SEP 26, 2013

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Compliance Matters

Jobs Act Creates Super, Secret IPOs

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A mortgage firm’s initial public offering can be filed with the Securities and Exchange Commission in secret.

That’s scary, I know, but true.

Standing between us and the privilege to know which firms in the mortgage business have filed for an initial public offering is a provision of the Jobs Act passed last spring that permits firms valued under a $1 billion to file their IPO in a confidential manner. Most mortgage technology vendors fall well beneath that threshold. According to investment and research firm Renaissance Capital, about 66% of the 132 firms that completed initial public offerings so far in 2013 chose private filings.

That means it’s not possible to know the firms that filed, until the curtain is pulled back 21 days before the deal is slated to come to market. At that point, analysts can review the firm’s finances, its profitability, the amount of money it pays senior management and so forth. But many of them worry that there will not be enough time to perform the necessary in-depth analysis of a company before the IPO comes to market.

More importantly, there is a broader issue, a deeper concern.

The new regulations from the Consumer Financial Protection Bureau were designed, at least, in part, to create transparency in financial markets, but the secrecy the Jobs Act permits undermines that goal. Perhaps the explanation is that Washington prefers no regulatory extremes except for rules it likes or dislikes. In its myopic view, transparency falls in between—landing in a place best described as Ambivalence, a regulatory never, never land.

Its streets are paved with Washington-style indifference, and its citizens targeted with passionate assurances from inside-the-beltway regulators that they know what they are doing, have the situation under control, and everything will be fine. Trust the regulators.

To be sure, a public filing delayed, is not one denied, but we’ve been through this before. Borrowers, lenders and vendors assume that the regulators have their backs only to learn, when it’s too late, that they don’t. Few promises have proven as hollow as those uttered in the name of regulatory paternalism.

It’s tough in real time to verify, much less trust, the quality of work regulators perform, especially in light of their track record.

The lack of transparency was culpable in the mortgage and economic collapse that we’ve been digging out from under, in fits and stops, during the five years of the Obama administration. But the regulators will not be held slave to consistency—even over a quaint, little concept like transparency.

And why should they?

Economic calamity has proven a good deal for them—bringing more jobs and rewarding them with fatter paychecks. All they have to do is speak quietly and point a finger at someone when business derails. At the Consumer Financial Protection Bureau, for instance, lawyers can all but name their price.

In my mind’s eye, I picture well-dressed, smug, self-impressed G-men from the SEC with their heads in the sand, passive bystanders, with no skin in the game, waiting to make an example of some one—and scare the rest of the mortgage industry into compliance.

In the years leading to the housing bubble, the mortgage market was often treated like it was part of a social experiment. It started small, moved insidiously, quietly, secretly. The anti-transparency provisions of the Jobs Act are a throwback to those irresponsible days.

The Jobs Act makes it all but inevitable that lines will be crossed and the SEC will be called in to save us from white-collar thugs—who are as much a creation of the legislation and the regulator’s empty promises of protection as they were by greed.

Matt Strickberger is the managing partner of OnPoint PR and Consulting LLC, a public relations firm that represents lenders, servicers, technology companies and others. He was editor of Mortgage Technology magazine from 1997-2000. If you have comments or suggestions for future columns, email him at mstrickberger@onpoint-pr.com.

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