV., R43087, WHO REGULATES WHOM AND HOW? AN OVERVIEW OF U.S. FINANCIAL

REGULATORY POLICY FOR BANKING AND SECURITIES MARKETS 9 (2013). In other

contexts, it “refer[s] to financial activity that is ineligible for a government backstop,”

i.e., deposit insurance and access to the Federal Reserve’s discount window. Id.

111. Id. at 21.

112. AMIN RAJAN, THE RISE OF PRIVATE DEBT AS AN INSTITUTIONAL ASSET CLASS 3

(2015).

113. Id. at 4; see also Morris-Levenson et al., supra note 78, at 2, 7 (making the

connection between the decline of banks in the loan origination markets and Dodd-Frank

capital and liquidity requirements).

114. See Morris-Levenson et al., supra note 78, at 7 (detailing the effects of the

2022 NON-DEBT AND NON-BANK FINANCING 457

economically unprofitable, since the higher capital requirements meant lost

business opportunities as less funds were available for lending.

115

With

lower loan-to-value ratios, tightened underwriting standards, and the absence

of government agency guarantees,

116

it seemed safer to stay out of the

business altogether rather than risk liability for regulatory lapses.

117

The

retreat occurred more often by larger banks

118

creating a perfect entry point

for non-banks.

119

Non-banks took advantage of historically high yields and

acquired “legacy residential mortgage exposure at very high levels.”

120

As the term suggests, non-banks are not depositary institutions, thus their

operations are not at the core of bank regulation. Yet, they have a presence

in all aspects of the credit markets, from mortgage loan origination to payday

lenders.

121

Their sui generis character makes them ineligible for government

guarantees, such as deposit insurance, and the Federal Reserve’s emergency

discount window. As I discuss below, the very fact that they are untethered

from the traditional banking system, should prompt us to look for meaningful

reins.

A. Novel Business Models: A Janus Effect

NDNBs are “two-faced,” but not something altogether ugly, as that term

suggests. Instead, the increased market liquidity and diversity of funding

sources aligns well with current financing philosophy and promises to

allocate risks to investors more efficiently. The technology-driven business

models that obviate the need for brick-and-mortar establishments, and

liquidity coverage ratio).

115. See id.at 7–8.

116. Joshua Anderson & Tom Collier, Earning an Illiquidity Premium in Private

Credit, PIMCO (July 7, 2015), https://www.pimco.com/en-us/insights/investment-

strategies/featured-solutions/earning-an-illiquidity-premium-in-private-credit/.

117. See Buchak et al., supra note 60, at 2 (suggesting the path for the entry of fintech

was made by the retreat of banks from the market); see also Julapa Jagtiani & Catharine

Lemieux, Fintech Lending: Financial Inclusion, Risk Pricing, & Alternative Pricing 2,

22–23, 26, 38 (Fed. Rsrv. Bank of Chi., Working Paper No. 17-17, 2017) (noting that

the use of novel algorithms and data sources risks diverging regulations); Kathleen

Pender, Why Big Banks are Losing Out to Nonbank Lenders in Mortgages, S.F.

CHRON., https://www.sfchronicle.com/business/networth/article/Why-big-banks-

are-losing-out-to-nonbank-lenders-6106027.php (last updated Feb. 28, 2015).

118. Morris-Levenson et al., supra note 78, at 2.

119. Anderson & Collier, supra note 116, at 3.

120. Id.

121. See Stanley Fischer, Vice Chairman, Bd. of Governors of the Fed. Rsrv. Sys.,

Speech at the Central Banking in the Shadows: Monetary Policy and Financial Stability

Postcrisis, 20th Annual Financial Markets Conference: Nonbank Financial

Intermediation, Financial Stability, and the Road Forward (Mar. 30, 2015),

https://www.federalreserve.gov/newsevents/speech/fischer20150330a.htm.

458 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

humans for that matter, are very twenty-first century. They have been

dubbed “fintech”

122

as they employ digital tools that operate autonomously

and are thought to produce greater efficiencies for the entity and ease of use

for customers.

123

While there will be some losses from the lack of human

judgment in transactions, fintech’s use of alternative metrics for assessing

risk has made home financing more available to a different cohort of

borrowers — those who appear under traditional criteria to be financially

marginal, but under eccentric gauges, not.

124

These same characteristics might describe the other, perhaps dark side of

NDNBs — in particular their growing market and their heavy reliance on the

FHA to insure their loans.

125

In 2020, of the top five lenders, three were non-

banks, Quicken Loans, United Wholesale Mortgage, and Penny Mac.

126

The

market share of non-banks rose nearly three-fold from fourteen percent in

2008 to over fifty percent in 2017.

127

The share continued to rise thereafter,

from 58.9% in 2019 to 68.1% in 2020.

128

Non-banks sell most of their

122. See infra Part III.B.

123. See Buchak et al., supra note 60, at 2–3 (stating that advances in technology

allow fintech firms to save labor costs, utilize advanced screening processes for loan

applicants, and provide better products and convenience to customers).

124. I discuss these new metrics infra text accompanying notes 133–39.

125. See You S. Kim et al., Liquidity Crises in the Mortgage Market, BROOKINGS

PAPERS ON ECON. ACTIVITY, 348, 348 (2018), https://www.brookings.edu/wp-

content/uploads/2018/03/KimEtAl_Text.pdf (linking the number of lenders engaged

with the FHA and VA to government vulnerabilities to nonbank lenders); Martin N.

Baily et al., The Origins of the Financial Crisis, I

NITIATIVE ON BUS. & PUB. POL’Y AT

BROOKINGS 14–15 (2008), https://www.brookings.edu/wp-content/uploads/2016/06/

11_origins_crisis_baily_litan.pdf (identifying that “[i]n 2001 there were $2.2 trillion

worth of mortgage originations with 65 percent of these in the form of conventional

conforming loans and Federal Housing Administration (FHA) and Department of

Veteran Affairs (VA) loans”).

126. See Alicia Phaneuf, The Growing Market Share of Nonbanks and Alternative

Financing in the Online Mortgage Lending Industry, B

US. INSIDER (Jan. 19, 2021, 10:40

AM), https://www.businessinsider.com/alternative-nonbank-mortgage-lending; John

Bancroft, The Battle for Origination Supremacy: Nonbanks at 63% Market Share,

NSIDE MORTG. FIN. (Jun. 25, 2020), https://www.insidemortgagefinance.com/

articles/218443-the-battle-for-origination-supremacy-nonbanks-at-63-market-share.

See generally Kayla Shoemaker, Trends in Mortgage Origination and Servicing:

Nonbanks in the Post-Crisis Period, 13 FDIC Q. 51 (2019), https://www.

fdic.gov/bank/analytical/quarterly/2019-vol13-4/fdic-v13n4-3q2019-article3.pdf

(discussing mortgage trends since the 1970s).

127. See Kathryn Fritzdixon, Bank and Non-bank Lending Over the Last 70 years, 13

FDIC

Q. 31, 34 (2019), https://www.fdic.gov/bank/analytical/quarterly/2019-vol13-

4/fdic-v13n4-3q2019-article1.pdf; see also Pedro Gete & Michael Rehr, Mortgage

Securitization and Shadow Bank Lending 1, 4 (June 2020) (unpublished manuscript),

https://ssrn.com/abstract=2921691 (discussing the market share of nonbanks in mortgage

origination).

128. Orla McCaffrey, Nonbank Lenders Are Dominating the Mortgage Market, WALL

2022 NON-DEBT AND NON-BANK FINANCING 459

mortgages to the GSEs, since nearly eighty percent carry FHA insurance,

which makes them eligible for purchase.

129

As market shares have increased,

the requirements on the borrower’s side of financing have changed — the

average down-payment has dropped to 11.4% from 20%

130

and FICO scores

have dropped to a median of 710 out of 850,

131

very close to the subprime

cutoff.

132

B. How the Fin-Tech Non-Banks Operate

As the term suggests, fintech is computer-driven technology with

standards and protocols for manipulating and transmitting data.

133

These

firms use complex algorithms that purport to assess credit risk, based on an

analysis of a variety of data — from citizenship or residence status, social

security accounts, and bank account records.

134

While FICO scores factor

prominently in this assessment, instead of a credit score,

135

non-banks assign

the would-be borrower a credit grade,

136

which is calculated based on the

ST. J. (June 22, 2021, 9:11 AM), https://www.wsj.com/articles/nonbank-lenders-are-

dominating-the-mortgage-market-11624367460.

129. As an example, by the end of 2017, the non-bank share of Ginnie Mae’s

purchases was nearly 60%. Kim et al., supra note 125, at 352.

130. Sara Ventiera, Where Buyers Are Making the Lowest — and the Highest — Down

Payments, R

ELATOR.COM (Mar. 18, 2020), https://www.realtor.com/news/trends/lowest-

down-payment-cities/. This is explained in part by the FHA loan insurance that allows

down-payments as low as 3.5%. See 12 U.S.C. § 1709(b)(9)(A).

131. What’s the Average Credit Score in America?, CAPITALONE (June 10, 2021),

https://www.capitalone.com/learn-grow/money-management/average-credit-score-in-

america/ (reporting an average FICO score of 710 for 2020). FICO scores are plotted

on a scale of 300 to 850 points. Kevin Outlaw, What is a Good FICO Score?, B

ANKRATE

(Jan. 11, 2017), https://www.bankrate.com/finance/credit/what-is-good-fico-score.aspx.

132. Eight years after the crisis, the Federal Reserve Bank of Cleveland reported that

the subprime loan was back; in 2014 26% of FHA loans originated from FICO scores

under 660, with 40% between 661–700, which is “near-pime.” Marshall Lux & Robert

Greene, What’s Behind the Non-Bank Mortgage, Boom? 22 (Harv. Kennedy School,

Mossavar-Rahmani Ctr. for Bus. & Gov., Working Paper No. 42, 2015),

https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/working.papers/42_

Nonbank_Boom_Lux_Greene.pdf.

133. See J. Christina Wang, Technology, the Nature of Information, and FinTech

Marketplace Lending 2 (Fed. Rsrv. Bank of Bos., Working Paper No. 18–3, 2018),

https://www.bostonfed.org/publications/current-policy-perspectives/2018/technology-

nature-of-information-fintech-marketplace-lending.aspx (explaining how Fintech

platforms operate).

134. Id.

135. Credit scores are compiled by the three credit bureaus and are used by the GSEs

in mortgage lending.

136. Wang reports that fintech company, Lending Club, assesses credit risk using up

to 35 subgrades. Wang, supra note 133, at 10. She goes on to comment on studies that

show that these subgrades are seen as an accurate measure “of the relative credit risk, as

evidenced by its rising and now high correlation with the average ex-post default loss

460 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

same factors used by banks, but also on atypical things, such as information

collected from social media accounts, which are used to confirm basic

information on a loan application, such as employment.

137

Perhaps most

concerning about the use of social media data is the idea that it helps these

non-banks to discern the would-be borrower’s “character.”

138

If this is meant

to refer to the borrower’s willingness to pay her debts as inferred from

payment records, it is of no significance. But, if this is meant to discern

political leanings or cultural affinities, then that is a different matter. For the

lay person, the correlation between social media and credit responsibility is

not obvious, but fintech quants who think in terms of game theory or

regression analysis find this information compelling. The idea is that the

cold, dispassionate algorithms operate to assess a borrower’s likely

propensity for honesty and responsibility, without the influence of human

bias.

139

To be sure, human assessment can tilt either way — to deny access

to credit, either intentionally or subliminally.

140

However, while an

automated lending system may not be influenced by implicit biases, it may

overlook a case for sympathy, exception, or context.

C. The Regulation of Non-Banks

Should we worry about rise of non-banks in the mortgage loan origination

market? The same impetus — regulatory myopia, cupidity for lenders and

investors, and naiveté by both borrowers and lenders — that led to increased

regulation of banks following the crisis should animate responses to non-

banks. This concern was raised by the previous Vice Chairman of the

Federal Reserve, Stanley Fischer, when he pointed to the non-banking sector

as a potential weak link in the chain of sound market transactions.

141

rate.” Id. at 11; Julapa Jagtiani et. al, Fintech Lending and Mortgage Credit Access 24–

25 (Fed. Rsrv. Bank of Phila., Working Paper No. 19-47, 2019), https://www.

philadelphiafed.org/-/media/frbp/assets/working-papers/2019/wp19-47.pdf.

137. Wang, supra note 133, at 13.

138. Id. at 13 n.26. In fact, Wang reports that in 2011 through 2012, Lending Club

relied so heavily on its algorithms for deriving credit grades that it essentially ignored

credit data, such as income, employment status, and length of employment provided by

the loan applicants. Id. at 12.

139. Id. at 14.

140. See Jagtiani et. al, supra note 136, at 4, 11 (“In fact, . . . fintech lenders

discriminate less than traditional, face-to-face lenders.”).

141. Fischer, supra note 121, at 1–2. Fischer highlighted the case of New Century,

the second-largest non-bank originator, which collapsed and set in motion waves of

disruptions throughout the financial industry. Even before the crisis, non-banks were

subject to the existing Truth in Lending Act standards and the Fair Debt Collection

Practices Act; however, these laws proved ineffective in avoiding unfair and unsafe

lending. See Eric S. Belsky & Nela Richardson, Understanding the Boom and Bust

in Nonprime Mortgage Lending 107 (Sept. 2010) (unpublished manuscript),

2022 NON-DEBT AND NON-BANK FINANCING 461

enacting Dodd-Frank, Congress had some awareness of this vulnerability

and the need for shoring up, but not subjecting non-banks to specific capital

requirements.

142

Instead, it named non-banks as “covered persons,”

143

which

by focusing on the particular activities in which they engage, their enterprise

comes under federal scrutiny for market risk,

144

bringing both banks and non-

banks into alignment for purposes of consumer protection regulations.

145

Yet, even knowing the CFPB is watching, some non-banks still cross the

line. Recently, two mortgage companies were caught defrauding potential

https://www.jchs.harvard.edu/sites/default/files/ubb10-1.pdf; Michael Flaherty &

Howard Schneider, U.S. Regulators Struggle in Effort to Tackle Shadow Banking,

EUTERS (Apr. 1, 2015, 1:31 PM), https://www.reuters.com/article/us-usa-fed-shadow

banks/u-s-regulators-struggle-in-effort-to-tackle-shadow-banking-idUSKBN0MS51X

20150401; Ryan Tracy, SEC Official: ‘Not Clear’ Bank Regulation Has Made Economy

Safer, WALL ST. J. (Apr. 1, 2015), http://blogs.wsj.com/moneybeat/2015/04/01/sec-

official-not-clear-bank-regulation-has-made-economy-safer (reporting that “Fed Vice

Chairman Stanley Fischer floated several ideas for regulating shadow banks, some of

which might take SEC action to implement”); see also U.S.

TREASURY, A FINANCIAL

SYSTEM THAT CREATES ECONOMIC OPPORTUNITY: ASSET MANAGEMENT AND

INSURANCE 63 (2017); IRIS H.Y. CHIU ET AL., RESEARCH HANDBOOK ON SHADOW

BANKING: LEGAL AND REGULATORY ASPECTS 7 (Iris H.Y. Chiu & Iain MacNeil eds.,

2018) (mentioning generally what shadow banking is and the regulatory challenges that

come with it); Yesha Yadav, Too Big to Fail Shareholders, 103 M

INN. L. REV. 587, 589–

91 (2018) (discussing the overall “scant” regulatory attention given to banks).

142. See KARAN KAUL & LAURIE GOODMAN, NONBANK SERVICER REGULATION 3

(2016), https://www.urban.org/sites/default/files/publication/78131/2000633-Nonbank-

Servicer-Regulation-New-Capital-and-Liquidity-Requirements-Don%27t-Offer-

Enough-Loss-Protection.pdf (noting how nonbanks “have not been subject to the same

level of supervisory financial regulation and capital requirements” as larger banks).

143. Under 12 U.S.C. § 5514(a)(1)(C), the CFPB has the authority to supervise any

covered person it “has reasonable cause to determine, . . . is engaging, or has engaged,

in conduct that poses risks to consumers concerning offering or provision of consumer

financial products or services.” This authority extends to

(1) nonbank covered persons of any size that offer or provide: (a) origination,

brokerage, or servicing of loans secured by real estate for use by consumers

primarily for personal, family or household purposes, or loan modification or

foreclosure relief services in connection with such loans, (b) private education

loans, and (c) payday loans; and (2) ‘larger participant[s] of a market for other

consumer financial products or services, as [the Bureau defines] by rule . . . .’

Procedural Rule To Establish Supervisory Authority Over Certain Nonbank Covered

Persons Based on Risk Determinations, 78 Fed. Reg. 40,352 (July 3, 2013) (to be

codified at 12. C.F.R. pt. 1091).

144. See CONSUMER FIN. PROT. BUREAU, 2014 CFPB DODD-FRANK MORTGAGE

RULES READINESS GUIDE 3–7 (3d ed., 2014), https://files.consumerfinance.gov/

f/201409_cfpb_readiness-guide_mortgage-implementation.pdf (providing a list and

interpretation of newly enacted mortgage loan origination and servicing rules).

145. See U.S. TREASURY, REFORMING WALL STREET PROTECTING MAIN STREET 9

(2012), https://www.treasury.gov/connect/blog/Documents/20120717_DFA_FINAL.

pdf (displaying a graphic showing both nonbanks and traditional banks under enhanced

federal supervision).

462 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

customers, service members and veterans with intentionally distorted

advertising regarding the company’s VA guaranteed loans.

146

One company

advertised credit terms it had no intention of offering, while failing to clearly

disclose the terms of the loans it did provide.

147

In refinancing loans, the

company misrepresented how much cash it was willing to give.

148

The other

company falsely characterized adjustable rate loans as fixed rate to get

borrowers to apply and falsely represented that impossibly low FICO scores

would qualify for the best interest rates.

149

The company’s advertisements

also falsely implied that it was a government affiliate.

150

IV. EMERGING NEW MODELS FOR HOME PURCHASE FINANCE

A. Installment Land Contracts

Leaving non-banks’ practices for the moment, let us go on to discuss the

alternative models — some old and venerable and some novel — being

employed by these entities to assist in achieving home ownership. The use

of installment loan contracts for a home purchase is not new, but what is new

is using them to repurchase homes lost in foreclosure during the housing

crisis. Despite a long history in property law, these devices became very

popular after the 2008 crisis, when speculators were buying up properties at

foreclosures as an investment strategy.

151

An “installment land contract,”

also known as a “contract for deed,” had long-been viewed as an attractive

financing device for those with poor credit or who are unable to save the

146. CFPB Settles with Two Mortgage Companies Over Misleading VA Loan

Advertisements, B

UCKLEY (Aug. 25, 2020), https://buckleyfirm.com/blog/2020-08-

25/cfpb-settles-two-mortgage-companies-over-misleading-va-loan-advertisements#

page=1.

147. Id.

148. Id. The ads violated CFPA, Mortgage Acts and Practices — Advertising Rule

(MAP Rule), and Regulation Z. Both cases were settled. “In addition to a $260,000 civil

money penalty, the consent order require[d] the company to enhance its compliance

functions, [including] to designate a compliance official to review mortgage

advertisements for compliance with consumer protection laws, and comply with certain

enhanced disclosures requirements.” Id. In the second case, in addition to a $150,000

civil money penalty, the consent order required the appointment of a compliance official

to ensure mortgage advertisements comply with consumer protection laws. Id.

149. Id.

150. Id.

151. See Ryan Dezember, After the 2008 Housing Crisis, a Lot of People Made Big

Money Buying Up Foreclosed Homes and Renting Them Out — and It Shows One

Response to a Financial Crisis, B

US. INSIDER (Aug. 4, 2020, 9:20 AM),

https://www.businessinsider.com/after-2008-housing-crisis-people-bought-and-rented-

foreclosed-homes-2020-8.

2022 NON-DEBT AND NON-BANK FINANCING 463

traditional 20% down payment for a mortgage loan.

152

Crisis investors have

taken advantage of the confluence of tightening credit and housing shortages

to sell these newly foreclosed homes through the contract for deed at

substantial markups over the foreclosure purchase price

153

and sometimes

selling them back to the foreclosed owner. As with mortgage loan

origination, some parties on the other side of these deals were targets for

unscrupulous practices. African-American and Latino homebuyers,

154

those

unsophisticated and inexperienced, have been the prime market for these

deals.

155

Ostensibly innocuous devices, the contract for deed and the related

rent-to-own scheme,

156

come with significant risks, all the while lacking the

required disclosures (e.g., physical defects or the presence of lead paint) and

limits on terms that come with mortgage financing (e.g., maximum interest

rates, balloon payments, prepayment penalties, or protections in case of

default).

157

152. See Cystal Myslajek, Risks and Realities of the Contract for Deed, FED. RSRV.

BANK MINNEAPOLIS (Jan. 1, 2009), https://www.minneapolisfed.org/article/2009/risks-

and-realities-of-the-contract-for-deed.

153. Fannie Mae has asserted that “the bulk sale program for hard-to-sell homes

accounted for a small fraction of the 900,000 homes it has sold since the financial crisis,”

many of them run-down and sold at bargain prices. Matthew Goldstein & Alexandra

Stevenson, Market for Fixer-Uppers Traps Low-Income Buyers, N.Y.

TIMES (Feb. 20,

2016), https://www.nytimes.com/2016/02/21/business/dealbook/market-for-fixer-upp

ers-traps-low-income-buyers.html.

154. In ‘Contract for Deed’ Lending Gets Federal Scrutiny, N.Y. TIMES (May 10,

2016), https://www.nytimes.com/2016/05/11/business/dealbook/contract-for-deed-lend

ing-gets-federal-scrutiny.html, reporters Matthew Goldstein and Alexandra Stevenson,

recount the case of Harbour Portfolio, which bought more than 6,700 single-family

homes for an average of $8,000 each in Ohio, Michigan, Illinois, Florida, Georgia,

Pennsylvania, and a handful of other states since 2010, for the purpose of reselling them

by contract for deed. Most of the homes were burdened by mortgages held by Fannie

Mae but sold in bulk after the crisis. See also J

EREMIAH BATTLE ET AL., TOXIC

TRANSACTIONS: HOW LAND INSTALLMENT CONTRACTS ONCE AGAIN THREATEN

COMMUNITIES OF COLOR (2016); JAMES H. CARR ET AL., STATE OF HOUSING IN BLACK

AMERICA (2016).

155. See, e.g., Matthew Goldstein & Alexandra Stevenson, How a Home Bargain

Became a ‘Pain in the Butt,’ and Worse, N.Y.

TIMES (July 7, 2017), https://

www.nytimes.com/2017/07/07/business/dealbook/how-a-home-bargain-became-a-pain

-in-the-butt-and-worse.html (reporting on a 2017 suit filed by the Atlanta Legal Aid

Society, against Harbour Porfolio, claiming that the firm “targeted African-American

communities to sell contracts for deed on at inflated prices”).

156. Discussed supra text accompanying notes 122–55 and infra text accompanying

notes 157–89.

157. See Alexandra Stevenson & Matthew Goldstein, Seller-Financed Deals Are

Putting Poor People in Lead-Tainted Homes, N.Y.

TIMES (Dec. 26, 2016),

https://www.nytimes.com/2016/12/26/business/dealbook/seller-financed-home-sales-

poor-people-lead-paint.html (reporting that many of the homes sold by Harbour Portfolio

were in severe states of disrepair). For an interesting discussion of the plight of

homeowners in Detroit, among other cities, facing tax foreclosures, see Bernadette

464 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

For some foreclosed homeowners, buying back their property through an

installment land contract is the only way of regaining homeownership, since

the right to redeem the property at foreclosure, has been frustrated by rules

adopted by the GSEs that prohibit not-for-profit entities from purchasing

property in foreclosure on behalf of the foreclosed owner.

158

Legal

challenges to these rules have all failed.

159

In other cases, would-be home

buyers are unable to obtain a bank loan or come up with a down payment so

they enter into a long-term contract for purchase.

160

Despite their important role in facilitating home ownership for would-be

buyers living paycheck to paycheck, installment land contracts are difficult

to embrace warmly because they are fraught with risk on both sides of the

transaction. However, these risks are primarily present on the buyer’s side.

While the buyer has the immediate right to possess, during the long

executory period, so much could go wrong. The buyer having only equitable

title, bears the risk of loss from casualties — acts of God and woman.

161

The

seller, holding legal title could encumber it exposing the buyer to loss by a

prior claimant.

162

Moreover, because the buyer is usually charged with

maintaining the property, in case of a default, as traditionally conceived, she

stands to lose everything — all the payments, all the improvements and all

the appreciation in value. Additionally, the usual forfeiture clauses mean no

restitution.

163

In the case of purchasers of foreclosed properties, there were

Atuahene & Christopher Berry, Taxed Out: Illegal Property Tax Assessments and the

Epidemic of Tax Foreclosure, 9 U.C.

IRVINE L. REV. 847 (2019) (reporting on a study of

tax assessments in Detroit, during the period after the housing crisis of 2008, showing

that from 2011 to 2015, Wayne County, Michigan foreclosed on approximately 100,000

Detroit properties for unpaid property taxes, which was more than a quarter of all

properties in the city); see also Bernadette Atuahene, Predatory Cities, 108 C

AL. L. REV.

107 (2020) (describing how through practices such as improper tax assessments, many

cities are systematically and illegally, taking property from residents only to vest in

public coffers).

158. See Green, Testing, supra note 2, at 500.

159. See Green, Testing, supra note 2, at 530–31.

160. See Amy Fontinelle & Rachel Witkowski, Land Contract: What It Is & How It

Works, F

ORBES (May 25, 2021), https://www.forbes.com/advisor/mortgages/what-is-a-

land-contract/ (explaining how these contracts work and how a would-be home buyer

can still move towards home ownership without the same challenges of traditional home

purchasing).

161. SARAH MANCINI & MARGOT SAUNDERS, LAND INSTALLMENT CONTRACTS: THE

NEWEST WAVE OF PREDATORY HOME LENDING THREATENING COMMUNITIES OF COLOR

10 (2017), https://www.bostonfed.org/home/publications/communities-and-banking/

2017/spring/land-installment-contracts-newest-wave-of-predatory-home-lending-threat

ening-communities-of-color.aspx.

162. Id.

163. Id. (explaining that without a clause providing protections otherwise, a buyer’s

default leads to “punitive forfeiture of all amounts paid”).

2022 NON-DEBT AND NON-BANK FINANCING 465

additional worries about the properties’ physical condition. These sales are

typically “as is,” and with no right to inspect other than from the sidewalk,

putting the risks of defects and the restoration burden on the buyers. Finally,

as buyers under contracts for deed often fail to record their contracts, they

are at risk of losing all of their investments to a subsequent purchaser without

notice of the contract.

But the general evolution in the law as it pertains to deals in real property,

such as the implied warranty of habitability in landlord-tenant relations and

the abandonment of caveat emptor in favor of disclosures by sellers of

defects, has not entirely bypassed parties to installment land contracts.

Indeed, in the last several decades, there has been a steady movement to

reconceptualize the contract for deed away from that of an executory contract

toward one that comports more with its essence, a conveyance of an interest

in land.

164

After all, the buyer in possession with the contractual obligation

and self-interest to maintain it and pay taxes, looks very much like an

owner.

165

Looking to the essence of that deal, then employing a legal fiction based

on the maxim that equity regards substance and not form, courts and

legislatures are treating the former vendor/vendee relationship as a

mortgagor/mortgagee relationship, with the seller retaining the legal title,

merely for purposes of security — just like a mortgage. As a mortgagee, the

vendee becomes required to extinguish the vendee’s interest, not simply by

declaring a default and forfeiture, but by foreclosure.

166

Just as in the

traditional mortgage context, a foreclosure by sale is hoped to generate a sum

to compensate the vendor for what remains on the debt and possibly to create

a surplus, which would go to the vendee. Even as some courts do not

reconceptualize the nature of the parties’ transaction, they apply contract

tools and equitable powers to reach a fair and equitable result.

167

Rather than

164. Fontinelle & Witkowski, supra note 160 (highlighting the importance of

negotiating for protection clauses and other provisions to safeguard the buyer’s property

interest).

165. Sometimes contract for deed programs are successful. Two programs, one in

Minnesota, Bridge to Success, and one operating in sixteen states, Battery Point

Financial, buy properties in foreclosure to resell by contracts for deed. Both Bridge to

Success, which utilizes pre-purchase counselling, and Battery Point Financial, which

rehabilitates homes and sells them under 20-year contracts, comply with CFPB

regulations for high-cost mortgages.

166. See, e.g., Skendzel v. Marshall, 301 N.E.2d 641 (Ind. 1973) (finding it

inequitable, that, if forfeiture were to be enforced, the defaulting defendants would lose

over half of their purchase price and the right to possess the home); Bean v. Walker, 464

N.Y.S.2d 895 (App. Div. 1983) (reversing the lower court’s holding that the defaulting

vendee lacked rights); Eric T. Freyfogle, Vagueness and the Rule of Law: Reconsidering

Installment Land Contract Forfeitures, 1988 D

UKE L.J. 609 (1988).

167. Associated Bank-Milwaukee v. Wednt, No. 00-0483, 2001 Wisc. App. LEXIS

466 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

allow forfeiture, courts permit a beleaguered vendee to cure a default; some

vendees may be awarded restitution of amounts paid in excess of the land

value.

168

Some borrowers may be entitled to reinstatement of the contract

after default by paying what was owed at the time.

169

These inventions were

long-coming and reveal a much needed reform in the law. Yet, because they

only operate after the deal has been consummated and performance is well

underway, they do little to help the naïve borrower before undertaking the

obligation in the first place.

170

B. Rent to Own and Seller Financing

In a rent to own model of home purchase finance, tenants/buyers have the

option to purchase the home they are renting from the landlord/seller, usually

within a specified amount of time. This arrangement gives the tenant/buyer

an opportunity to see the value of the home and neighborhood up close and

operates as a hedge increases in home prices. It is one of the few home

purchase options for renters with less than stellar credit. Typically, the rent

payments will be applied as a down payment on the home and the renter will

seek a traditional mortgage for the balance.

171

Sometimes, the seller offers

to finance the purchase with the renter signing a promissory note, along with

a purchase money mortgage, in favor of the seller.

172

On the surface, rent-to-own plans seem to be a good thing, but more often

than not, they serve to pass off a property otherwise unsellable because of its

physical condition. That was the case in Rainbow Realty Group, Inc. v.

Carter.

173

There, Cress Trust offered four alternatives to consumers

interested in its housing stock: “straight sale, straight rental, land contract,

192, at *3 (Wis. Ct. App. Feb. 7, 2001) (stating that “foreclosure actions are subject to

equitable considerations”).

168. See, e.g., Peterson v. Hartell, 707 P.2d 232 (Cal. 1985); Rosewood Corp. v.

Fisher, 263 N.E.2d 833 (Ill. 1970).

169. Peterson, 707 P.2d at 234 (holding that even after a willful default, a vendee can

redeem her right to the property by making all payments due); Rosewood, 263 N.E.2d at

837–40 (holding that the Forcible Entry and Detainer statute does not apply to purchasers

under land sale contract).

170. The FHFA is conducting a review of some of the terms of deals between

investors and purchasers of GSE property, and the CFPB has begun to look into

consumer protection violations by these companies. This could result in Fair Housing

Act violations if the investors are targeting a particular cohort based on race or ethnicity

and if the forfeiture provisions operate to make housing unavailable. See Fannie Targets

‘Abusive Seller Financing’ Sales, D

AILY REAL EST. NEWS (May 25, 2017),

https://www.iprore.com/news/fannie-targets-abusive-seller-financing-sales.

171. Jean Folger, Rent-to-Own Homes: How the Process Works, INVESTOPEDIA,

https://www.investopedia.com/updates/rent-to-own-homes/ (last updated Oct. 12, 2021).

172. Id.

173. 131 N.E.3d 168 (Ind. 2019).

2022 NON-DEBT AND NON-BANK FINANCING 467

and rent-to-buy contract.”

174

A married couple with a good monthly income

but a poor credit history entered into the “rent-to-buy contract,” signing a

“Purchase Agreement Rent to Buy Agreement,” for a single-family house.

175

The agreed price was $37,546, payable at $549 per month to be paid over the

course of thirty years with 16.3% interest.

176

Under the agreement, the

couple took the property as is, acknowledging that it was not in “livable

condition,” that it was their responsibility to “make it habitable” prior to

moving in, and that their renovations and improvements would thereafter be

considered attached to the real property.

177

The agreement stated that the

parties intended to execute the sale and clarified that the payments for the

first twenty-four months would be considered “rental payments.”

178

After

these payments, a “Conditional Sales Contract (Land Sale)” would be

entered into for twenty-eight years.

179

The house was in miserable condition

— toilets were missing, plumbing and electric wiring were defective; there

were no door locks; windows were broken; the basement stairs were

unusable; and carpets were destroyed beyond repair.

180

There was virtually

no flooring; trash was everywhere and animals had taken up nests inside.

181

When the couple failed to make payments as agreed, Cress Trust sued to

evict in small-claims court.

182

The couple counterclaimed, alleging injury

from Cress Trust’s failure to make the premises habitable as required by the

landlord-tenant statute.

183

The trial court ruled for defendants on the

counterclaim, but the court of appeals reversed.

184

The Indiana Supreme

Court agreed with the trial court. It explained that even though the agreement

was designated “a contract” and contained attributes of a contract of sale —

stating the home was purchased “as is,” with no warranty of condition, and

labeling the transaction a “sale” — the form and labels did not determine the

legal status of the deal.

185

The court observed that if the agreement were a

contract of sale, the couple were homeowners and thus, not subject to

eviction in small-claims court, where the landlord brought its action.

186

Most

174. Id. at 171.

175. Id.

176. Id.

177. Id.

178. Id.

179. Id.

180. Id. 171–72

181. Id.

182. Id. at 172.

183. Id.

184. Id.

185. Id. at 173.

186. Id.

468 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

telling was that the agreement referred to “rental payments” for the first 24

months, which the landlord was entitled to keep on eviction.

187

Because a

landlord-tenant relationship had arisen, the landlord had a duty to make the

premises habitable.

188

The result in this case was an enlightened one, but

there may be many other courts who are less sympathetic, leaving the

renter/owner at the mercy of the deal they made.

C. Alliances and Joint Ventures Between the

Borrowers And Financers

As the above discussion shows, the primary attractive feature of

installment land contracts and the rent-to-own arrangements is that they

facilitate initial entry into homeownership. Nevertheless, there are

discernable limits on that ownership. For the installment land contract, the

buyer holds only an equitable title until the full purchase is paid. In the case

of rent-to-own agreements, the renter holds only an option to buy if she is

somehow later able to find traditional financing. The new models discussed

below purport to help the buyer acquire full and immediate title. However,

the investments made by NDNBs may result in novel claims and rights that

may not fit within the existing taxonomy of ownership rights. Below, I

discuss specific NDNBs in turn and offer an analysis of their shape and

content later.

i. Fleq

The Fleq™ website states: “You get one life. Own it. At Fleq, we believe

home ownership is attainable without a large down payment. Without

difficult credit standards. Without taking on massive amounts of debt. And

without long-term commitments.”

189

Fleq is just one of a growing number

of NDNBs that have emerged since the 2008 housing crisis.

190

On their face,

these firms seem to achieve the twin goals of homeownership with little risk.

The name, Fleq, suggests its model: “flexible” and “equity.”

191

It “partners”

with homebuyers into an “alliance” to purchase a home,

192

making the

homebuyer both owner and tenant. The process of acquiring a home and

187. See id. at 172.

188. Id. at 177.

189. FLEQ, https://fleq.com/ (last visited Nov. 20, 2021).

190. See Kelsey Ramirez, Startup Explains Its New, No-Mortgage Homeownership

Model, H

OUSINGWIRE (Jan. 6, 2020), https://www.housingwire.com/articles/startup-

explains-its-new-no-mortgage-homeownership-model/ (“Many firms are trying to

improve the affordability of homes and the attainability of mortgages . . . .”).

191. See FLEQ, supra note 189.

192. Id.

2022 NON-DEBT AND NON-BANK FINANCING 469

forming the alliance is described in these steps.

 The would-be homebuyer finds a home, sometimes using a broker

recommended by Fleq.

 Credit and background checks are made, then Fleq forms an

“alliance” with the homebuyer. The costs — the monthly

payment, which is comprised of rent, ownership costs, and fees,

and the initial equity contribution to the alliance — are calculated,

an appraisal is ordered, and an inspection of the property’s

physical condition is conducted.

 The respective percentages of ownership are determined as well

as the amounts required for increasing those shares, but rent paid

by the homebuyer cannot be used to acquire additional equity in

the home.

 After payments of the initial equity contribution, a membership

fee and part of the closing costs, the purchase closes.

193

D. Equity Sharing: The Spoils of Appreciation

In the equity sharing arrangement, a financer is an investor in the

transaction and purchases a portion of the homeowner’s equity. In return,

the homeowner accepts a contractual limit on her equity appreciation. When

the value of the property changes, there is a risk and reward trade-off for both

the borrower/homeowner and the lender/investor.

i. How the New Equity Sharing Models Work

a. Haus

The Haus program, offering a “co-investment partnership,” is available to

both current homeowners (for tapping into homeowner equity) and would-

be homebuyers.

194

Like other “co-investors,” Haus advertises that the funds

are not a mortgage or debt but an investment in the home.

195

These are the

components of the Haus model:

 After approval, Haus determines how much the buyer must

initially put down and funds the balance of the purchase price.

 The buyer makes monthly payments to buy back the equity from

Haus.

 The monthly payments include the “monthly equity purchase, a

fee, homeowners’ insurance, and property taxes.” The

193. Id.; Ramirez, supra note 190. Fleq may further assist the homebuyer in

managing title issues, arranging for homeowner’s insurance, and setting up escrows.

194. HAUS, https://haus.com/faq (last visited Nov. 20, 2021).

195. Id.

470 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

homeowner is free to increase the amount of equity payments

during the term but must maintain a minimum percentage of

ownership. The homeowner is allowed to “cash out,” by selling

back equity to Haus for personal use, and the monthly payment is

adjusted accordingly.

 Payments are fixed for ten years.

196

 After ten years, if the homeowner has bought back all of Haus’s

equity, the home is owned outright. If the homeowner has not

purchased all of the equity, they can choose to renew the

partnership, buy-out the remaining Haus equity, or sell the home

to a third party.

197

b. Noah

The newest fintech firm engaged in home purchase finance is Noah,

another form of equity-sharing arrangement.

198

Noah’s technological

platform develops “a full financial profile of [its] homeowner partners,” even

for those in marginal financial circumstances, proclaiming itself the “the

financing source of last resort.”

199

Noah’s prequalification process is not

unlike that for traditional mortgage refinance, where the terms depend on the

market value of the property, available equity, and the homeowner’s credit

standing. It is all done online through Noah’s customer portal. The process

is fast and can be completed in as few as fifteen days. Despite the outward

similarities, Noah’s financing is not secured by a “mortgage” on a home loan,

rather it is described as a “debt-free investment agreement.”

200

Homeowners

do not make monthly payments or interest, but a one-time lump sum to Noah

at any time during the relationship.

201

Noah uses a holistic approach,

considering more than just an applicant’s credit score, to determine the value

and terms of the arrangement.

202

Suppose Noah co-invests $100,000 in the purchase of a home, this is how

196. Id. Haus claims that, compared to a traditional mortgage, these payments are

30% less. Haus Raises $7.1M to Bring Flexibility and Affordability to Homeownership,

USINESSWIRE (July 18, 2019, 11:17 AM), https://www.businesswire.com/news/

home/20190718005549/en/Haus-Raises-7.1M-to-Bring-Flexibility-and-Affordability-

to-Home-Ownership.

197. HAUS, supra note 194.

198. Benjamin Horney, Home Equity Financing Fintech Noah Nabs, $150M In

Funding, L

AW360 (April 22, 2020), https://www.law360.com/articles/1266276/home-

equity-financing-fintech-noah-nabs-150m-in-funding.

199. Id.

200. Id.

201. How it Works, NOAH, https://www.noah.co/how-it-works (last visited Nov. 20,

2021).

202. Id.

2022 NON-DEBT AND NON-BANK FINANCING 471

the plan operates:

 It first determines the Adjusted Home Value.

 It then offsets risk through a valuation adjustment, which

typically ranges from 10% to 20%.

 This adjustment reduces Noah’s exposure to downturns and

amplifies its returns in a rising market.

 As Noah’s co-investment of $100,000 was contingent on

receiving a 30% equity share, if the home’s value increases to

$1,343,916 at the end of the ten-year term, Noah’s payout is

$233,175; it’s a gain of $133,175, at an annualized return on

investment of 8.83%.

203

c. Unison

Perhaps seeing what was over the horizon, Unison entered the home

finance business in 2004, just before the worries about a crisis began to take

shape. Like the GSEs and other private participants on the secondary market,

Unison is funded by institutional investors, such as pension plans and

university endowments.

204

It offers to “partner” with homebuyers, not by

making a loan, but instead by making a co-investment in the buyer’s home

— such as by providing part of the down payment and sharing in the homes

appreciated value.

205

The Unison partnership makes homeownership

possible as it eases the down payment burden — the buyer paying as little as

five percent, while Unison pays the balance of the traditional twenty

percent.

206

The loan to value ratio (eighty percent) under the Unison model

is the same as under the traditional borrowing scenario and Unison sets

specific qualifications to ensure that the home is a good long-term

investment that is likely to appreciate.

207

Unlike a mortgage, no interest is

charged on Unison’s down payment contribution, and the homebuyer does

not make monthly repayments. Instead, Unison recoups its investment on

203. This is a hypothetical based on the Noah concept. See also Colin Robertson,

Noah: A Home Equity Sharing Product, T

RUTH ABOUT MORTG. (Apr. 1, 2020),

https://www.thetruthaboutmortgage.com/noah-review-a-home-equity-sharing-product/

(explaining how the Noah model works).

204. Where Does Unison Get Its Funds?, UNISON (Mar. 20, 2019),

https://www.unison.com/article/about-unison-funding.

205. Robert Farrington, Unison Review: Uniquely Use the Equity in Your House,

COLLEGE INV., https://thecollegeinvestor.com/24159/unison-review/ (last updated Nov.

18, 2021).

206. Liz Brumer, Unison Review: Capturing Home Equity Through Shared

Appreciation, M

ILLIONACRES (Nov. 20, 2019), https://www.fool.com/millionacres/real-

estate-financing/unison-review-capturing-home-equity-through-shared-appreciation/

(last updated May 19, 2021).

207. See id.

472 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

the eventual sale of the home. In this partnership, Unison stays in the

background, assuring the homebuyer that she is sole owner of the home and

that Unison is merely an investor with “no rights of occupancy” or control.

208

Besides enabling the initial purchase, Unison also helps homeowners tap

into the equity of their existing homes. Unison will give cash for a part of

the equity, in exchange for a percentage share of the home’s future

appreciation.

209

For example, Unison will convert up to $500,000 or 17.5%

of a home’s value to cash in exchange for a portion of its value when the

homeowner decides to sell.

210

Unlike a home equity loan from traditional

lender, the Unison “co-investment” does not encumber the property with

more debt, nor does it require contemporaneous repayment as the cash out is

only repayable at the end of the partnership agreement, which is the earlier

of the sale of the home or thirty-years from signing. Unison is not in these

deals for charity; instead, it may earn a substantial profit if the value of the

home increases during the life of Unison’s “investment.”

211

There are certain restrictions and tangential costs attached to both the

“HomeOwner” and “HomeBuyer” programs. For instance, as part of the

agreement, Unison sets a “Maximum Authorized Debt Limit,” meaning that

any future refinancing will be subject to limitations.

212

Homeowners must

pay all third-party closing costs as well as a 2.5% origination fee

213

and are

subject to periodic credit checks.

214

d. Point

Point is another business model that invests in the equity of existing

homes. While there are surface similarities to Unison in the sense that Point

does not lend money, as would require monthly repayments, Point is

different in several structural respects: buyout, caps on points return, and

rights to rentals. These are the features of Point:

 Homeowners are required to own at least thirty percent of the

208. How It Works for a Homeowner, UNISON, https://www.unison.com/

how_it_works_homeowner (last visited Nov. 20, 2021) (“If I partner with Unison, who

owns the home? You own the home!”).

209. Brumer, supra note 206.

210. Id.; UNISON, supra note 208.

211. Brumer, supra note 206; UNISON, supra note 208.

212. UNISON HOMEOWNER PROGRAM GUIDE 48 (2017), https://seeking

alpha.com/uploads/2017/11/11/5068968/Unison_HomeOwner_Program_Guide.pdf.

213. Brumer, supra note 206.

214. Unison requires a certain FICO score, which is the same as a credit check. Your

Homeowner Questions Answered, U

NISON, https://www.unison.com/faq_homeowner

(last visited Nov. 20, 2021). As another example, Hometap is an equity sharing company

that is very similar to Unison. The Smart Way to Tap into Your Home’s Equity,

OMETAP, https://www.hometap.com/ (last visited Nov. 20, 2021).

2022 NON-DEBT AND NON-BANK FINANCING 473

equity in the home.

 The homeowner has the right to buy out Point or pay off the

investment by sale of the home at any time during the thirty-year

term with no pre-payment penalty.

 Point’s return is capped at a set amount, usually twenty-five to

forty percent of the appreciation value.

 The homeowner has the right to rent out the property, upon

payment of a “small rental premium” to account for any decreases

in value of the home from wear and term from use, such as the

natural depreciation from a renter’s presence.

215

ii. Other Alternative Financing Models

a. P2P Mortgage Loans

Peer-to-peer (“P2P”), lending helps homebuyers by making available

loans from groups of individual lenders, who desire to help those that

otherwise lack the means for accessing capital. In this respect, P2P lenders

tend to operate in underserved markets — making loans to borrowers with

marginal credit standing; even so, P2P loans typically carry lower interest

rates than those charged by traditional lenders.

216

They are open to hearing

the borrower’s “story,” which purports to capture all aspects of the

borrower’s circumstances as would allow a fully, and perhaps sympathetic

assessment of the borrower’s application for capital. This wide-ranging

application process does come with the cost of a much slower procedure.

P2P loans offer the flexibility of a “mix-and-match option,” under which

borrowers can use a P2P loan for the down payment and seek a conventional

loan for the balance of the purchase price.

217

While reports show that more

than thirty percent of Americans have used P2P lending, many banks are

reluctant to accept P2P funds as a down payment on a conventional loan.

218

The reasons for this hesitancy are not clear. It seems that what might be the

main concern, priority of claim, could easily be addressed by an agreement

215. Most Popular FAQs, POINT, https://help.point.com/collection/1-homeowner-faq

(last visited Nov. 20, 2021); see also Hal M. Bundrick, Shared Appreciation: Tapping

Home Equity Without Taking a Loan, N

ERDWALLET (Aug. 9, 2019), https://

www.nerdwallet.com/blog/mortgages/shared-appreciation-tapping-home-equity-with

out-taking-out-a-loan/.

216. Bob Schneider, Peer-to-Peer Lending Breaks Down Financial Borders,

NVESTOPEDIA (Jul. 25, 2019), https://www.investopedia.com/articles/financial-the

ory/08/peer-to-peer-lending.asp.

217. Id.

218. See End of the IOU: P2P Payments the New ‘Social Norm’, BANK OF AM. (May

11, 2017), https://newsroom.bankofamerica.com/press-releases/consumer-banking/end-

iou-p2p-payments-new-social-norm.

474 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

under which the P2P loan would be subordinate to the bank loan.

219

This is

typically how these arrangements are handled. Ostensibly, P2P lending

looks like purchase-money mortgages.

220

While this form of lending is not necessarily a “non-debt” means of

financing a home, it is certainly a non-conventional option.

221

The process

can be compared to “crowdfunding,” a popular platform used to invite

contributions for sympathetic causes or to launch some invention.

iii. Novel Home Purchase Assistance Programs

a. “Alternative” iBuyers

As the homebuying experience can seem inscrutable at worse and time-

consuming at best, companies have emerged to make the whole process

worry- and stress-free. For customers needing to sell an existing home while

looking to purchase a new one, Homeward is the answer. Acting for the

homebuyer, Homeward purchases the new home, usually all-cash, while the

customer hires an agent to sell the existing home.

222

In the interim, the

customer enters into a lease with Homeward for the new home until the old

home is sold (typically for periods up to six months).

223

The customer will

acquire a new mortgage to purchase the new home from Homeward at the

original price plus a two to three percent convenience fee, but this may vary

219. See Frank Addessi, The Risks and Rewards of P2P Lending, SMARTASSET (Mar.

14, 2018), https://smartasset.com/personal-loans/the-risks-and-rewards-of-p2p-lending.

220. See id.; Jim Probasco, P2P Mortgage Loans — A Growing Trend, INVESTOPEDIA

(Apr. 9, 2021), https://www.investopedia.com/articles/personal-finance/071515/p2p-

mortgage-loans-growing-trend.asp.

221. Jean Folger, 5 Problems With Buying a House With a Friend as an Investment,

NVESTOPEDIA, https://www.investopedia.com/articles/investing/073015/5-common-

problems-buying-house-friend.asp (last updated June 29, 2021), offers some caution for

friends purchasing a home together: the credit status of the friends will be tied together;

exiting the relationship may be difficult without a prior agreement; and the friendship

may be tested as disagreements over use or transfer arise. See also Rachel Stults, What

to Do When Buying a House With a Friend — And Why You Probably Shouldn’t,

EALTOR.COM (Jan. 27, 2016), https://www.realtor.com/advice/buy/how-to-buy-a-

home-with-friends-and-why-you-probably-shouldnt/. For an example of a “successful”

friendship buying experience, see a case detailed by Julie Beck, The Case for Buying a

House with Friends, T

HE ATLANTIC (Dec. 13, 2019), https://www.the

atlantic.com/family/archive/2019/12/how-buy-house-friends-without-going-

crazy/603538/.

222. Mary A. Azevedo, Homeward Secures $371M to Help People Make All-Cash

Offers on Houses, T

ECHCRUNCH (May 27, 2021, 9:00 AM), https://tech

crunch.com/2021/05/27/homeward-secures-371m-to-help-people-make-all-cash-offers-

on-homes/.

223. Id.

2022 NON-DEBT AND NON-BANK FINANCING 475

depending on location.

224

The whole process purports to be risk-free, as

Homeward guarantees to purchase the old home at the predetermined price

if it has not sold on the market within the period agreed to.

225

This guarantee

appears to remove much of the risk of a stagnant market and helps the

homeowner avoid having to take out a second mortgage loan while the first

home is awaiting sale.

226

PROMISES AND RISKS FROM ALTERNATIVE BUYING

AND FINANCING MODELS

A. The Lure into the Shadows: Muddy Rights and Remedies

We should worry about the novel practices and non-banks in the home

purchase world,

227

for the promise of low down payments and no monthly

payments are but surface appeals, with real risks lurking beneath. I lay out

several kinds of risks that exist.

i. Costs

The non-debt models are not without monetary costs. They specify

224. Id.

225. Id.

226. See Mary A. Azevedo, Austin-Based Real Estate Startip Homeward Secures

$105M in Debt & Equity, C

RUNCHBASE NEWS (May 14, 2020), https://news.

crunchbase.com/news/austin-based-real-estate-startup-homeward-secures-105m-in-

debt-equity/. Several other companies, like Offerpad and Opendoor, offer similar

services to make the homebuying experience seamless, with their “one stop shops”

through their “iBuyers” programs. See Jeff Andrews, The Real Estate Transaction is

Broken. Tech Companies Want to Fix It, C

URBED (Mar. 21, 2019), https://www.

curbed.com/2019/3/21/18252048/real-estate-house-flipping-zillow-ibuyer-opendoor;

Jeff Andrews, These Startups Make Selling Your House as Easy as Possible, C

URBED

(Apr. 12, 2018), https://www.curbed.com/2018/4/12/17221178/opendoor-offerpad-sell-

house-online-offers; Courtney Read, What is an iBuyer?, O

FFERPAD (Dec. 21, 2017),

https://blog.offerpad.com/what-is-an-ibuyer/; Joe Gomez, What is an iBuyer —How It

Works and Is It Worth It?, O

PENDOOR, https://www.opendoor.com/w/guides/what-is-an-

ibuyer (last visited Nov. 20, 2021). Another company, Knock, while not an iBuyer, also

uses “data science and local experts to set a list price on your home,” which then becomes

the “trade-in price” of the home. While the homeowner pays these costs, Knock will

advance up to $25,000 for upgrades to improve the marketability of the home. K

NOCK,

https://www.knock.com/faq (last visited Nov. 20, 2021). When the transactions are

completed, Knock earns a 6% commission from the homeowner and a 3% commission

from the seller of the new home.

227. See generally FIN. STABILITY OVERSIGHT COUNCIL, 2019 ANNUAL REPORT

(2019), https://home.treasury.gov/system/files/261/FSOC2019AnnualReport.pdf

(examining risks to financial stability in the United States in various markets and

sectors); Debra Kamin, Is iBuying Here to Stay?, N.Y.

TIMES (Nov. 19,

2021), https://www.nytimes.com/2021/11/19/realestate/ibuying-ilending.html

(describing risks and potential drawbacks of using ibuying and ilending).

476 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

maximum investment amounts ranging from $400,000 (Hometap) to

$500,000 (Unison).

228

The minimum share of investment ranges from

$25,000 (Point) or 17.5% (Unison), with maximums from 20% (Point) to

70% (Unison).

229

The stated investment terms are either ten years (Hometap

and Noah) or thirty years (Point and Unison).

230

The fees assessed are 1) 3%

of the financing amount, appraisal, and third-party fees (Hometap); 2)

Servicing Fee of $2,000 or 3% of the financing amount, whichever is higher,

underwriting, appraisal, and third-party fees (Noah); 3) 3%-5% of the

financing amount, appraisal, and third-party fees (Point); and 4) 3% of the

financing amount, which includes appraisal and third-party fees (Unison).

231

When maturity arises after thirty years or if the homeowner sooner sells

the property, Unison claims a share of the appreciation as valued from the

date of the transaction. The share will vary depending on the deal but could

be as high as “the original co-investment plus or minus their share of the

home’s change in value.”

232

That payment to Unison may be greater than

the homebuyer would have paid in interest to a traditional lender. This is

how the numbers add up. For 10% of the down payment, Unison earns

33.3% of the change in value as determined by an independent appraisal

when the homeowner chooses to end the relationship, either at sale of the

property, buy out of Unison, or at the scheduled termination point, i.e., 30

years. For 15% of the down payment, Unison would earn 49.5% of the

increase in value.

233

If the homeowner decides to sell the home within three years, Unison may

invoke a “Special Termination” payment, which is the original investment

plus an investment option, starting around 3.3% of the property value.

234

the homebuyer does not maintain the property, she may be subject to a

“Deferred Maintenance Adjustment.”

235

228. Frequently Asked Questions, HOMETAP, https://www.hometap.com/faqs/ (last

visited Nov. 20, 2021); U

NISON, supra note 214.

229. UNISON, supra note 214; POINT, supra note 215.

230. UNISON, supra note 214; Point, supra note 215; Still have questions? We’ve got

answers, N

OAH, https://www.noah.co/faq (last visited Nov. 20, 2021); HOMETAP, supra

note 228.

231. See supra note 230.

232. UNISON, supra note 214.

233. See id.; What is an Option Contract, UNISON (Apr. 11, 2019) (on file with author)

(demonstrating how the option contract with Unison works).

234. UNISON, supra note 214.

235. Id. In its FAQ, Unison describes ordinary wear and tear as allowed, but that

damage exceeding ordinary wear in tear is “assessed by one or more appraisals,

inspections or repair estimates obtained from independent third-party providers who are

used to determine the amount of the Deferred Maintenance Adjustment” and defines a

Deferred Maintenance Adjustment as “allocating the loss in value due to improper

2022 NON-DEBT AND NON-BANK FINANCING 477

How does Unison compare in terms of cost to a traditional mortgage? It

depends on whether the property appreciates in value, in which case, the

Unison investment — the down payment and eventual share — will cost

more. Conversely, a traditional mortgage loan does not involve sharing of

equity with the lender. But, if the value of the property declines, Unison is

the better deal. In summary, the Unison model makes sense for the budget-

stressed homebuyer — as initial payments are low — who expects to be

better off financially in the future. It also makes sense for homebuyers in

markets experiencing modest gains in appreciation, in which case the down

payment assistance and comparatively low monthly payments will mean

most of the gain is kept by the homebuyer.

ii. Contracting and Consumer Protections

As explained above, mortgages given to an institutional lender are subject

to a host of federal and state regulations designed to protect banks from

excesses, the markets from systemic risks, and borrowers from their

improvidence.

236

Adherence to the ATR regulations and loan disclosure is

critical if we are to avoid another housing crisis.

237

But, as the structure of

financing offered by the equity sharing partners and alliances does not

involve a “mortgage” per se, none of these protections are available. There

are no disclosures about the economics of the deal, nor even about the

financer’s business model.

The appeal of the benefits seems like the same lures that drew in buyers

to ARMs leading to the crisis.

238

Then, as now, homebuyers may be inclined

to overlook the downsides in favor of the immediate satisfaction of

homeownership. Just as subprime loans were made to credit-risky borrowers

or exposed borrowers to greater risks because of adjustable interest rates and

interest only terms, equity-sharing arrangements use less stringent standards

for evaluating an applicant’s credit worthiness. Although FICO scores for

first time borrowers have been dropping in recent years even for

mortgages,

239

the metrics used by the non-banks are unconventional and

maintenance to [the homeowner].” Id. There are otherwise no standards for determining

where to draw the line.

236. See supra Part II.B.

237. See McCoy & Wachter, supra note 88, at 649.

238. See generally Eric S. Belsky & Nela Richardson, Understanding the Boom

and Bust in Nonprime Mortgage Lending (Sep. 2010) (unpublished manuscript),

https://www.jchs.harvard.edu/sites/default/files/ubb10-1.pdf (explaining the

appeal secondary benefits had to buyers).

239. Aly J. Yale, Lenders are Loosening the Reins; What FICO Credit Score Do You

Need to Get a Mortgage?, M

ORTG. REPS. (Dec. 25, 2017), https://themortgage

reports.com/34667/mortgage-fico-scores-drop.

478 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

unproven. Indeed, the “co-investment” business model is unchartered

territory and raises a host of issues that could trap even the economically

savvy millennial.

240

Many of these businesses are not forthcoming with the

specific terms of the agreements and borrowers do not appear to be

encouraged to consult with an attorney. Instead, several of them suggest

borrowers speak with an in-house consultant to make sure the borrower is

“fully informed” prior to signing the agreement.

241

Additionally, while “co-

investment” businesses advertise that they are sharing in “all” the risk, the

fine print indicates that for platforms such as Point and Unison borrowers are

required to pay back some or all of the initial investment, at the very least,

even if the home depreciates in value.

242

iii. Novel Forms of Rights

The Fleq Alliance and equity sharing arrangements suggests new forms of

ownership, defying numerus clausus.

243

Under numerus clausus, only

certain forms of property rights are recognized as such by the legal system.

This limited recognition circumscribes the private parties’ ability to craft

novel rights and obligations.

244

The main reason asserted for this principle

is the interest in “‘optimal standardization,’ that is, balancing economic and

social demand for different types of property interests against the need to

economize on information costs imposed on third parties that have to

accommodate to such diversity, in view of the in rem nature of property

rights.”

245

Professors Arruñada and Lehavi explain:

240. See Larry Kochard, Commentary: Overcoming the 4 Most Common Co-

Investment Obstacles, P

ENSIONS & INVS. (Sept. 3, 2019), https://www.pionline.

com/industry-voices/commentary-overcoming-4-most-common-co-investment-

obstacles (discussing the difficulties of the “co-investment” strategy).

241. NOAH, supra note 230; POINT, supra note 215; HOMETAP, supra note 228;

NISON, supra note 214.

242. See supra note 241.

243. See FLEQ, supra note 189.

244. Benito Arrunada & Amnon Lehavi, Prime Property Institutions for a Subprime

Era: Toward Innovative Models of Homeownership, 8 B

ERKELY BUS. L.J. 1, 19 (2010)

(citing U

GO MATTEL, BASIC PRINCIPLES OF PROPERTY LAW: A COMPARATIVE LEGAL

AND

ECONOMIC INTRODUCTION 39 (2000)).

245. Id.; see Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the

Law of Property: The Numerus Clausus Principle, 110 Y

ALE L.J. 1, 24–42 (2000). Some

maintain that information and transaction costs from novel forms can be controlled

through the requirement that parties seeking to use them give some sort of public notice,

and through the adoption of rules to guide our understanding of the arrangements. See

Henry Hansmann & Reinier Kraakman, Property, Contract, and Verification: The

Numerus Clausus Problem and the Divisibility of Rights, 31 J.

LEGAL STUD. 373, 395–

409 (2002).

2022 NON-DEBT AND NON-BANK FINANCING 479

This does not necessarily mean that recognized types of property rights

included in the “closed list,” such as ownership, should essentially adhere

to a single blueprint, i.e., an indivisible fee simple interest in both the land

and the home.

246

At the same time, for new models that “rearrange”

ownership to become formally institutionalized, the new format needs not

only to become de facto familiar to various stakeholders, but should also

be supported by enabling legislation and regulation. This support and

familiarity would allow actors such as lenders to fully understand the

nature of the property configuration and the type of collaterals, and

consequently to be willing to extend credit.

247

While there may be good reasons for not rigidly adhering to this principle,

such as where its rationale is not implicated,

248

that is not the case with these

new inventions. The structure and nature of their claims to an interest in the

property are not readily apparent from the ground. Because the relationships

may not be evidenced by a recordable instrument, discovering the claims

may not be possible, and the resulting claims against the property may not

fit within the traditional regime, from which there are specific rights,

remedies, and schemes for resolving conflicts.

a. Property or Contract Rights

Rights in property acquired under these new models may be limited in

idiosyncratic ways. In the Noah model, the relationship is described as an

“equity-sharing contract,” that refers to “homeowner partners.”

249

Fleq

246. Other writers have pointed out practical and normative differences in the concept

of traditional property rights across different social contexts and different types of

resources. See Hanoch Dagan, The Craft of Property, 91 C

AL. L. REV. 1517, 1558–70

(2003) (discussing “institutions of property” ranging from those regulating arms-length

market transactions to marital property); Amnon Lehavi, The Property Puzzle, 96 G

EO.

L. J. 1987, 1997–2000 (2008) (noting that different values implicate the ordering of rights

to various resources).

247. Arrunada & Lehavi, supra note 244, at 19.

248. In Community in Property: Lessons From Tiny Homes Villages, 104 MINN. L.

REV. 385 (2019), Professor Lisa T. Alexander challenges the numerus clausus

proposition by offering the phenomenon of the tiny homes village as a new kind of

property interest. The contours of this new form of housing tenure or property relation

is complex and nuanced. As she describes it, the interest in tiny homes villages lacks a

“formal title,” yet operates much like traditional rights, in the sense of some security of

tenure and the obligation and self-interest to maintain. While there are limits on the right

to alienate, some tiny villages allow participants some share in the appreciation in value

when they decide to leave. In Professor Alexander’s view, the absence in this

stewardship model of all those attributes normally associated with ownership

(unqualified rights to exclude and to alienate) does not disqualify it from the canon of

property interests.

249. NOAH, supra note 230.

480 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

purports to create an “alliance,” that refers to a “joint venture.”

250

If we treat

them as they are denominated, then the rules of business associations should

apply. This means equal participation in management, sharing of liabilities,

formalities for dissolution, and fiduciary duties. As contracts, then the rights

and remedies are measured in some ways by default rules — implied

covenant of good faith and fair dealing, anticipatory repudiation,

impossibility — but subject to bargain. It is unlikely that there will be much

bargaining between the would-be homebuyer and financer, as the

arrangements suggests an etched in stone character. In any case, the usual

remedies will mean actions against the parties, but not against the property

as would be the case with property interests.

As property interests, the lines are equally blurred. If the deed, the written

evidence of ownership, names parties other than or in addition to the

homebuyer, then all the rights of ownership are diminished, as the

homebuyer will lack the apparent ability freely and unilaterally to transfer

title or to give lesser rights. A deed that names parties in addition to the

homebuyer will give those parties rights of possession and perhaps rights to

veto decisions by the homebuyer over the use and changes to the home.

Under the Unison model, the homeowner is typically not permitted to rent

out the property and must keep the home in good condition.

251

Who decides

on the quality and extent of improvements and repairs? If they are co-owners

of joint venture property, can the homeowner seek partition? The Fleq

Alliance does not specify relative claims and rights in the context of a divorce

proceedings between married homebuyers or where the homebuyers fall into

a bankruptcy proceeding. How do the financers protect their interests in case

of involuntary transfers? There is a risk on the other side as well — what if

the investor is in bankruptcy? Is the house an asset of that debtor’s estate?

These seem to be the same kinds of risks facing a vendee under an

installment land contract, but at least there, the vendee, if she is in

possession, can give notice by that possession of her equitable claim to the

property to later purchasers. In the title examination phase, the non-

possessing co-investor may be willing to accept risks of title, thought

unsuitable by a single homebuyer? The non-possessing co-investor may be

content with title insurance proceeds if defects manifest themselves later, but

a possessing owner, may not want the risk of losing ownership.

b. A Mortgage by Another Name

The equity sharing company, Unison, states that it does not offer loans but

250. FLEQ, supra note 189.

251. UNISON, supra note 214.

2022 NON-DEBT AND NON-BANK FINANCING 481

options for investment.

252

Because it is not a loan, the homeowner is not

required to make monthly payments to retire it, nor is she obligated to pay

interest. Because Unison enables the homebuyer to make a larger down

payment, private mortgage insurance may be avoided, and the monthly

mortgage payments are smaller.

253

But, where does Unison’s investment

stand in terms of priority of claims? What are Unison’s rights in case the

homebuyer doesn’t fulfill his side of the bargain? The claim clearly does not

fit the traditional notion of a mortgage.

254

All the usual recourses and

protections, notice of default, right to cure, and to redeem in case of a default,

leaves homebuyers quite exposed. At the same time, the NDNB lacks those

recourses available to a traditional mortgagee in case the co-venturer fails to

fulfill his part of the deal.

i. Shared Appreciation Mortgage Comparison

One ready comparator to the shared equity investor model is the shared

appreciation mortgage (“SAM”), which emerged in 1980.

255

SAMs enable

reduced monthly payments, which in turn means less annual income

252. See Brumer, supra note 206.

253. See UNISON, supra note 214 (explaining Unison’s services and comparing

Unison to alternatives such as a second mortgage, an FHA loan, or a gift fund).

254. See generally David Waddilove, The “Mendacious” Common-Law Mortgage,

107 K

Y. L.J. 425 (2019) (examining the critiques of the “common-law mortgage” and

interpreting the common-law mortgage in the context of the seventeenth century and

judicial interventions to the doctrine since then). The first mortgages took the form of a

fee simple subject to a condition subsequent, under which the borrower transferred legal

title to a lender, which title would terminate on law day when the debt was repaid. The

conveyance was structured with this language: “To lender, but if borrower pays by

September 1530, borrower has the right to reenter and retake the land.” However, this

arrangement put the borrower at great risk. If on law day, the borrower was unable to

repay the loan — he fell off his horse — the failure to repay, meant forfeiture of all

payments made to that point as well as of the land. Borrowers appealed to equity for

relief and the courts obliged by offering the “equitable right of redemption” — borrowers

could thus pay late. But, because the courts of equity did not specify a date by which

late payments must be made, this left lenders in a very precarious position. They in turn

appealed to equity and this appeal gave rise to “strict foreclosure,” that is, that the

borrower was required to pay by a date certain or forever lose the property. Eventually,

courts came to see that strict foreclosure was too very harsh, such that they required

foreclosure by sale on the theory that a public auction might generate funds to repay the

lender as well as some surplus to the borrower. Alas, that was only the theory, as studies

over the centuries reveal that rarely do public sales generate any surplus to the borrower,

but only minimize her ultimate liability to the lender. However, in several states, lenders

are denied any deficiency judgment against the borrower. See G

RANT NELSON ET AL.,

REAL ESTATE FINANCE LAW 199–210 (6th ed. 2015); RESTATEMENT (THIRD) OF

PROPERTY: MORTGAGES §4.1 cmt. a (AM. L. INST. 1997); Bennett v. Bank of E. Or., 167

Idaho 481 (2020).

255. Shared Appreciation Mortgage, 45 Fed. Reg. 66801 (proposed Oct. 8, 1980) (to

be codified at 12 C.F.R. 545.6-4(b)).

482 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

necessary to buy a home. It does this through a two-tiered system of interest:

a) a fixed, below-market interest, payable for the term and b) “contingent

interest,” payable as a percentage of the appreciation in the value of the

property, either at loan maturity or on sale or transfer of the property.

256

The

percentage of value is determined at the inception of the loan and may not

exceed forty percent of the net appreciation.

257

That appreciated value is the

difference between the sales price as market value and the costs — original

costs (purchase price, closing costs, including real estate commissions, title

insurance, appraisals, inspections); capital improvements; and outlays for the

appraisals to calculating appreciated value.

258

While the SAM is amortized

as a forty year loan, the actual term is much less, only ten years.

259

While there are superficial comparisons between the SAM and the equity

sharing home financing models, there are significant differences on several

points:

 Required disclosures: At bottom, a SAM is a mortgage that is

memorialized in an instrument that contains language to give

notice of its claim to part of the value of the property, and in

closing the loan, lenders must make disclosures to the borrower

on the economics of this financing device.

260

With a SAM, the

lender must show the borrower how the mortgage aligns with a

fixed-rate mortgage in terms of cost, based on the fixed interest as

well as the contingent interest. To do this, the lender must make

an honest representation of the anticipated rate of appreciation of

the property.

261

None of these requirements exist for the equity

sharing models; only the percentage of appreciation is specified

in the closing documents.

 Economic Benefits: The SAM benefits the lender if the rate of

appreciation is as great as the contingent interest rate is fixed at

the inception. But the borrower remains obligated to pay the

principal of the loan, no matter if the value declines. Conversely,

under the Unison model, the risk of the home not appreciating in

value, falls entirely upon Unison and Unison’s expectation of gain

256. Stanley L. Iezman, The Shared Appreciation Mortgage and the Shared Equity

Program: A Comprehensive Examination of Equity Participation, 16 R

EAL PROP. PROB.

& TR. J. 510, 515 (1981); see also ANDREW CAPLIN ET AL., FACILITATING SHARED

APPRECIATION MORTGAGES TO PREVENT HOUSING CRASHES AND AFFORDABILITY

CRISES (2008).

257. CAPLIN ET AL., supra note 256, at 8–9.

258. Iezman, supra note 256.

259. Id.

260. Id. at 516.

261. Id.

2022 NON-DEBT AND NON-BANK FINANCING 483

can be short-circuited if the homeowner sells the property or buys

it out after five years,

262

in which case, any future gain goes

exclusively to the homeowner.

 Consequences at the end of the term: Under both models, if the

borrower is unable to sell the property profitably, she may have to

refinance the loan at then prevailing interest rates and if she is

unable to find a loan that is affordable, she might find herself in a

forced sale, where all parties stand to lose. On this point, the two

models, equity sharing and the SAM, are alike in terms of the dire

consequences confronting the homebuyer at the end of the loan or

investment period. They both may require a substantial payment

of unrealized appreciation, even as the homebuyer or borrower

may lack the liquid funds to make this payment.

263

In both cases,

the choices of the obligor are limited — take out a new

conventional loan, and incur substantial transactions costs (fees,

time, lost opportunities), or sell the property. The potential loss

of home looms large in both scenarios.

264

 Liability upon death of the homeowner: The obligation to

repay a SAM continues to burden a borrower’s estate after his

death. While the Unison model requires the heirs or the estate of

the homebuyer to settle the Unison agreement after a 180-day

grace period, it is not clear how Unison enforces this right.

265

c. Landlord-Tenant

As described above, Fleq forms an alliance with the homebuyer who

becomes both an owner and a renter, with the option to buy equity in the

262. What is an Option Contract, UNISON, supra note 233. As stated earlier, the

buyout amount is the sum of Unison’s original investment plus a share of the change in

value of the home, which is determined by an independent appraisal. While the

homeowner is entitled to a “Remodeling Adjustment” for improvements that add value

to the home, improvements cannot be made during the first five years of the agreement.

263. See Arrunada & Lehavi, supra note 244, at 34 (suggesting that at the end of a

loan period under the shared-appreciation mortgage, a borrower may lack liquidity and

force her to take a conventional loan or sell the house).

264. See id.

265. Your Questions, Answered: Advanced Topics, UNISON (last visited Nov. 21,

2021), https://www.unison.com/ (lacking a clear answer to this issue); see also Creative

Financing for Home Purchases: What’s Available Now? M

CKISSOCK (Feb. 17, 2017),

https://www.mckissock.com/blog/appraisal/18584/; Is Unison Home Co-investing

Legit?, C

LARK (June 6, 2019), https://clark.com/homes-real-estate/unison-home-co-

investing/; James Rufus Koren, This Company Will Help With a Down Payment, But It

Wants a Stake in Your New Home, L.A.

TIMES (Jan. 6, 2017, 3:00 AM),

https://www.latimes.com/business/la-fi-home-equity-investments-20170106-story.html.

484 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

property.

266

While the outward appearance may be the classic landlord-

tenant relationship, with the “tenant” having exclusive possession, Fleq does

not assume the role of landlord, with the significant obligation of making

sure the premises remain habitable under the implied warranty of

habitability, instead placing that burden on the tenant. Most courts do not

allow a waiver of the warranty.

267

The court in Rainbow saw through the

contract label and evaluated the relationship for what it was, a landlord-

tenant relationship.

268

Is “the alliance” a landlord-tenant relationship in

disguise? If it is, what form of tenancy is it — tenancy for years or tenancy

at will? What happens when the tenant fails to make the rental payments?

Does Fleq have the right to terminate the tenancy and seek possession in a

summary proceeding?

B. Remembrance of Looming Systemic Risks

The growing power and means to control the housing finance market by

non-banks is cause for concern. Studies show that the growth of non-banks

poses risks to borrowers, communities, and the U.S. government alike.

269

And because of the identified weaknesses in their business models, they

remain just as vulnerable to a significant and sustained macroeconomic

shock.

270

The same lax underwriting standards indicted as large contributors

to the 2008 crisis, since circumscribed by bank regulations, now define the

holdings of non-banks.

271

In general, mortgage loans from non-banks are of

poorer quality than those originated by banks, and are being made to

homebuyers with less income and wealth, and less business sophistication,

272

than those originated by banks.

273

And this seems to be the consciously

266. Frequently Asked Questions, FLEQ (last visited Nov. 21, 2021), https://

fleq.com/faqs/.

267. See, e.g., Rainbow Realty Grp., Inc. v. Carter, 131 N.E.3d 168, 174 (Ind. 2019)

(holding that the agreement met the statutory requirements to subject the parties to a

landlord tenant relationship, including warranty of habituality).

268. Id.

269. See, e.g., Kim et al., supra note 125, at 349 (outlining the vulnerabilities of non-

banks).

270. See id. at 387.

271. Lux & Greene, supra note 132, at 7.

272. Kim et al., supra note 125, at 390; see also Neil Bhutta et al., Disparities in

Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances, F

ED. RSRV.

(Sept. 28, 2020), https://www.federalreserve.gov/econres/notes/feds-notes/disparities-

in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.

htm (describing various trends in homeownership by race, ethnicity, and socio-economic

status).

273. Kim et al., supra note 125, at 390.

2022 NON-DEBT AND NON-BANK FINANCING 485

adopted business model.

274

Recent reports show that non-banks originated

a significantly higher share of mortgage homes loans to minority borrowers

and in low- to moderate-income neighborhoods,

275

than the number made by

large banks.

276

By the objective measure of FICO scores, the loans made by

non-banks carry lower expectations of performance — more than half were

to borrowers whose FICO scores were below the 660 benchmark for

demarcating prime from subprime loans.

277

While this presence in

underrepresented communities might otherwise be applauded, we should

worry if these efforts are the same kind of setup that led to so much economic

and psychological grief in these communities during the crisis.

278

Just as before, the GSEs and banks are playing a large role in this new

drama — the GSEs purchasing most non-bank loans and banks making them

warehouse loans

279

in the background. Despite the apparent constraints

imposed by the conservatorship under HERA, the GSEs are heavily invested

in loans originated by non-banks.

280

These loans are not much different from

those that were the culprits in the financial crisis and are still more costly

274. The Quicken Loan ads for its “rocket mortgage” and the Lending Tree pajama-

clad puppet aim to put viewers at ease about borrowing.

275. Kim et al., supra note 125, at 390.

276. As stated, the good part about this new world of lending is that loans are

accessible to Black and Hispanic borrowers and as they live in low-or moderate-income

tracts, see id. at 351, yet, there are some troubling underwriting dynamics still operating.

This cohort of borrowers is less likely to have college degrees and have less income and

wealth. Id. at 390. They have a higher debt-to-income ratio, at the same time, having a

FICO credit score lower by five points for GSE pools and twenty-five points for Ginnie

Mae, making the chances of default significantly higher. Id. at 392.

277. Lux & Greene, supra note 132, at 22.

278. Buchak et al., supra note 60, at 19–20 (finding that fintech and shadow bank

loans are more than .02% likely to go into default than traditional bank loans).

279. Id. at 11. Warehouse lenders typically fund 95% of the mortgage balances,

lending $40 billion at the end of 2016. Id. at 12–13. See generally Peter Rudegeair et

al., Big Banks Find a Back Door to Finance Subprime Loans, Lending to Nonbank

Financial Firms Surges to Record as Banks Avoid Direct Exposure, W

ALL ST. J. (Apr.

10, 2018, 7:18 PM), https://www.wsj.com/articles/big-banks-find-a-back-door-to-

finance-subprime-loans-1523352601 (stating that while banks describe this new lending

approach as “safer than dealing directly with consumers with bad credit . . . [it] mean[s]

that banks are still deeply intertwined with the riskier loans that they say they swore off

after the financial crisis”). Heavy reliance upon warehouse lending by non-banks puts

them in a precarious existence if their loans are called in on margin or are subject to

market-to-market reevaluations.

280. FHFA, RECENT TRENDS IN THE ENTERPRISES’ PURCHASES OF MORTGAGES

FROM SMALLER LENDERS AND NONBANK MORTGAGE COMPANIES 16 (2014)

(“[N]on-banks accounted for 26.3 percent of agency purchase mortgage loans originated

in December 2012, by December 2014, that number had grown to 48.37 percent.”); see

also AEI Housing Center, AEI, www.housingrisk.org (last visited Nov. 21, 2021).

486 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

than those from banks, despite the support of the GSEs and Ginnie Mae.

281

Because they are dependent on short-term credit to finance their operations,

they may experience losses from contraction if these sources become more

expensive or non-existent in a tight financial market.

282

Moreover, because

their business model is novel and decentralized, they are challenging to

monitor and constrain,

283

and due to their small size, they may regard the

effects of excessively risky activities as merely abstract.

As with all technology-dependent operations, hacking — in recent times,

carrying huge ransom demands — is an ever-present threat.

284

The new

technology employed by NDNBs to assess credit risk may not lead to better

assessments but would instead mask risk factors.

285

This point should not

be rejected out of hand as the ravings of a luddite. The algorithms developed

to evaluate applications that use unorthodox sources and types of data, such

as insurance claims, utility bills, social networks, data from Amazon

purchases, and eBay transactions may only reveal frequencies of occurrence,

but not necessarily meaningful correlations.

286

After all, how does buying a

classic Burberry raincoat on eBay predict whether one is likely to make

timely mortgage payments? It may show that the would-be borrower is

frugal, buying used and not new, or it might just as well show him to be

profligate — a store brand coat would keep the rain away just as a classic

one. This is not to say that a human assessment of creditworthiness is better,

but only that we should not take technology as infallible. While these

algorithms have not yet been tested in times of market turmoil, at least in

281. In fact, despite the strong market support offered by the GSEs and Ginnie Mae,

non-bank loans carry interest rates that are 3.7 basis points higher than loans made by

banks. Buchak et al., supra note 60, at 21–22; see also Neil Buchak & Aurel Hizmo, Do

Minorities Pay More for Mortgages, Finance and Economic Discussion Series (Fed.

Rsrv, Finance and Economics Series No. 2020-07, 2020), https://www.federal

reserve.gov/econres/feds/do-minorities-pay-more-for-mortgages.htm (concluding that

minority borrowers pay more for mortgages).

282. See Kim et al., supra note 125.

283. William Magnuson, Regulating Fintech, 71 VAND. L. REV. 1167, 1172 (2018);

see also Rory Van Loo, Making Innovation More Competitive: The Case of Fintech, 65

UCLA

L. REV. 232, 235 (2018) (describing the risk implications of fintech in consumer

finance).

284. Magnuson, supra note 283, at 1201–02; see Nicol Turner Lee et al., Algorithmic

Bias Detection and Mitigation: Best Practices and Policies to Reduce Consumer Harms,

ROOKINGS (May 22, 2019), https://www.brookings.edu/research/algorithmic-bias-

detection-and-mitigation-best-practices-and-policies-to-reduce-consumer-harms/.

285. Jagtiani et al., supra note 136, at 5. Those who borrow from the Lending Club

have a higher risk of becoming delinquent. Jagtiani & Lemieux, supra note 117, at 31.

286. Jagtiani & Lemieux, supra note 117, at 2, 26–28.

2022 NON-DEBT AND NON-BANK FINANCING 487

other areas of trading, it is widely believed that algorithmic high-speed

trading has contributed to instability in markets.

287

C. Untethered and Operating in the Shadows

As I suggested at the beginning of this paper, non-banking is sometimes

referred to as “shadow banking,” and this is for good reason. In many ways,

they operate outside of the larger regulatory regime which places a premium

on disclosures — to consumers

288

— and on public scrutiny. This is so

because of non-banks’ decentralized structure, consisting of a series of

dispersed networks with discrete functions.

289

The asymmetric systems of

information access make it difficult to monitor them and anticipate industry

harm.

290

In such a scenario, there is little incentive to look out for or avoid

relationships whose risks are apparent or could be discovered with a little

investigation.

291

Unlike depository institutions, non-banks do not have Community

Reinvestment Act (“CRA”)

292

obligations; nor an affirmative legal

obligation to lend in any specific geographic area, but they are enjoined from

engaging in practices that discriminate. Recently, the CFPB brought the

first-ever redlining complaint against a non-bank, in Bureau of Consumer

287. The Long-Term Capital Market Program, at its debut, was widely celebrated

because of its leveraged trading strategies premised on computer models. However, the

models lacked the judgment required to abandon the strategies before it was too late,

leading to the eventual collapse of the hedge fund, threatening billions in losses, but it

was bailed out by the government. See Adam Hayes, Long-Term Capital Management

(LTCM),

INVESTOPEDIA (May 3, 2021), https://www.investopedia.com/

terms/l/longtermcapital.asp.

288. See Mary Jo White, Chair, SEC, Opening Remarks at the Fintech Forum (Nov.

14, 2016), https://www.sec.gov/news/statement/white-opening-remarks-fintech-forum.

html.

289. Magnuson, supra note 283, at 1169.

290. See From the People, for the People, THE ECONOMIST (May 7, 2015),

https://www.economist.com/news/special-report/21650289-will-financial-democracy-

work-downturn-people-people (describing peer-to-peer lending companies, such as

Lending Club).

291. Magnuson, supra note 283, at 1213 (discussing the balance of long-term and

short-term interests). Magnuson posits that fintech may have long-term incentives to

maintain a reputation for providing high-quality, reliable loans and investment

opportunities; but, where the long-term interests of the company and the short-term

interests of the managers of the company diverge, it is far from clear that the long-term

interests will win out. See id.

292. 12 U.S.C. § 2901. The Act requires depository institutions to designate an

assessment area or assessment areas. Then, the depository institutions must act to serve

the credit needs of the entire area — including low- and moderate-income areas, which

typically will overlap with predominantly minority areas. See 12 C.F.R. § 25.41 (2022);

see also Jagtiani et al., supra note 136, at 2 (stating that in CRA assessment areas with

fewer than ten banks, fintech loans are more prevalent than loans from other nonbanks).

488 AMERICAN UNIVERSITY BUSINESS LAW REVIEW Vol. 10:3

Financial Protection v. Townstone Financial Inc.

293

The CFPB alleged that

Townstone engaged in redlining by acts calculated to discourage

applications based on race, including staff making disparaging comments

about Black residents and certain minority populated areas, failing to market

in those areas, and failing to employ non-whites as loan officers.

294

The

CFPB has tried to overcome the hurdle posed by the absence of CRA

obligations by “leveraging the concept of a Reasonably Expected Market

Area (“REMA”)”

295

or a “Proper Assessment Area,” as a basis for evaluating

claims of redlining.

296

VI.

CONCLUSIONS: NECESSARY REFORMS AND CONTROLS

It is fair to ask whether the regulations coming out Dodd-Frank went too

far, particularly as we see that tighter lending standards made loans largely

unavailable to many in marginal economic circumstances. The new

regulations sensibly called for greater scrutiny in extending credit to protect

both the borrower and the lender,

but they should not disqualify them

wholesale.

While the NDNBs present many differences from the financing tools that

were prevalent prior to the 2008 housing crisis, ARMs were not at all novel

when they were used. It was the indiscriminate deployment that led to the

crisis. Then, as now, there is the need for controls on both sides of the

transactions. NDNBs should be regulated by rules precisely calibrated to

their particular features,

297

be subject to registration procedures that are

simple,

298

and be subject to centralized regulation.

299

What this might look

like must come from both imagination to design different kinds of legal

relations, and fear of relieving a dark period in our financial history. At a

293. Complaint, Bureau of Consumer Fin. Prot. v. Townstone Fin., Inc., No. 1:20-cv-

04176 (N.D. Ill. July 15, 2020). The CFPB alleged violations of the Equal Credit

Opportunity Act, Regulation B. 15 U.S.C. 1691(a). Id.

294. Id. at 4–13.

295. The FDIC has offered guidance to banks on how to determine the appropriate

geographic area to avoid charges of redlining. See Are You at Risk for Redlining?

Understanding Your Reasonably Expected Market Area (REMA) and CRA Assessment

Area, FDIC

DIV. OF DEPOSITOR & CONSUMER PROT. (Mar. 14, 2018), https://www.

fdic.gov/news/events/sf-region/2018-03-14-rema-cra-presentation.pdf.

296. Id.

297. See Dale A. Oesterle, Intermediaries in Internet Offerings: The Future Is Here,

50 W

AKE FOREST L. REV. 533, 547–49 (2015).

298. See Gregory Scopino, Preparing Financial Regulation for the Second Machine

Age: The Need for Oversight of Digital Intermediaries in the Futures Markets, 2015

OLUM. BUS. L. REV. 439, 505–06.

299. See Kevin V. Tu & Michael W. Meredith, Rethinking Virtual Currency

Regulation in the Bitcoin Age,

90 WASH. L. REV. 271, 300–13 (2014).

2022 NON-DEBT AND NON-BANK FINANCING 489

minimum, the capital requirements applicable to banks should apply to non-

banks as well. As former Vice Chairman Fischer has suggested, they should

be required to “maintain buffers of highly liquid assets that are sized

according to the risk that their liabilities will run off quickly in a stress[ful]

situation.”

300

On the substantive side of the transactions, the use of untested and

unconventional criteria for assessing creditworthiness should be allowed

only as a comparative measure. The surface appeal of non-debt financing

seems well-calculated to mask the genuine risks not just to the homebuyer,

but to the partner in the alliance or co-venturer. Homebuyers in these

arrangements — particularly, equity sharing arrangements — need the same

kind of cost of finance disclosures as borrowers from banks. To head off

systemic and ripple market effects when the market turns bad, these finance

companies should be required to make the same ATR determination as

lenders. As I suggested in my earlier work, financial ability is not a static,

fixed thing, but ebbs and flows with the economic tides. This means that the

assessment of risk should anticipate that life happens. The best responses to

life changes that make it impossible to meet financial obligations cannot

handily be addressed by moratoria on foreclosures and stimulus checks.

301

Instead, we need to build in mechanisms for systemic or market adjustments

— ones that perhaps index payments to the events in the economy, indeed to

personal circumstances.

The merits of NDNBs, novel creatures in many respects, must be

evaluated for their hidden and obvious threats before they take root that is

too deep to pull up. As their place in the taxonomy of common law property

is not clearly established, the contours of rights and obligations may need

legislative definition. The result may be something sui generis in terms of

category, but with bright lines fixed that delineate contours. NDNBs must

not be allowed to operate on the edges, but must be brought squarely within

the established, tested regime and held up against safety and soundness

measures calibrated to the risk inherent in financing home purchases in the

shadows.

300. Fischer, supra note 121, at 7.

301. The HUD Single-Family Housing Policy Handbook includes “residual income”

as a compensating factor in calculating the allowable DTI ratio. U.S.

DEP’T OF HOUSING

& URB. DEV., HANDBOOK 4000.1, FHA SINGLE FAMILY HOUSING POLICY HANDBOOK

339–43 (2021).