Books We Trust: The Seven Stages of Money Maturity

George Kinder, father of the Life Planning movement and founder of the Kinder Institute of Life Planning, talks to us about the first of his books on the integration of financial planning and the human condition, The Seven Stages of Money Maturity, in the latest installment of the Books We Trust author interview series.

Life Planning

Trusted Advisor Associates: George, I don’t know of any other book that reaches so far across the right brain / left brain divide.  Or is it the money / spirituality divide?  In any case, you manage to integrate asset category management with the Buddhist Bodhicaryavatara.

What is it that you’ve done here? What is this thing called Life Planning?

George Kinder:  We have gotten stuck thinking of money as about counting, about numbers, something abstract done by banks and accountants.  The truth is, money is a much larger topic—it involves our whole human nature. I talk about the conversation that needs to take place before a financial plan can be done.  That conversation is all about the human being, so we can go into emotional and creative territories.  It requires a different way of listening.

Most financial planners don’t think this way.  They were brought up on old sales approaches.  Life insurance was the first product; it got encrusted with sales techniques.  Then we got to stocks, which have always represented a commodity to people. So we’ve never had a consciousness that money has a purpose connecting it to our passions and our deeper levels of meaning.

A group of us around the globe said, this is not the way it should be, and we set about to change it. Is there a client relationship dividend to re-thinking this approach?  There sure is, and it’s huge.

TAA: Lest I give readers the wrong idea, this book and your work are part of mainstream, hardcore capitalism.  You are highly regarded among financial planners and wealth managers, people to whom other people entrust the management of their money.  This is not fluff stuff, and your clients are as sober and conservative as any.

George: Let’s touch on your “mainstream hardcore capitalism” language.  That’s an important message for my and your audiences alike. We have a secular financial system that has basically failed.  It’s in collapse. The trust level for financial advice is so low these days partly because you have to question the sustainability of our very system.

A Dow Jones survey from a few years ago (Dow Jones Wealth Management, After the Crunch) said 75% of consumers who have a financial advisor would never recommend that advisor to a colleague or friend. How horrible is that!

The trust issue is threatening what we think of as hardcore capitalism.  We believe in supply/demand and efficient markets, but the proper reverence for a vital system isn’t there, and without that quality of reverence the whole system is threatened. You can’t have a trust relationship built around nothing but avarice and sales.

TAA: Who are your clients? Who needs and hears your message?

George: We at the Kinder Institute work with three different markets.  The Seven Stages book was written for the consumer.  That’s one market, which I’ll expand on in my new book called Life Planning, co-authored with Mary Rowland.

The second client group is independent financial advisors, usually CFPs or the various global equivalents.  We work with advisors in 23 different countries.

The third group is corporate clients; we’re moving into markets in North America and Europe, mainly the UK.

Companies are in danger because their products are commoditized and sales-driven, and consumers have had it with the old approaches.  Consumers need this more human approach because they’re dysfunctional when it comes to money, and because they have no one to talk to about it.  And advisors need it because their model also is being challenged; they’re all scrambling to figure out what a client-service model looks like.

There are enormous opportunities for all concerned.

Integrating Art and Finance

TAA:  How is it you came to write such a book?  You were an artist who became an accountant—but you kept both sides of your personality. That’s unusual.

George: I was an accountant because I had to be, I had to make a living.  Following your bliss didn’t work for me—I tried it, but I couldn’t make money from my paintings or my poetry.  But I developed a strong business sense from the accounting, and that became the basis for my business now.

I was an over-achiever: despite the artist in me, I had 800s on my math boards, but lousy verbal skills.  I was competitive and cocky so I majored in English–I figured I already knew how to do Math.

TAA. You talk about people’s profound relationship to money.  People would sooner talk about their sex lives than their money lives, and money is the source of profound psychological meaning, or dissatisfaction.

Your narrative of progression to Money Maturity parallels that described in Buddhism for personal growth. What’s the connection with money?

George:  Human growth has to mirror the growth of our relationship with money, because money enables so much of our lives.  I like to say there are far more money apps for human beings than there are computer apps in the app store, because money facilitates everything in life.  People have dysfunctional relationships with money and they have trouble getting advice about it.

Buddhism? I taught meditation for 25 years, and led week-long silent meditation retreats in each of those years; I just came out with a book on meditation—a secular book, not a religious one.  When we train financial advisors to listen really well to their clients, we start those practices with “inner listening,” which is basically a meditative practice.

If you’re not aware of what’s going on inside you, you can’t separate your own thoughts and feelings from those in your clients.  We’re highly cerebral in our normal lives, and when talking with clients, we need to be much more connected with our emotions, and with theirs.

Financial Planning Today

TAA. Your earliest version of your seminar was called “12% in 12 Years,” and it was about how you could achieve financial independence.  That was then. Now, the Dow sits where it was a decade ago, and bonds are yielding low single-digit returns. Very low.

It’s got to be harder to achieve financial nirvana these days; how do you advise people now?

George: When I was giving the 12-and-12 it was an exhortation to consumers to save 12%, not to earn 12%.  So you compound as best you can, and you simplify—both while you’re earning, and when you retire.  You ought to be able to have modest financial independence.  That’s still true, but obviously when you look at the yields of the last decade, it’s a much harder task to accomplish.

One of the values of life planning is it gets away from the numbers and gets down to what’s really important.  What’s most important is actually much easier to achieve than when it’s all about money.

TAA: Most financial advisors just jump into discussions of required spend levels, rates of return, financial risk profiles, and so forth.  They forget the entire front end—why is it that we’re doing this stuff in the first place?

I sometimes think that the financial planning industry is the most product-driven business I know: they can’t even graduate from features to benefits, much less to goals.

George: In Life Planning we look at goals deeply and seriously. What people care about most is their family. Four other things come close to it, but they’re mainly concerned with family, spouse, and relationships.

The next most common response has to do with values: not living their values the way they’d like.  Maybe their job threatens their integrity; (sometimes it’s explicitly religious or spiritual, though that’s true more in the US than in Europe).

The third most common goal is a wild creativity; the fourth is community and the fifth the environment or sense of place–typically people talk about a move to the city or the country.

And all these things are doable!   This puts the advisor in a much stronger role, focusing on what the persons really care about, rather than trying to force money itself to do all the heavy lifting. We help them live with passionate purpose.

TAA. Financial planners and wealth managers come in many forms these days.  What roles do you see being played by the Financial Planning Association, by the National Association of Personal Financial Advisors (NAPFA),  by your own Kinder Institute, and by similar associations outside the US? What’s been the evolution of brokers and independents?  Does the fiduciary movement have legs?

George: The fiduciary movement definitely does have legs.  For the first time in a long time, this movement toward client centricity is happening more outside the US than inside.  We’ve been ahead in the past because of things like NAPFA, life planning, the emphasis on the fiduciary.  These movements grew up here because of the entrepreneurial spirit of America. But it’s been almost 30 years since I joined NAPFA, and there’s still a lot to be done.

We’ve gone far in America, but we’re not the leaders any more. The leadership is now coming from governments in places like India, the Netherlands, Australia and the UK.  The regulators in those places have said “enough already.”

The industry in those countries recognized they needed to shift away from the heavy sales and commission system, because of lower and lower levels of trust. Those countries are now leading with ways that make Dodd Frank look like just a piece of paper.

Dodd Frank takes the consumer back to the Investment Advisers Act of 1940. We should have been there all along. Dodd-Frank is sort of Back to the Future.

The cozy relationship that grew up here between industry and government meant brokers could insist to the SEC, “No, we’re not advisors, we’re salespeople not subject to the Act,” and then turn around and tell the customers the exact opposite.  Dodd Frank basically says (as yet unconvincingly) we’re going to enforce the 1940 Act.  Meanwhile, other countries are going much further.

I’m not optimistic short term here in the US, though I continue to be an optimist about the long run.  Eventually the consumer wins.  The model we have in America is not designed for the consumer like it is in other countries. But I have faith we’ll get back there again.

The Stages of Maturity

TAA: In the Seven Stages you write about how the tension between the first two stages is particularly poignant—the crunch that happens when Innocence (Stage 1) comes up against Pain (Stage 2).  How can people recognize that tension?

George: Innocence and Pain are the first two of the Seven Stages, and there’s a bit of psychological approach here.  It’s like being in childhood.  Innocence is our beliefs about money; every single belief you can imagine is partial and incomplete.

The more insidious innocent beliefs are things like,  “Spend today because you never know about tomorrow,” or, “The only way to get money is to borrow it,” or, “Be ever on guard against those who’d steal it from you.”  Investment schemes will often play against that last one, as in, “Do you know how the rich really get their money?” I call these beliefs Innocence because they’re all incomplete. We pick these deep beliefs up early in life, from our parents.

Then comes the Pain, when your beliefs turn out to be wrong. Pain is primarily emotional.  You see your neighbors doing well but you don’t invest because your grandparents were from the depression. Meanwhile, your neighbors get yachts; so your particular brand of pain is envy.

Then, say in October of 1987 you go all in, and you do it on margin. More pain.  You get anger, sadness, despair, frustration, all of those things.  And people get in a loop, going back and forth between Innocence and Pain.

TAA: What’s the biggest mistake made by financial planners?  And by their clients, in their relationship to their financial planners?

George:  The biggest mistake made by financial planners is that even if they’re honest, have integrity, and care about their clients–they don’t know the clients well enough. They don’t know enough to know how much to save, how much to put into retirement, and how to help the client not worry so much and to live their dreams.

It’s a tragedy. They don’t know how to develop the biggest opportunity they have–the opportunity to talk meaningfully to their clients. If they could do that, they could say, “Hey, you can have that, let’s make sure you move toward your dreams.”  Instead, it’s all about shovels—not about holes.

And it’s even more of a tragedy for the consumer; they’re still thinking that it’s all about the money. They think their job is to find an advisor who can beat the market.

What they need is someone they can really trust; someone who has the capacity to help them articulate what they’re really inspired about in life, so that they can use money as a means to that end.

TAA: George, thank you very much for taking the time to speak with us. Your ability to link our material and our spiritual lives is unparalleled, and I hope we help sell you a few more books—they help people.

George: My pleasure.

Books We Trust: The Seven Stages of Money Maturity by George Kinder is the fifth installment in the Books We Trust author interview series.

Books We Trust interviews include:

A Case Study in Low Trust: NAPFA

Industry associations occupy a rare and privileged status in our society. Associations serve two masters: their industry membership, and the consumers those industries serve. 

Largely unregulated themselves, if they do a good job they can avoid regulation for their industry.  If they do a bad job, they can accelerate abuses–and end up getting regulated.  You’d think most associations would want to avoid regulation.  And so, they trumpet their service to the consumer.

The question is, what do their actions say? 

All too often, it’s food for cynicism.   The National Association of Personal Financial Advisors  has lately exhibited such cynical behavior. 

Last week NAPFA’S chairwoman Diahann Lassus represented the Financial Planning Coalition in front of the House Committee on Financial Services.  She testified strongly in favor of a fiduciary standard for all individual financial planners.  So far, so good.

Then yesterday NAPFA issued a press release sounding a different tone, commenting on proposed custody-related SEC regulations put in place partly to curb Madoff-like abuses.  One clause in particular proposes spot-audits of RIAs (registered investment advisers) who deduct their fees directly from clients’ accounts.  

NAPFA Says It’s Pro-consumer, but it’s Hard to See How.

To read NAPFA’s press release headline, you’d think they were the Consumer’s Friend:

NAPFA Believes SEC Mission for Custody Rule Changes is Commendable, but views Commission’s Proposed Changes as Not a Proper ‘Means to an End’

OK. The SEC would like to audit certain advisers.  NAPFA thinks that’s a bad idea.

Why?  Get this.  Because, NAPFA says, audits:

1.    won’t protect consumers
2.    would cost more than they’re worth
3.    will cost consumers additional expense and inefficiency.

Are you kidding me?  In this post-Madoff  environment you’re telling us that spot-auditing some RIAs won’t help consumers?  Tell it to Madoff whistle-blower Markopolis, who clearly disagrees. Cost more than it’s worth?  I think a few Ponzi schemes prevented or uncovered would easily cover costs.

NAPFA’s better idea?  Leave it to NAPFA.

The industry, including NAPFA, suggests that instead of the SEC, we rely on a professional oversight board made up of–the industry.

A little problem with that.  There are NAPFA members out there today who have been convicted in court of professional malpractice–with no NAPFA action taken.  There are RIAs out there who violate ethics guidelines by lending to their clients.  In fact, just recently a former NAPFA president was sued by the SEC for accepting $1.2M in kickbacks. 

The response of NAPFA chairwoman Diahann Lassus to that last one? “’The reality is that this situation, in comparison to the Madoff scheme, and many other things that have happened out there, is very small,’ Lassus said.”  Well that’s a relief.  And Nixon wasn’t a crook.

Not a good track record.  So just what does NAPFA suggest?  Hold on to your hats.

  1. Encourage consumers to thoroughly read and review all statements to identify all questionable account activity
  2. Offer incentives for whistleblowers who bring to light dishonest advisor activity
  3. Provide means for consumers to report fraudulent activity anonymously

In other words: the way to protect consumers is to encourage the consumers to read more fine print, find financial Dog the Bounty-Hunters, and offer an anonymous tip line.

Enforce ethical and fiduciary standards?  Do audits themselves?  Nah, that’d cost the planners too much.

Suppose this were legislation about child abuse at daycare facilities, and the government proposed spot-audits to prevent it.  How would parents react to a daycare association recommendation that, instead of audits, parents read the fine print of their daycare contracts, and phone any concerns into a tip-line?

If NAPFA won’t even discipline its own court-convicted members–arrogantly flunking a rather basic test of ethical self-enforcement–what right do they have to claim that they’re better qualified to protect consumers than the SEC?  I cannot see it.

There are many very fine, ethical financial planners.  There are of course a few bad apples as well (Lassus herself says she hears "nightmare" stories, and "sadly, these stories are not unusual").  But when it comes to NAPFA, you can’t help but notice the rot in the barrel itself.

Can Financial Planning Avoid More Regulation?

I’m all in favor of industry associations behaving responsibly, realizing that the long-term health of the industry depends on feeding the long-term and short-term health of the consumer, rather than serving short-term member greed.  That means self-enforcement, and I would love to see it happen. 

But at some point, an industry forfeits its right to be trusted anymore on its own.  The financial planning industry–as represented by its associations–has about crossed that line.  It’s hard to take seriously the idea that they have earned the right to self-enforce.  Bring on the SEC.

Have We Learned from the Financial Crisis?

Most people would agree that something went awry with large parts of the global financial system.  Most would also agree with some broad-brush characterizations of just what went wrong.  A bit too much greed, self-orientation, short-termism.  A bit too little customer focus, ethics, regulation.

Hopefully some of the overheated sectors learned something, or were at least chastened.  Then again: don’t hold your breath.  Here are some anecdotal samplings from the home lending and the financial advisory segments.

Ethical Improvements in the Home Appraisal Business

In an April story the Center for Public Integrity reports:

In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.

How much pressure?  All too often, if appraisers didn’t come up with numbers that fit what lenders wanted, they found themselves blacklisted.  How overtly?

Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it.

Actions taken?  NY Attorney General Cuomo did some vigorous investigation; one results was a Freddie Mac new “Home Valuation Code of Conduct” to go into effect May 1. 

Who opposed it?  Why, the National Association of Mortgage Brokers, of course. 

The same people who, when JPMorgan Chase’s Jamie Dimon said his failure to terminate the company’s mortgage broker business was the “biggest mistake of his career” responded by saying Dimon’s remarks “clearly reflected his poor understanding of the mortgage industry.” 

Uh, NAMB vs. Jamie Dimon? Tthat’s one you lose on credibility alone, NAMB.

NAMB’s excuse for its role in the mortgage debacles?  Others did it too.  So much for ethical learnings.

Ethical Improvements in the Financial Planning Business

There are principled, ethical, customer-focused financial planners; I’ve met many, and know a few well.  At the same time, I think few would argue that the sector is a hotbed of high ethical behavior. reports:

According to a recent study by Prince & Associates…15 percent of the wealthy left their financial advisors in 20087 and 70 percent took at least some of their assets out of the advisor’s hands.

Why?  False advertising, says Cerulli Associates in the same article: what an advisor says he offers and what he really does aren’t in sync.   Bill Bachrach, a respected (by me as well as by the industry) consultant in this space says:   

“It’s been way too easy for former stockbrokers to gather assets and dump them somewhere and call themselves wealth managers…If asset management is all you do and you can’t point to some other way you make money, you have nowhere to hide when performance goes south.”

What’s the industry response?  Here’s Ken Fisher, a mega-marketer of financial services, responding to two former sets of clients who are suing him for failing in his fiduciary responsibilities:

The lawyers who are representing the clients in both matters are “similarly incompetent."  Both cases “will run into a concrete wall.  The person who will be sorry in the end is the client, who will wind up spending money on lawyers and getting nothing.”  [Fisher said he wanted to teach one lawyer] “a lesson he won’t forget.” 

Now there’s a client-focused kind of guy.  The kind you’d want out front promoting responsible behavior on behalf of your industry. Customer satisfaction?  Let them sue for it, then endear them to you through public insults and threats.  Great strategy, Kenny boy. 

Then there’s the case of Jeffrey Forrest,  fired by his broker dealer, sued by the SEC to keep him from working as an investment advisor.  He continues to run an RIA firm in California, and is licensed to sell insurance there.  In March, he and Associated Securities, for whom he was a top producer, were found guilty by a FINRA panel. 

Associated Securities—surprise surprise—is appealing.  Another great customer lesson: never admit you’re wrong.  Especially when you are.  Goebbels had that one down pat. 

Last but not least.  Finally, after all the Madoff hoopla—some concrete action:

SEC commissioners on May 14 voted 5 to 0 in favor of a proposal that would require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to undergo surprise audits. The move is part of a wider effort by the regulator to crack down on advisers with direct custody over client holdings.

Exactly.  Bernie made off with all the money by skulking in the gray spaces between regulators: for example, he custodied his own investments and no one checked on them. 

So, surprise audits?  You betcha, right on, about time. The industry should applaud this effort to help improve its reputation.  Thank you SEC!

But, wait.  The proposal is opposed by the FPA, NAPFA  and the IAA

Why the resistance?  Here’s a taste:

A surprise audit would likely cost his firm about $3,000 a year, said Ben Baldwin…That fee would likely be passed on to clients, he said.

“There should be an uproar because it’s going to hurt a lot of consumers,” Mr. Baldwin said.

Others contend that the proposal would force smaller firms to stop deducting fees from their clients’ accounts — a move that would require them to wait for clients to reimburse them for their services.

A National Board member of NAPFA elaborates further:

“When you deduct your fee from the client’s account, you have no cash-flow problems.”

And that, I guess, would be why NAPFA opposes the SEC’s proposal.  Because it would force advisors to send invoices instead of directly deducting fees.  Thus slowing cash flow.

More Madoffs?  An occasional small price to pay if it helps protect advisors’ cash flow.

There are simply too many players like the ones quoted in this post who still see regulation as a hateful intrusion on their god-given right to extract cash from customers’ wallets unless expressly forbidden by federal law.

And there are simply not enough players who see regulation as the regrettable consequence of the presence of the former group of players.  They do business based on the simple idea that you should treat people, and most certainly customers, decently.  It can’t be easy for you to watch the first group so demean your industry’s reputation.

Many from that first group must have read a blogpost of mine from two and a half years ago: How to Get Your Industry Regulated in 6 Easy Lessons.  They’re executing the six lessons marvelously, and I have no doubt they’ll succeed beyond their wildest dreams very soon now.

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, 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.