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Shinya Imura

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The Mortgage Market

Shinya Imura
Professor, Faculty of Economics, Chuo University
Areas of Specialization: Monetary and Financial Policy Theory, Comparative Financial System Theory, and American Economic Theory

Introduction

My areas of expertise are monetary and financial policy theory and comparative financial system theory. I entered this field from research on American financial history. Currently, my research focuses on the mixture of public and private financial systems; specifically, in mortgages. My research includes monetary and financial policy, regulatory policy, and related business models or schemes in America, Japan and Korea.

Academically speaking, there is some hesitation and criticism towards the inclusion of business models and schemes. However, I became exposed to things that cannot be observed within a classroom, which I find quite interesting. My impetus for entering this field came in the 1990s, when I was involved in formulating the scheme for collateralized loans ("Flat 35" in Japan) and making recommendations to housing loan advisors at organizations including the general survey office of the former Housing Loan Corporation (currently the Japan Housing Finance Agency), the Investigation Committee of the Ministry of Land, Infrastructure, Transport and Tourism (MLIT), and the Panel on Infrastructure Development. At that time, I strongly felt the need to confront the lack of consumer rights in the Japanese housing market and mortgage market, to introduce and establish new market conditions modeled after America and England, and to develop a legislative system for the new market.

Mortgage market without consumers

It has been a long time since the 1970s, when the Japanese housing market achieved a housing rate of 100% and home ownership reached an average of 60% for all households. The shift to a stock-type society and the long-term stagnation of lending by banks and financial institutions left the mortgage markets as the only remaining frontier. This resulted in low-interest loans and a large proportion of rollover loans under fierce competition, something which was not seen in other countries. Amidst such conditions, mortgages showed remarkable diversification, including the appearance of risky products which closely resembled a Japanese version of subprime loan. Indeed, a market was formed in which banks and mortgage banks fought and scrambled for customers.

When formulating a family budget, the majority of Japanese families take on a mortgage when purchasing a home. Approximately 60% of those families have a loan recommended and supplied to them by a housing corporation or homebuilder (real estate agency). However, it cannot always be said that borrowers are supplied with an appropriate mortgage. The loans affiliated with housing corporations and homebuilders are introduced without sufficient explanation, focusing mainly on the sales talk that the amount of monthly payments is less expensive than paying rent for a rental unit. For the rest of their lives, consumers are faced with the heavy burden of repaying a loan, as well as the risk of increased interest rates in the future.

The purchase of a home is something that occurs only once or twice in a lifetime. When facing such a situation, consumers are filled with the dream of living in a new home. However, they are also fearful about whether or not they will be approved for a loan. While worrying whether they may be declined due to factors such as late credit card payments, they wait for the results of bank screenings almost as if waiting for a decree by a king. Many people lack the composure to select a mortgage which is right for them.

This is a prime example of asymmetric information and points to a lack of consumer rights.[1]

Rampant lending by unregistered business

In this situation, there are countless examples of unauthorized and unregistered mediation being performed by businesses which call themselves financial planners (FP) and proclaim a neutral and fair position. Such mediation infringes upon the Banking Act and the Money Lending Business Act. When googling to search for keywords such as mortgage or contingency fee, the results show entities that are neither agent banks nor registered money-lending businesses and that promise to provide support for negotiation with financial institutions, to introduce loan officers, to be present during application and signing of financial contracts, to support procedures for batch repayment to current financial institutions, and to be present during the execution of loans. These entities make promises such as “you will receive preferential interest rates by showing a letter of introduction with our company’s seal,” or to charge compensation such as 1% to 2% of the total loan contract amount. The problem is that such actions are evidently classified as mediation which includes support, assistance and effort for entering into a loan.

Regarding mediation for bank loans in Japan, in the case of mediation on behalf of banks, it is necessary to obtain permission to operate as a bank agent so as not to violate the Banking Act. In the case of mediation on behalf of consumers, it is necessary to become a registered money-lender or affiliated agent based on the Money Lending Business Act.

In particular, in the case of the Money Lending Business Act, severe punishment is placed upon action taken without registration (unauthorized business) or name-lending in which a bank or mortgage bank has unauthorized business performed. (The wrongdoer is subject to a maximum of 10-year imprisonment or a maximum fine of 30 million yen, or the both (Article 47, Item 2 and Item 3 of the Money Lending Business Act). The corporation where the wrongdoer belongs is subject to a maximum fine of 100 million yen (Article 51, Paragraph 1, Item 1 of the same Act)).[2] Indeed, such harsh punishment is not found in other areas of economic law.

Waiting for the development of legislation

To be honest, industry groups and the national government have not taken sufficient response to the issues of unregistered mediation. The Japan Financial Services Association and related regulatory agencies are also hesitant to state a clear opinion when asked for a specific comment on mediation for financial loan transactions as based on the Money Lending Business Act. As long as individual cases of unregistered business are not prosecuted, the national government shows no signs of taking action. There are already cases in which lawmakers, their secretaries or accountants have been prosecuted for performing mediation or introduction to banks and financial institutions, conducting mediation for loans, and receiving unreasonable fees.

On the other hand, business models in which consumers pay money for services such as consulting or mediation have yet to take root in Japan. In actuality, housing businesses already charge such fees as miscellaneous expenses together with administrative fees for custom-built homes, housing loan administrative fees when selling condominiums, and registration fees and fire insurance premiums when implementing housing loans. At the very least, at the Housing Loan Advisory Committee of the All Japan Real Estate Federation for which I serve as a committee member, a representative of consumer groups has stated “today, consumers are willing to pay money to protect themselves.” This shows that there is high consumer interest for consultation and mediation.

In reality, the professions of mortgage broker and mortgage intermediary which have taken root in the systems of America and England already exist in Japan. The development of related legislation is an urgent task which must be performed before illegal and unregistered businesses cause great damage to the interest of consumers.

From a consumer perspective, malicious acts arising from the unregistered business of providing mediation for mortgages are definitely illegal actions. In some cases, a lawsuit can be filed based on obligation to return unjust enrichment (Articles 703 and 704 of the Civil Act); specifically, the receipt of unjust compensation despite providing almost no actual service. A portion of mortgage banks which own the parent companies of listed corporations take dubious action in which, pretending to be agents, they induce mortgage customers to their businesses through external firms. If such action is verified to be name-lending as defined by the Money Lending Business Act, it will be a major blow to the corporations involved and to the mortgage market.

The development of legislation for loan mediation

Loan sharking problems which arose in the early 1980s were the impetus for applying the classification of money-lending to mediation for financial loans, even when the mediator itself does not lend money. It also led to the duty of registration for mediation business and the application of severe penalties as discussed above. Even if mobsters and other illegal organizations did not lend money themselves, they led consumers suffering from multiple debts to money-lending business which were illegally backed. Such consumers then found themselves in even tougher conditions. As such, it was necessary to regulate such activities.

Upon entering the 2000s, the Revised Money Lending Business Act was fully enacted on June 18, 2010 in order to respond to issues such as Shoko Fund (high interest rate loans provided mainly to small and medium-size enterprises), including interest restrictions and repayment of overpayments. As a result, loan sharks were eradicated and the money-lending industry had to start from scratch. However, it is said that black-market loans are still rampant. Also attracting attention in 2013 was full-scale procedures for revision of the Insurance Business Act, including legislation that prohibits delegated representatives of insurance agencies.

For the past 10 years, there has been rapid growth of independent agents which enable consumers to select the insurance products of several different insurance companies. Independent agents have established offices in shopping malls and other facilities, and there is a profession of insurance agents which encourage customers to visit their offices, as seen on TV commercials. Within these independent agents, there has been the appearance of major insurance agent networks which have annual insurance premium income exceeding several tens of billions of yen, and seek to become listed corporations.

In contrast to the fair and impartial consultation on insurance products for the benefit of consumers which is professed by these insurance agencies, experts have pointed out legal violations and compliance issues including recommending products with high agent compensation to consumers, the existence of delegated representatives who operate outside the agency without insurance agency certifications and do not fulfill the responsibility for sufficient explanation of insurance products, and unjust allocation of agent compensation. In particular, the existence of delegated representatives who operate outside of insurance agencies is in violation of the prohibition of reconsignment. At insurance agencies, it is prohibited for insurance representatives to be positioned outside of the forms of employment, deployment, or loan to sell insurance. Furthermore, agencies have been notified to establish the same regulations and supervisory measures as insurance companies.

A similar basic legal framework is shared by bank agencies as defined by the Banking Act, mediation for financial loans as defined by the Money Lending Business Act, insurance sales equivalent to mediation or representation for the conclusion of an insurance contract as defined by the Insurance Business Act, and the Financial Instruments and Exchange Act (formerly known as the Securities Act). If issues arise, it is expected that legislative development will come swiftly. I predict that one of the next steps will be the development of legislation for loan mediation.

References
  • ^For further information, refer to Shinya Imura, “Mortgages shift to a scrambling market and enter war of attrition: Turning point in competitive strategy and business models,” the Financial Journal, December 2012 issue, the Financial Journal Co., Ltd. Also refer to Id., “Japanese sub-prime loan crisis: Urgent need for cultivation of professionals for mortgage planning,” the Financial Journal, February 2010 issue, the Financial Journal Co., Ltd.
  • ^For further information, refer to Shinya Imura, “Legislation for mortgage mediation and related outlooks: (1) Legal edition,” Compilation of Commerce Debate, Vol. 55, 3rd Issue, March 2014, pp. 181-202, Chuo University. Also refer to Id., “Legislation for mortgage mediation and business schemes,” Research Series 35, Chuo University Institute of Business Research, and Masumi Kishi, Iwao Kuroda and Hiroshi Mifune ed., “Regional Finance in an Age of Globalization,” March 2014, Chuo University Press.
Shinya Imura
Professor, Faculty of Economics, Chuo University
Areas of Specialization: Monetary and Financial Policy Theory, Comparative Financial System Theory, and American Economic Theory
Imura was born in Ishikawa Prefecture in 1953. He graduated from the Chuo University Faculty of Economics in 1978. In 1981, he completed the Master’s Program in the Chuo University Graduate School of Commerce and left without obtaining a Doctoral Degree from the Chuo University Graduate School of Commerce in 1985. Ph.D. in economics from the University of Tokyo. Imura served as an instructor and Assistant Professor at Otaru University of Commerce Junior College, and as Assistant Professor and Professor at Otaru University of Commerce before assuming his current position in 1996. From 2001 to 2005, he served as a member of the Housing Site Subcommittee for the Panel on Infrastructure Development, Director of the NPO Japan Assets and Securities Center (JASC) from 2002, and Chairperson of the Association for Promoting Research on Long-Term Top-Rated Mortgages from 2010. His major written works include Mortgage System in Modern America (University of Tokyo Press, 2002) and Fundamentals of Mortgage Consulting and Mediation(Seiunsha Publishing, February 2014) and more. His major translated works include The Bank Merger Wave (co-supervised translation together with Akira Matsumoto; Nihon Keizai Hyouronsha Ltd., 2004; originally written by Gary A. Dymski).
Please refer to the following links for related research, theses and essays by Imura: http://www.jasc.jp/new window and http://www.j-mpa.jp/new window.