How To Get Your Industry Regulated, in 6 Easy Lessons
On November 15, the US House of Representatives passed HR 3915, known as the Mortgage Reform and Anti-predatory Lending Act of 2007, mainly along party lines.
Led by Barney Frank, the impetus for this legislation was the disastrous subprime lending meltdown, whose implications are looking worse every day—right up to today, December 6, 2007.
To hear the mortgage industry tell it, this legislation is a classic big-government socialist disaster in the making. The Heritage Foundation says it will “put individuals of moderate incomes, imperfect credit histories, and limited wealth at an even greater disadvantage, leading to a decline in the home ownership rate,” and if they say that’s a bad thing, then of course it must be so.
A typical letter in the Originator Times, a mortgage broker publication, predicts “this [legislation] will cripple the economy and the livelihoods of thousands of people in this industry.” Brokers, that is; never mind the homebuyers.
Aubrey Clark, of Lendfast.com, says, “Lawmakers attempting to pass the Anti-predatory Lending Act of 2007 right now are effectively trying to tell lenders whom they can and can’t loan money. HR 3915 is vaguely written and enables borrowers to sue their lenders for giving them a loan should they decide not to pay.”
Well, Aubrey’s reports of impending communism are slightly exaggerated. This legislation has already been watered down, and may get still more diluted in the Senate.
But more importantly—the mortgage industry, and the two main industry associations (the Mortgage Bankers Assocation, and especially the National Association of Mortgage Brokers) have no one but themselves to blame. Anyone running a services industry association has just been handed a “teachable moment” in how to shoot themselves in the foot.
It’s classic—an industry association that sees its role as pursuing the short-term interests of its constituents at the cost of the customers’ interests—and therefore at the long term cost to everyone. The (predictable) end result is government regulation—about which they then bitterly complain.
Wanna get regulated? Follow these Six Simple tips.
1. Wrap Your Business in the Flag
Testifying in the house in 2003, Mr. A. W. Pickel, President of the National Association of Mortgage Brokers (NAMB), talked about “the dream of home ownership…the joy of home ownership…We believe the record levels of home ownership in the US can be attributed to the vibrant and competitive mortgage market.”
Therefore, “addressing abusive lending requires a balanced response…Any efforts to address abusive lending practices cannot cut off access to consumer credit.”
[Try substituting another industry here. “Addressing abuse of alcohol requires a balanced response…Any effort to get bartenders to address excessive drinking cannot cut off patrons’ access to more booze.”]
The Mortgage Bankers Association (MBA) in 2006 says: “More Americans own homes than ever before…Americans are building tremendous wealth.”
Throw in some free market talk stuff too: “If consumers did not feel mortgage brokers were delivering on what was promised, they would not reward them in the market.” Of course not. Who could think otherwise?
When threatened, repeat: "We cannot allow the American Consumer to be separated from the dream of home ownership."
2. Say You’re the Hero of the Underdog
NAMB: “Subprime lending often serves the market of borrowers whose credit history would not permit them to qualify for the conventional “prime” loan market.
MBA: “The subprime market has evolved dramatically in recent years, providing significant benefits to consumers. Non-prime borrowers commonly have low-to-moderate income, less cash for a downpayment and credit histories that range from less than perfect to none at all. Before the advent of this new market, these borrowers were either simply denied homeownership or…served exclusively by FHA or other government subsidized financing.
[Inconvenient truth: “In 2005, the peak year of the subprime boom, the study says that borrowers with [credit scores high enough to qualify for conventional loans with far better terms] got more than half—55%—of all subprime mortgages].
3. Deny Bad News
In August, 2006, the MBA said, “Default and foreclosure rates are low. Some argue that [they] are at crisis levels and that a greater percentage of borrowers are losing their homes. MBA’s data does not support this—instead, it tells a different story.”
[A scant 8 months later, this headline: US mortgage default rates hit an all-time high in the first quarter of 2007.
Mr. Pickel, of NAMB: “the incidence of abuse is very small relative to the whole industry…NAMB strongly advocates that our members never originate a loan to an uninformed consumer…”
[Counterpoint, Wall Street Journal: “A study done in 2004 and 2005 by the Federal Trade Commission found that many borrowers were confused by current mortgage cost disclosures and ‘did not understand important costs and terms of their own recently obtained mortgages,’” ]
4. Blame the Consumer and the Government
“Education is key…NAMB supports federal legislation that includes provisions to address financial literacy…NAMB urges increased enforcement of existing abusive lending prevention laws.”
“MBA believes that borrower education to help consumers navigate the home buying and mortgage finance process is extremely important…MBA and its members have developed a number of strategies to educate consumers about their options in the mortgage marketplace.”
“Some of the barriers to fair lending include…insufficient enforcement of existing laws…NAMB believes existing laws should be better enforced by state and federal regulators as a means to eliminate abusive lending practices.”
[In other words: the problem is consumers are too stupid to follow our fast-talk—and that’s not our fault. Feel free to use taxpayer money to educate millions of consumers—and boil the ocean while you’re at it. And we don’t need no more stinkin’ laws; get some FBI agents to bust criminals, and leave us good guys alone.]
5. Say Bad Things Are Not Your Fault
HR 3915 makes lenders more responsible for assessing borrowers’ ability to pay. Listening to the industry, you’d think this is the death of civilization. (“What!? I lend a guy money and he doesn’t pay—then sues me because I lent him the money!!”).
Sounds reasonable, until you substitute:
“Those kids don’t have to watch our (cereal/game) ads on TV on Saturday morning, they could be studying.”
“Those people didn’t have to move next to a chemical dump, no one forced them.”
“We’re not in charge of the nation’s diet, we just offer the high calorie high fat part of it; they can buy salads anytime they want.”
"Why should I have to drive slow just because some other folks are bad drivers, and can’t afford gas?"
6. Whatever You Do—Don’t Share Data
One of the biggest worries of the industry was that legislation might eliminate the YSP—yield spread premium. It’s money paid by the lending institution to the broker for higher interest loans.
The mortgage brokers howl at the idea of disclosing these numbers; the WSJ article shows a broker’s rate sheet with the footnote: “for wholesale use only. Not for distribution to the general public.”
In industries where the wholesaler’s payment to the retailer is disclosed, it goes by names like "advertising allowance." In industries where it’s secret, it’s called a kickback.
The brokerage association says it gives the broker flexibility to help the consumer. The Wall Street Journal calls it “a compensation structrue that rewarded brokers for persuading borrowers to take a loan with an interest rate higher than the borrower might have qualified for."
Mr. Pickel—now a CEO of a mortgage brokerage firm, and no longer head of the NAMB, says there is “a lot of play in the system. You have to operate with an ethical basis.”
He’s wrong. You don’t "have to." And not enough did.
Now they’re getting the results they in effect asked for—the prospect of regulation.
But don’t cry too hard for them: they’ve already succeeded in watering down the YSP restrictions. They have a few friends in congress—(curiously, all of them Republican—the House vote was 100% of the Democrats.)
So there’s your recipe. Are you listening, financial planners? Credit card operators? Insurance specialists? Stock brokers? Follow these easy rules, and you too can enjoy the benefits of greater federal regulation in your industry.
Of course, you could clean it up yourself.
Nah…
Great post, Charlie, and you’re exactly right: the mortgage industry is getting what it asked for with its actions.
Given that you start with a quote from the Heritage Foundation, and close with a list of other industries that should learn from the negative example of the mortgage sector, I thought you’d appreciate this quote from Sourcewatch’s comprehensive profile on the Heritage Foundation about the corporations that happen to provide the Heritage Foundation with funding:
"…defence contractors Boeing and Lockheed Martin, finance and insurance companies such as Allstate Insurance, Mortgage Insurance Companies of America, and American International Group (AIG), auto company Honda, tobacco company Altria Group (Philip Morris), drug and medical companies Johnson & Johnson, GlaxoSmithKline, Novartis, and Bristol-Myers Squibb Foundation, oil companies ChevronTexaco and Exxon Mobil, software giant Microsoft, and chipping in over $100,000 each, Alticor (Amway), Pfizer, PhRMA, and United Parcel Service (UPS). [1]"
It is surely no coincidence that finance and insurance companies are associating with all of these other fine, upstanding, self-regulating industries — or that their investment in the Heritage Foundation earns them such pithy and truthiness-filled sound-bytes.
Yes, it’s interesting.
The mortgage industry could have learned from the pharmaceutical industry about what not to do to stay unregulated.
At least in my humble view, PhRMA is one of the more strident industry associations–and I don’t their stridency does them much good.
It seems so simple: if you wanted to stay unregulated, which strategy would you choose:
a. shrill, aggressive, anti-regulatory public relations campaigns, or
b. great customer satisfaction.
Why so many industries manage to convince themselves of a. is a real head-scratcher.
Well, that didn’t take long.
For some regulations in the oven, see about Colorado restricting adjustable mortgages
and about The Federal Reserve Board getting ready to take on abusive lending practices.
For Carnak’s next prediction…
Charlie, on the topic of self-regulation, I’d love to know what you make of this:
The US meat industry is calling for a ban on downer cows (cows that are more likely to have mad cow disease and other illnesses) in the nation’s food supply, but the USDA won’t agree to change its policy.
(full details at The Press Enterprise, via the Center for Media and Democracy.)
Keep in mind that in the US meat industry the practice of feeding pigs to pigs, cows and chickens is also widespread and legal–so both the USDA and the meat industry clearly have a number of issues to address, but I thought that in this particular case, you might find a story of an industry trying to clean up one of its own problems refreshing.
More power to them!
Shaula raises an interesting example: check the links, I didn’t catch this one.
Basically, the meat-packing industry is out in front of the US Department of Agriculture, seeking a ban on certain practices.
You can argue the industry is reacting to bad publicity in the form of highly publicized videos from slaughter houses that were just polite enough to be publicized, but just gut-wrenching enough to provoke outraged response.
A more cynical viewpoint might say this is not an example of proactive industry, but a typical case of a Republican administration’s self-contradictory performance in a regulatory role.
But I’m not sure it matters. The industry is taking voluntary joint action in what looks like a generally agreed-upon positive direction–keeping sick cows out of the food supply.
I think it’s a positive step.
Charlie, I particularly appreciate that make the distinction between industries that genuninely self-regulate to do things right vs those that "self-regulate" as a PR move.
Re: the latter, I just read two short articles I though you might find interesting on how voluntary marketing standards (a form of self-regulation) are used for masking marketing reality, and an exploration of problems with voluntary industry codes (and who they really benefit).
Another interesting example. Now the hedge fund industry is facing regulation by the State of Connecticut (the state wherein 9% of the global hedge fund assets lie–Greenwich, Stamford, Westport).
The original post here used the mortgage brokerage industry as an object example. It’s interesting to read it in retrospect, replacing "mortgage brokers" with "hedge funds." The fit, I would say, is pretty strong.
And while both hedge funds and mortgage brokers have important economic roles to play, they are both about to get severely constrained, controlled, more bureaucratic, and probably less profitable.
And honestly, who’s more to blame than themselves?
It is time to revisit one of my favourite perennial topics. NPR ran a great segment of This American Life this weekend about how Not All Regulators Are Created Equal, that describes how the AIG debacle was made possible in part by businesses’ ability to shop around for the most lenient regulator. I found it fascinating, and I hope you’ll enjoy it.