Seventeen states have enacted online mortgage laws designed to protect consumers and provide added convenience, but the laws inadvertently hurt competition and tend to keep online mortgage costs higher than necessary.

When the Progressive Policy Institute examined states' approach to e-commerce, it found that while most states don't require online mortgage operations to have a physical "brick and mortar" presence, one third of all states do and the extra costs could add to expenses that, in part, keep lenders from using the paperless mortage.

The Electronic Financial Services Council (EFSC), a financial services industry trade group for e-commerce issues, says such laws are "unconstitutional" and "protectionist barriers" that create unfair and burdensome restrictions to conducting business.

"While this 'clicks-and-mortar' model increases convenience for consumers, it limits competition from cyber-only mortgage brokers that could charge lower rates by taking advantage of new efficiencies," according to the institute's new study, "Best States For E-Commerce".

The institute promotes Information Age-based politics and is a branch of The Washington, D.C.-based New Democrats Online, the Democratic Party's think tank for new policy development.

Along with mortgages, the study examined states' approaches to e-commerce in contact lenses, prescription drugs, tele-medicine, insurance, autos, wine, auctions, access taxes, digital government and the Uniform Electronic Transfers Act.

Ironically, some of the less friendly e-commerce states are considered leaders in developing the technology necessary to promulgate e-commerce.

The most restrictive states requiring that online mortgage lenders have a physical presence were Arizona, California, Hawaii, Missouri, Nevada, New Jersey, Ohio, South Carolina, Tennessee and Texas. Many of those same states were are the bottom of the heap when considering overall e-commerce friendliness. Six additional states have less restrictive physical presence laws, but also require online mortgage operations have brick and mortar operations under certain circumstances.

(The study also found that Alaska, Colorado, Montana, and Wyoming do not regulate mortgage brokers at all.)

The institute said lobbying by existing bricks-and-mortar mortgage brokers to limit competition is largely responsible for the physical presence laws. It also said while the laws may be well-intentioned they create a multistate licensing system that gives an unfair online competitive advantage to national mortgage firms that already have physical offices in all states.

"Because online mortgage companies do not have to pay for expensive bricks-and-mortar infrastructure and because they have lower transaction costs, they have the potential to offer lower rates and or fees to consumers," the study said.

Late last year in the "Study of Banking Regulations Regarding the Online Delivery of Financial Services," EFSC told the Federal Deposit Insurance Corporation, the Federal Reserve Board and other related government agencies that the physical presence laws are unconstitutional.

"Companies are forced to either incur the cost of leasing offices, hiring employees and paying for equipment that they do not need and would not use, but for the fact of the bricks and mortar requirement, or elect not to do business in that state," EFSC said.

"Either way, consumers are the ones that ultimately suffer as there are fewer sources of capital and less competition among lenders. The EFSC urges the banking agencies to recommend that Congress enact legislation to remove these unconstitutional, protectionist barriers to electronic commerce by expressly preempting state requirements for in-state office and resident agent requirements for mortgage companies, insurance companies and other financial services providers," EFSC also said.

Published: April 11, 2002

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.