originally written for the Real Estate Mortgage Executive Newsletter (REME), July 2012
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When lawmaking changed from a part-time pursuit for a few rich white men who didn’t really like laws into a full-time career, our government changed with it. This was no unintended consequence, unforeseen by the Founding Fathers. They knew full well this risk existed. That’s why they drafted a Constitution that attempted to guarantee personal liberty by putting limitations on government instead of attempting to protect a long list of explicit freedoms.
Big government is scary. I’m certainly not the first person to say so. In our lifetimes we have seen big governments in Soviet Russia, Cuba, Vietnam, Iraq, and China. We watch in shock as China controls every aspect of the lives of its people. We can’t believe that religious regimes like those in the Middle East enforce laws that turn their women into chattel. We shake our heads, while behind us, our own government is very busy, creating long lists of the things we are allowed to do and the things we are not.
Of course, it’s all for our own good, we are told. The government is only protecting us from the threat of big business.
Forget for a moment that “big” was a virtue not that long ago, during the days of “too big to fail,” and focus instead on the government’s role as self-appointed chief protector of the consumer in a financial transaction. It would take a global economic meltdown to convince the American public that the federal government needed to have a seat at the closing table for every conceivable financial transaction. Of course, that’s pretty much what we saw in 2007. And now, we have the Consumer Financial Protection Bureau.
Technically part of the Federal Reserve System, the CFPB is now the primary rulemaking body for all things that impact American consumers’ financial lives. The Bureau has been tasked with carrying out the letter of the Dodd-Frank Wall Street Reform and Consumer Protection Act as part of the Fed. It is a body that has proclaimed itself independent within the government with the power to make decisions that do not have to be approved by the president or any member of the executive or legislative branches of government. It will write the new rules and then enforce them, and there is little the U.S. financial services industry can do about it. Or is there?
The industry has exactly one hope of influencing this rulemaking body and it doesn’t have anything to do with anyone now working at the CFPB or likely to do so. Our only hope is to win over the hearts and minds of the American public in an effort to expose the CFPB for what it truly is, government growing out of control, a cancer spreading through our country in a mindless quest to gain more control, secure larger budgets and hold onto its power.
It could work. People hate big government. It scares them and rightfully so. People are fed up, and the only thing that has ever stopped tyranny is the application of the combined hearts and minds of a people fed up. And they’re close. A Gallup poll recently (within the last six months or so) found that 64% of people surveyed said big government was the biggest threat to the country, compared to just 26% who said big business is their gravest concern and 8% who picked big labor.
It might only take a spark to get the American public to force Congress to overturn Dodd-Frank and dispel the CFPB forever! The only problem is that the CFPB might actually be doing some good for the American consumer--it’s working day and night to win over their hearts and minds and reminds them on a daily basis why they hate us. They come across as being squarely on the side of the consumer and ready to protect them from the threat of an industry that they see as an evil empire. We could also add that the CFPB has the power to put an industry player out of business with a pen stroke, but why make things more difficult than they have to be?
So what should the industry be doing now? Three things. First, realize that we are at a turning point and that once firmly in place, the CFPB will be as difficult to dislodge as the Fed, HUD, Freddie, Fannie or any other quasi-government institution. The time to act is now. Second, accept the fact that the government is not your friend. Time spent on Capitol Hill will be wasted if you don’t find a way to win over the hearts and minds of the American consumer. Third, this is a race. Either we win over the consumer now or the government does, and there’s only one way to win it.
There is a classic story about the French Revolution in which Marie Antoinette, when informed that an angry crowd of French peasants were rioting just outside the walls for lack of bread, looked down her nose and suggested they simply eat cake instead. Who knows if it really happened, but what a great way to illustrate how completely out of touch these leaders were. Every crisis spawns its own stories. Today, we have the stories about the Wall Street guys laughing in e-mail about the crap they’re selling, the bankers on trial for pushing minorities into subprime loans when they qualified for agency paper, and servicers telling their sub-servicers to lose the paperwork on loan mods to slow down the process. Is it any wonder so many Americans are searching eBay for used guillotines.
So the question is, do we have to quit making a profit on our deals? Of course you don’t have to turn your business into a non-profit in order to win back the customer. People expect you to make a profit. They know you have expenses, especially those consumers who own a business or belong to labor unions. It’s okay to make money in America, as long as it’s an exchange of services. Ponzi schemes, fraud, theft, negotiating in bad faith--these don’t float.
You and I were not engaging in that type of evil during the downturn, but it doesn’t matter. The first thing you have to realize is that if this industry doesn’t win back the consumer, the government will win by default and then rewrite all of the industry rules and turn your company into a non-profit. Count on it. This is a game of perception and the winner will make the rules going forward. Worse, this is a game of consumer perception, which is much different than the old game of winning over a few politicians and SEC boys. That game was easy. This one isn’t.
If we want to win this game, we’re going to have to convince the American home loan borrower that we’re in it to serve them, which means we’re going to have to show that they are better off after they get their new loan than they were before they signed on our dotted lines.
This is not a new concept. The industry has been pushing hard against this for some time. While proving that the borrower will be in a better financial condition after the loan may be challenging, CFPB seems to feel that making sure the borrower can repay the loan is a step in the right direction. Even now, the bureau is working on its definition of the “qualified mortgage,” which is expected to include elements designed to assess the borrower’s actual ability to repay the loan.
But the industry already has tools available that can tell quite easily whether a borrower will have more money left at the end of the pay period after the new loan is written. One, according to Garth Graham, founder of Financial Literacy Solutions, is the good old household budget. You know, the one that uses numbers like net pay and actual living expenses. Much different from the gross pay and basic ratios used in most loan underwriting.
Another tool is provided by Greenbar Mortgage. It’s basically a spreadsheet program that LOs can use to enter consumer information and then know what the borrower’s resulting financial condition will be under a number of loan scenarios.
Regardless of how the industry does it, step one is to begin acting like the job is helping people reach financial goals and not just selling financial instruments. The former has the potential to convince consumers that we provide a service more valuable to them than what big government provides. The latter will put us right back into trouble.
Once we accept the fact that our industry must do more than sell financial instruments to be successful, we need to get that word out. But to whom? Some may rush to Capitol Hill in an attempt to convince the government that we’re the good guys now and they can quit working on the hundreds of new rules that will be the legacy of Dodd-Frank and go back to doing whatever it was before the economy hit the skids. That’s a waste of time.
The federal government is like a snowball rolling down a winter hill. It grows bigger, never smaller. Pulling the CFPB back now would be like trying to catch a bullet and stuff it back down the barrel of a sniper’s rifle. It never, ever happens. In a few years, some political action committee may grow large enough in the face of the many future unintended consequences of Dodd-Frank to get the law repealed. But all of your businesses will be dead by then.
No, the government is not the target. The people you need to impress and the only people who will ever be in a position to help our industry are the consumers. You must respond to all requests from the CFPB and other regulators, but expect them to twist anything you tell them into the message most likely to preserve the importance of their mandate and, by extension, their own importance. It is the way of government agencies.
Finally, once we realize that our business really is all about the consumer, we need to realize that the federal government has already arrived at this conclusion. The consumer was the first target public of the CFPB. To this day, their websites are all geared at harvesting information from consumers, with a clear preference for negative information. Whether we like it or not, we’re in a race, the consumer is the prize, and everything is at stake.
Winning over the consumer will require the industry to provide a real service to them (not just sell into the naturally greedy nature like a casino), teach them how to be financially literate, learn to speak the borrower’s language, and then relentlessly tell them success stories about other borrowers just like them and encourage them to tell their own success stories. In short, the industry had better figure out PR and social media so satisfied customers can share their experiences.
It’s the kind of work that can take years, and one greedy Wall Street firm can tear it all down again. The industry may not have the patience for it, but the government does. Bureaucrats have been known to work quietly behind the scenes for years to solidify their power bases. Believe me, they’re in it for the long haul.
After a financial crash the likes of the one Americans have lived through over the past half decade, it’s probably not realistic to believe that our industry can make consumers like us. But it should be possible to get them to like us more than the government. If we can do that, we’ll shortly be back in control of Americans’ financial lives.
If we don’t, our industry will become a puppet of the U.S. government, making loans to anyone the government decides should get one and acting more like postal workers making their deliveries than independent businesspeople delivering products and services. If that doesn’t scare you, practice repeating this: “Neither snow nor rain nor heat nor gloom of night stays these couriers from the swift completion of their appointed rounds.”
Let’s hope it doesn’t come to that, but remember that hoping won’t be enough to stop it.