Death Panels for Small Business Owners? Part I

Last week, Senator Richard Shelby (R. Tx) announced that the debate on financial reform would move from committee on to the full Senate. After three failed attempts to get the votes to move the bill forward, the bill could have died in a stalemate, but instead, the Republicans decided to stand down and allow the reform measure to go to the Senate floor. Of course, at this point, no one knows what the final provisions of the bill will be, but we do have Richard Shelby's warning that every small business owner should fear the provisions of the Consumer Financial Protection Act which this bill will create (which does the beg the question of why he allowed it to move forward.)

Apparently, many Americans view financial reform as an opportunity to punish those on Wall Street who squandered bailout money on lavish bonuses and vacations. The piper has now returned to be paid, and Congress is going to extract vengeance on behalf of all taxpayers everywhere (which would be amazingly ironic since many of the Congressmen and women and Senators supporting reform are the same ones who voted for the stimulus package in the first place.)

But is that really the purpose of financial reform, or is it just another excuse to consolidate more wealth into fewer hands?

Take, for instance, my profession, the mortgage broker. At the end of 2006, there were estimated to be over 50,000 independent mortgage brokerage shops in the United States, and the average shop employed approximately 7 people. According to the National Association of Mortgage Brokers, approximately 65% of residential loans in the U.S. were brokered loans. Today, according to a statistic posted on the Think Big Work Small website, mortgage brokers do about 12% of the loans in the United States. The term "mortgage broker" has almost become an obscenity, as the small independent business owners took the blame for every bad thing that happened in the real estate industry over the last five years.

While it is popular to crucify the small broker with stories of unscrupulous loan originators who put their borrowers in terrible loans, few remember that before the real estate market crashed, there were loan originators everywhere. I worked for three and a half years on a street with two other originators. I worked at the top of the street, so borrowers passed my office on their way down to the main intersection. My competitors worked closer to the intersection. So the borrower who left my office was within walking distance of two other licensed choices to receive a mortgage loan. If he did not like any of us, he could go one street over and find several more options. Additionally, Texas licensing law allowed active real estate brokers and insurance agents to obtain a license to sell mortgages. He could further choose among the mortgage departments at the banks and the credit unions, and there were always the on-line companies competing for business. This meant that after he had received his quote and even after the borrower was well into the process, he could continue to shop his loan. When he went to buy his homeowner's insurance, he might find that his agent was offering him a mortgage loan at a lower rate. And, frequently, he would come back just before closing and renegotiate for more favorable terms.

For the small business owner, this was a highly competitive environment. Service and likability were important factors in retaining the loan. So was offering a low cost mortgage with a very competitive rate. Borrowers did not live in a vacuum; they talked to their friends and family members and compared mortgage rates with their neighbors. Borrowers with good credit used their low interest rate as a bragging right.

Fast forward to May of 2010. As regulations have tightened, mortgage loans no longer abound. The one page estimate has been replaced by five pages of forms containing less information. Mortgage originators are being required to complete both state and national exams and receive both state and national licenses at very high costs, with the result that many originators are choosing not to renew their licenses. As the cost of doing business increases, the cost of getting a loan does too. A borrower with a loan approval is probably much less likely to shop his loan now because his appraisal cannot be transferred to a new company and as competition disappears, so do his choices.

In December, the House of Representatives passed HR 4173, sponsored by Barney Frank (D MA). This over 1700-page piece of legislation aims at completely remaking the financial landscape of the US. It includes a new Consumer Financial Protection Agency which will oversee all consumer lending. The bill includes oversight for all types of financial institutions and a long section detailing dissolution of firms. Which firms? In September of 2009, Frank was captured on video speaking about financial reform in front of an audience that included Treasury Secretary Tim Geithner, who is smiling during Frank's remarks. The video associated with these remarks can be viewed by logging onto www.zillow.com and also by going to YouTube. In speaking about public frustration over bailouts, Frank states that he is going to be "putting together a package...of legislation that will substantially diminish that problem. We will be providing a mechanism for putting non-bank financial institutions out of everybody's misery. There will be death panels enacted by this Congress, but they will be for non-bank financial institutions not considered too big to die. I say that because we have this euphemism that we are going to be 'resolving' these institutions. It has not been my experience that when someone says they are going to resolve something, they kill it. And we are talking about dissolution, not resolution."

Considering that approximately 500,000 jobs have been lost in the financial sector and that jobs continue to be lost as regulations become more restrictive and business tightens up, perhaps Congress should be trying to introduce regulation to grow business, not to kill it.