Shamrock Financial Corporation

Wednesday, July 28, 2010

We all learn as kids that every action we take results in SOMETHING. By the time we’re adults we’re actually able to forecast that something most of the time. This kind of defines the difference between childhood and adulthood on many levels.

Unfortunately, bureaucrats and politicians often stay stuck in the childhood understanding of actions while those in private enterprise are forced to operate in adulthood.

History is littered with positively stunning examples of laws and regulations enacted by politicians to seek or predict one action only to see a completely different set of results. Some are reversible with little or no damage. Others lay in wait, hatching a dire, unintended set of ramifications that, by the time they are noticed, have done untold harm.

Back in 1992, Congress passed a new law to heavily tax yachts that sold for more than $100K. The result? People started buying these yachts outside the US, crippling the luxury boat builders market here in my home state of Rhode Island. Congress repealed the tax a year later but the industry has never fully recovered.

More recently, many states have made it illegal to text while operating a motor vehicle. Simple enough, right? Ah, no. Several states took it one step further and ruled it illegal to text even at a red light or parked on the side of the road. Unintended consequence? Since the fine is the same to text while stopped or while driving more drivers will, quite naturally, elect not pull over or wait for a red light before texting because there is no incentive in the way of avoiding a fine.

The Law of Unintended Consequences has been alive and well in the mortgage and real estate industry for years and you don’t need me to itemize the examples here. However, there is a startling regulation, born and raised in Congress, that imperils future mortgage applicants and I find it remarkable how few people know about it.

In July of 2008, the SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act of 2008) established the National Mortgage Licensing System (NMLS) in order to license and regulate individual mortgage originators operating in the housing industry. The criteria used for licensing are educational, financial and criminal. In other words, you have to pass tests, pay your bills on time and be free of a criminal record. Most consumers would probably agree that these standards represent a move in the right direction; so the bureaucrats and politicians got it right? Ah, no. Not even close.

Amazingly, the new NMLS mandate exempted any and all mortgage originators working for a federal savings bank (huge contributors to political campaigns) or credit union. Can you imagine if this were the case with, say, doctors? Some needed a medical license, some didn’t depends on if they work at a hospital or a private clinic. Now, I’m not trying to equate mortgage origination with surgery (well, wait a minute, seen FHA’s new guidelines lately?) but all financial planners nationally have to be licensed no matter who they work for. Why not mortgage originators?

So where’s the Law of Unintended Consequences you ask? Some have likely already figured it out. It’s not all that well hidden.

If you’re a mortgage originator who couldn’t pass the test, or who has gone bankrupt, or who has a criminal record, guess where you end up originating mortgages? That’s right. The Law of Unintended Consequences brought to you, ironically, by the SAFE ACT.

Dean Harrington has been active in the consumer finance industry since 1984 and is the current Chief Executive Officer of Shamrock Financial. Dean can be reached at dean.harrington@shamrockfinancial.com .