There is a lot of talk in Washington these days about financial regulation. The House Financial Services Committee wants to pass new regulations that would, theoretically, protect consumers better than the current regulations. Indeed, they have just scheduled eleven hearings on various aspects of reform that would involve the creation of a new agency, the Consumer Financial Protection Agency.
This new agency would take over some of the responsibilities currently held by one of the other half-dozen agencies involved in regulating lenders. The problem is that Congress passes legislation and/or the Federal Reserve makes rules, but they never make any provision for enforcement (or they have too few regulators without sufficient budgets to have any impact).
With no enforcement, what happens is that the honest lenders follow the new rules and the bad guys, the ones who really NEED regulating, find a way to do business as usual. They only create the appearance of following the rules. Consumers, who do not know what to expect, simply do not know what the rules are and do not know when one has been ignored to their disadvantage.
Let me give you an example of how something that the California Legislature thought would help but that had tragically disasterous consequences. Prior to the year 2000, mortgage banking companies – not brokers and not banks, but sort of half-way in between – originated loans. Previously they had been supervised or regulated by the Department of Real Estate, the DRE, that required loan officers to be licensed.
The mortgage bankers successfully got the legislature to take them out from under the DRE and put them under the Department of Corporations. Someone forgot to check if that Department had any investigators who could supervise their activities. Bad mistake. The first thing the mortgage bankers did was to fire their highly priced licensees. Then they hired twenty-somethings off the street for less money, ran them through a short training program in how to fool their customers, and put them to work answering the phone.
This lack of regulation made California an ideal place to start a subprime mortgage lending company. Indeed, California became “ground zero” for the subprime industry; a majority of the industry was headquartered here. We know how much trouble that caused. It was one of the principal reasons why the housing industry crashed and darn near took the rest of the economy with it. And it started out with so-called regulatory reform.
Congress has previously displayed its ignorance about the mortgage industry in so many ways that it is simply appalling. I think that the average man on thee street feels the need for more protection, but it seems as if our legislators are more interested in getting re-elected than in providing substantive help that really would help consumers. What seems to happen with every new law is more burden for the good guys. The bad guys – the ones the laws are aimed at – seem to find new ways around whatever laws are passed. This is not progress.
Add to that the natural problems of trying to do something substantive in a political world. For example, ever since 2001 all the signs of potential risks to the system were on the horizon. Congress was warned about the dangers to the financial system but did little more than change the name of the inept and ineffective Office of Housing Enterprise Oversight to the Federal Housing Finance Agency. Big deal! The name wasn’t the problem, it was how the agency was run. They did nothing but sit on the sidelines and watch the system collapse.
Watch this YouTube clip and see for yourself.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.
Randy Johnson Randy is a Credit.com contributor and seasoned mortgage expert. He writes about home buying, mortgage laws and real estate finance issues. He has financed over $1 billion in properties, is the author of How to Save Thousands of Dollars on your Home Mortgage and he is a feature columnist for Savvy Borrower.
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