By Green, Tim | Mortgage Banking, May 2005 | Go to article overview


Green, Tim, Mortgage Banking

IF CAPITALISM TRULY ENCOURAGES FREE markets, open competition and the pursuit of profit, then why has the industry found itself tangled in an ever-widening web of government regulation? Did a few industry participants, in the immortal words of Wall Street movie character Gordon Gecko, overly embrace the concept that "Greed is good"? Or more to the point, do lawmakers and regulators perceive that to be the case? Worse yet-does the industry now find itself in a situation where a segment of its own customers feels exploited? Has our industry not done enough to protect an invaluable asset-the public's trust? Or have others overreacted to isolated incidents and anecdotes at the expense of overall well-intentioned financial services organizations?

Prior to the Great Depression, the U.S. economy had relatively limited government intervention and flourished largely unchecked. However, that single seminal event influenced the role of government and created an environment in which regulation became an acceptable means for achieving economic and social objectives.

This evolved even further after President John F. Kennedy outlined his thoughts on the Consumer Bill of Rights and launched a wave of consumer-protection legislation. For the financial services industry this has led to what today appears as a puzzling mess of federal, state and local laws, rules and regulations designed to "protect" the consumer.

Over the past decade, challenges have emerged as the industry quickly evolved with multi-jurisdictional lenders aggressively pursuing market share. Poorly conceived incentive-based compensation structures and the relative ease with which participants could move in and out of the market created an opportunity for public distrust to develop. Each isolated transgression that became public, in its own way, helped lay the foundation for things to come-progressively more regulation by an increasing number of governmental authorities.

For the financial services industry overall, the complexity of financial transactions and political sensitivities to problems experienced by constituents produced substantial regulation designed to supplement the operation of free markets and to support customer protection. Would regulation have been less onerous if the industry had done a better of job of protecting its reputation for stability, quality of service and trust?

Unquestionably, the industry has made positive inroads toward educating the public, isolating bad actors and improving its image. However, steps such as pursuing a national predatory lending standard or satisfying minimal compliance requirements do not of themselves constitute a long-term strategy for addressing the broader image issues facing the industry. Smart organizations that quickly recognize this will find themselves with a golden opportunity to increase shareholder value by earning the public's trust through responsible leadership in the marketplace.

Why being right matters

The public focus on the mortgage industry's behavior affects all participants. Instead of being congratulated for providing broader access to credit with new mortgage products and enhancing homeownership opportunities, the industry increasingly finds itself having to react defensively. This defensive posture forces even those firms that consistently make a sincere effort toward serving the best interests of the customer to expend resources otherwise earmarked for more productive purposes. To a certain degree, some consumers are beginning to question their confidence in what historically has been perceived as a trustworthy industry.

And who can blame them when articles and politicians constantly question the tactics of some industry participants, especially those serving the nonprime mortgage market? Clearly, any instances of consumer dissatisfaction must be well-managed throughout all levels of the mortgage industry before they lead to a more difficult situation for all participants. …

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