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ECONOMIC ANALYSIS: State's new mortgage law is regulation gone awry

July 28, 2008

Indiana is known as a state possessed of thoughtful and minimalist regulatory constraint of business. That's why a littleknown law enacted in 2007, which further regulates mortgage brokers, should come as a shock to many Hoosiers.

As of July 1, when the law became effective, roughly 600 Indiana mortgage brokers (perhaps 1/10th of 1 percent of all small businesses in the state) were out of compliance. When a one-month extension granted by Secretary of State Todd Rokita expires next month, the ill-conceived regulatory changes likely will force many brokers out of business.

Indiana now requires additional testing and 36 months of supervised experience before an independent mortgage broker can open up shop. This is a marked change from earlier rules, which already included stiff regulation. It is a bad law, and here's why.

While mortgage brokerages are an industry ripe for fraud, it is the larger mortgage brokerages that have caused the biggest problems (think Countrywide). Even with this concern, Indiana's bad experiences with subprime loans are among the lowest in the country. Our new mortgage broker law is now the most restrictive.

Economists have long known that licensing of occupations drives up costs. It is a clear barrier to entry for new workers. I am sure well-established mortgage brokers were among the leading proponents of this new legislation.

Much government licensing is undertaken with an argument of improved quality. That's bunk, too. In a famous national study in the 1970s, two economists examined government-sponsored occupational licensing across most major occupations and all states. They found (as have several since) that the more restrictive the license, the lower the quality. So, Massachusetts, with highly regulated electrician licenses, has the highest rate of accidental electrocutions. West Virginia, with its absurd restrictions on dental hygienists, suffers the nation's highest rate (of lost teeth).

Government-enacted occupational licenses are legislatively sponsored efforts to restrict competition. By the way, there's nothing wrong with having private organizations license or approve their services-that's been happening pretty effectively these past 2,500 years. Government licensing simply crowds out the private sector's efforts. That is why we have 50 CPA tests, and only one chartered financial analyst test.

Sadly, too, the new restrictions will have no effect on fraud. That was illegal in the first place, and there's no evidence that small or new brokers were more likely to break the law.

This legislation may have cost Indiana 600 small businesses and perhaps 2,500 jobs. Consumers will face higher prices and less competition when trying to secure a home loan and government is becoming more costly. All legislation has unintended consequences. It's time to reconsider this one.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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