Pros and Cons of a Nationwide Mortgage Guild

Treasury Secretary Henry Paulson, Jr. has announced plans to establish stringent national licensing standards for mortgage brokers. While many embrace the idea, others say that it will be a disservice to both brokers and American consumers alike. Some say it will make no difference at all.

Licensing does two basic things to any industry: It makes it harder to get in, and more expensive to stay in. The costs of licensing-including payments for bonds, insurance to cover lawsuits if regulations are breached, and professional licensing fees and memberships-are passed along to the consumer. The lack of competition and diversity within the profession is also passed along, in terms of fewer available professionals, and an imbalance in supply and demand that favors charging higher fees to clients.

If there's only one doctor in the village, it may be good for the physician's practice, but it doesn't serve the needs of the community. Of course, adding a couple of quacks can have even worse consequences, so the debate about licensing and regulation is a tough one to put to rest.

Increased borrower protection

Consumer advocates have long complained that mortgage brokers need to be licensed and regulated, like real estate brokers or stockbrokers. Today, you can enlist the help of a professional mortgage broker who happens to have a criminal background, and never even know it. Or you could hire one who was banned in one state and then hopped across the state line to hang a shingle in your neck of the woods. The kind of guild proposed by Paulson would create a national network, industry standards, and agencies to monitor and audit mortgage brokers. Evaluating, licensing, and tracking mortgage brokers would be required, and that should offer increased protection for borrowers.

No grandfathers allowed

Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island have already formed their own cooperative system for sharing information on brokers, and they have laws that impose serious penalties for those who don't comply with their rules and regulations. But some think that the real problem is that when the government initiates licensing, it often makes it easier for those who are already in the business to stay. In other words, seasoned mortgage brokers may be eligible for a grandfather clause that lets them sidestep some of the more difficult obstacles that will now confront the new younger generation of brokers. After all, it's those already in the business who are responsible for its problems.

Unless these regulations weed out those who are bad, while encouraging and supporting those who are good, the problem won't get solved. Bad brokers are like bad loans: Bundling them together without first separating the subprimes from the primes won't do much to help the industry. We already have plenty of experience with that kind of algebra, and know that it leads to a negative balance sheet for consumers, professionals, and the nation as a whole.