ICE/Black Knight merger
I had meant to put out this Musing a week or so ago, but I got sidetracked by the brain fog of COVID for a few days. I’m much better now, but speaking of having difficulty concentrating, I’ve been considering the ICE/Black Knight merger and how that might play into the market power-focused consumer protection views of CFPB Director Rohit Chopra covered in prior Musings. The merger of those two 800 lb gorillas of mortgage technology will have a massive impact on the rest of mortgage industry as well.
Horizontal and vertical concentration
ICE’s loan origination system (LOS), Encompass, already holds a huge market share among mortgage lenders. Black Knight’s loan servicing system also is the dominant servicing system by far[1]. The horizontally concentrated market dynamics that already exist will only get worse if the number 1 and number 2 LOS providers combine under one company. But, it’s the vertical control of the mortgage lifecycle with all of the systems brought together by the merger from application through servicing that poses a multidimensional concentration and anti-competitive question for regulators and industry alike.
The primary tension with the merger relates to the prospect for transformative process improvements in loan production and administration against unfettered monopolistic pricing and service control over the technology and data needed to originate and service mortgage loans. As ICE President Ben Jackson said on a May 5 ICE earnings call, “Bringing these businesses together is the best way to further advance innovation in the mortgage industry and bring efficiencies that are desperately needed to servicers, to originators, and then through to the end customer.” As might be expected, however, not everyone sees it through rose-colored glasses.
Some groups are already lining up against the merger, while others, like former MBA CEO and FHA Commissioner David Stevens, are asking questions about what concentration of all that consumer data might do. Stevens told me that his clients say both Black Knight and ICE already make it very hard for lenders to get to their data and they charge to access it when they do. In fact, Stevens told me, “not having access to the data readily is one of the root causes which drive costs up for servicers, since they now have to build wrap systems and add-on to skirt around the issue. This is true for both large enterprises/banks to smaller independent servicers.”[2]
Breyer on Antitrust
Relatedly, during my last semester of law school in 1989, I took Antitrust Law with then federal court judge and law professor Stephen Breyer. Two years later he got famous and way more important as a Supreme Court Justice where he has been a leading voice on antitrust matters and for advocating “rule of reason” type balancing tests in decisions. Breyer is retiring at the end of this month, but I will never forget his inability to articulate the name Toyota on a case we were reading in class (he kept saying, “Toyodo, Toyat,…ugh, let’s just call them Suburu”). Breyer is a funny, self-deprecating, and brilliant justice whose affinity for balancing tests over strict rules in many areas of jurisprudence is laudable if for no other reason than those balancing tests become full employment plans for litigators, judges and expert witnesses. Breyer’s antitrust expertise, however, is unmatched in the current makeup of the SCOTUS Justices, so his retirement is a cause for worry by some antitrust observers.
What do antitrust law and research tell us?
All the current focus on competition and antitrust law isn’t just coming from Chopra, but he certainly is the most prominent regulatory voice in DC on the topic.[3] And what do those antitrust laws say? Despite taking Breyer’s class over 30 years ago, I’m no antitrust law expert. Still, I did see that last year’s unanimous Supreme Court decision for NCAA athletes concluded, “Whether an antitrust violation exists necessarily depends on a careful analysis of market realities. If those market realities change, so may the legal analysis.” NCAA v. Alston, 141 S. Ct. 2141 (2021) at 2158 (internal citations omitted). So, yeah, a lot of antitrust is just “in the eye of the beholder” kind of reasoning. Meanwhile, there are a lot of different economic theories around the issue of the impact of market concentration and when that is a problem. Some studies even hold that market concentration can be good for consumers.[4]
Back to Chopra and CFPB
So, is this merger something CFPB Director Rohit Chopra can and will engage on? As I have somewhat gratefully noted in prior Musings, Chopra has a consumer protection philosophy that is unlike any other regulator I’ve ever encountered. He expressly eschews the traditional lawyer-like consumer protection approach of strict enforcement of technical compliance violations of complex rules.[5] Instead, he brings to his job an antitrust hawk’s view of market competitiveness (to ensure consumer options) along with a populist understanding that all that regulatory complexity favors large players[6](which creates barriers to entry and innovate which limit competition). Chopra’s unorthodox views were on full display again last week in his blog post Rethinking the approach to regulations | Consumer Financial Protection Bureau (consumerfinance.gov).[7]
To my knowledge, Chopra hasn’t spoken publicly on the ICE/Black Knight merger yet, but in remarks to the CFPB’s Community Bank and Credit Union Advisory Council last April, he offered to help smaller banks and credit unions “collectively bargain” with core service tech providers to better secure customization and pricing leverage. As a result, I can’t imagine this huge merger of mortgage tech providers hasn’t caught his interest as well.
Stay in your lane bro’?
With that said, even if consumer protection issues are implicated by the merger, neither Chopra nor the CFPB are entitled to interpret (or enforce) the antitrust laws. Nevertheless, I don’t expect that will stop Chopra, who finds a way to get what he wants. CFPB has already announced it intends to Invoke Dormant Authority to Examine Nonbank Companies Posing Risks to Consumers. Throw that in with the announcement CFPB Launches New Effort to Promote Competition and Innovation in Consumer Finance[8] and I’m sure he’ll find something to work with.
ICE’s perspective on market power
Meanwhile ICE’s CEO and Chairman, Jeff Sprecher, doesn’t seem to buy the market power concern at all. In a (corrected) transcript of comments made at a conference on June 1, he said,
“…the notion that somehow we can get away with something with large financial services companies that don’t have the ability to put pressure on us from a competitive standpoint is laughable. I really do believe, this is about the consumer. And I think a large part of the cost in that space is government saying, we want lenders to do and comply with certain things. There are regulations that were put on, many of which after the last financial crisis. But they also expect that, you know, lenders are going to do that cheaply and efficiently and with data integrity and with honesty in terms of how they consider those loans. And that can only happen with more interoperability and better data. Right now, a lender can – and they do: they buy whatever they need a la carte, and there are dozens and dozens of things that – we have 1,400 vendors on our loan network providing various services to manufacture that loan. And, you know, the notion that there isn’t competition and that big, you know, lenders that have market share and even the fintech startups there really do innovative things that they need help is – we just don’t see it.”
My take
Again, market concentration risk is “in the eye of the beholder” and while ICE leadership may not “see it”, there’s no telling what CFPB’s Chopra or other regulators may see. Certainly, the industry is already wary of these companies whose agreements can be extremely one-sided given their existing market power. In considering how Chopra might view this merger, however, I would say that it would be a mistake to view his interest only in the combined companies’ ability to promote compliance as the goal to measure consumer benefits. Sure, most of Chopra’s (lawyer heavy) staff still are hammering away at technical enforcement nails, but as you can see from his recent blog post, Chopra’s vision for consumer choice isn’t at all tied to complex rules like TRID or the RESPA servicing rule[9]. As I see it, it’s all going to be in ICE’s hands depending on whether promised consumer and industry benefits materialize or monopoly rents and profits are realized instead…., unless regulators such as Chopra don’t even give them a chance prove it out.
[1] Black Knight also offers a customizable LOS solution that to mostly larger enterprise license users as opposed to the “one size fits all” LOS product used by most independent mortgage bankers that is Encompass.
[2] Stevens also reminded me that these tech companies aggregate the data for analytics that they then sell data back to companies.
[3] Of course, the greatest market power in the mortgage business is wielded by the federal government itself which controls 95% of all mortgage lending through FHA and the GSEs (with Fannie and Freddie in conservatorship). Imagine what Chopra might do as FHFA Director.
[4]Because he’s a Penn Wharton MBA guy, it’s possible Chopra would totally discount research by these Stanford GBS and U of C Booth School Professors who concluded, “An important implication of our model is that these effects are welfare improving. While sector level concentration increases, the increase is driven by efficiency considerations and consumers benefit.” Concentration in Product Markets, Benkhard, Yurukoglu and Zhang at p. 6.
[5]You’ve heard the phrase, that “if all you have is a hammer everything looks like a nail”? Maybe since he’s not a lawyer, Chopra doesn’t see as many nails to hit as the lawyers at his agency and elsewhere in DC.
[6]Director Chopra and I are again on the same page when he notes that complexity is a subsidy for larger participants: a topic I have covered in these Musings often.
[7]Most folks commenting on Chopra’s post about looking to offer simple, easy to understand rules focused on his mention of revisiting the QM Rule (see, e.g., CFPB to Rethink QMs Again | Consumer Financial Services Review (cfsreview.com), but the rate-based QM is about the simplest rule ever promulgated in history, taking the complex DTI calculation using Appendix Q and turning that into a simple question of ‘what rate did the borrower get?’ I don’t think they’ll touch that one, but the “seasoned” QM category, on the other hand, might have a bit too much ‘salt’ (so to speak).
[8] This announcement coupled with the dismantling of the previous Office of Innovation and Operation Catalyst made for an interesting CFPB denial that the good attorneys at Ballard Spahr called BS on.
[9]Many observers have already noted that Chopra believes that mortgage consumers should be able to switch from servicers they don’t like.