Regulation, liability, and rising costs

by 17 Mar 2016

The Flint water crisis that has been in the news over the last several months has impacted the mortgage industry significantly. Obviously, loans cannot be issued on homes where water is not accessible. Moreover, the lead in the water has brought about more potential legislation. On the March 14 episode of my Lykken on Lending Internet radio show, regular contributor Alice Alvey discussed the possibility of a bill that would add another paper to the stack for lenders--this one regarding lead in the water.

I understand the difficulty regulators must face on a day-to-day basis, trying to decide what is so important that it needs to be enforced through law and what can be left up to the agreements between buyers and sellers. However, it often seems like regulators are unaware of the costs they place on the very consumers they're trying to protect. It's almost as if regulators feel that they're only taxing the industry through regulation...and that consumers get nothing but benefits.

As we all know, this kind of thinking cannot be further from the truth. As economists like to say, "there is no free lunch." When the industry becomes regulated, costs must increase to compensate for the greater liability. If we want to stay in business, those costs then get passed on to the consumers. I think that most people understand this--just look at how medical malpractice insurance raises the costs of healthcare. It's no different in the mortgage industry. If we want to protect consumers in any given situation, I'm all for it. But, let's make no illusions about the costs that are being added to their account--as well as to the industry.


Is TILA-RESPA a good or bad thing long term?