Mortgage brokers challenge new compensation rules

Lawsuits claim ban on rebates will give bank loan originators unfair advantage

Editor’s note: This story has been corrected to note that the Federal Reserve put forward rules governing loan officer compensation under its authority to enforce the Truth in Lending Act. The rulemaking process predated passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which also includes prohibitions on steering borrowers into higher-cost loans.

Two groups representing mortgage brokers and other real estate industry professionals have filed suit against federal regulators over new rules governing loan officer compensation that are scheduled to take effect April 1.

The Federal Reserve drafted the rules under its authority to enforce the Truth in Lending Act, with the goal of preventing loan originators from steering borrowers into higher-interest-rate loans.

The rules, which stipulate that loan officer compensation cannot be based on a mortgage transaction’s terms, will prevent mortgage brokers from collecting rebates on higher-interest loans known as yield-spread premiums, groups representing mortgage brokers say.

Critics of yield-spread premiums say they can serve as an incentive for mortgage brokers to steer borrowers into high-interest loans, if brokers pocket the rebates themselves rather than applying them to borrower’s closing costs.

Supporters say yield-spread premiums allow borrowers to finance their closing costs and loan origination fees by paying a higher interest rate on their loan. Those costs can be a "major obstacle to homeownership" for those who can’t afford to pay them out of pocket, the National Association of Independent Housing Professionals said in a lawsuit filed Monday.

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The Fed’s rule is "arbitrary and capricious," the NAIHP said in its complaint, because loan officers employed by banks will still be able to provide that same option to borrowers.

Bank loan officers offer loans with reduced or no upfront settlement costs in exchange for a higher rate on the borrower’s mortgage, and recoup those costs by adding a "service release premium" when they sell mortgages with higher interest rates in the secondary market, NAIHP’s suit said.

In overhauling the Real Estate Settlement Procedures Act (RESPA), the Department of Housing and Urban Development (HUD) "expressly approved (yield-spread premiums) as a way for borrowers … to pay settlement costs, including compensation to their broker for loan origination services," NAIHP said.

The lawsuit seeks a temporary restraining order and preliminary injunction barring the Federal Reserve from enforcing the rule. The public would be better served if the newly formed Consumer Financial Protection Bureau drafted a rule to implement Congress’ intent in the Dodd-Frank bill, the group said.

The National Association of Mortgage Brokers today said it’s filed its own lawsuit with the same goal.

The section of the rule NAMB objects to "could cause devastating and irreparable harm to small-business mortgage brokers," the group said.

The Fed’s rule-making authority under the Truth in Lending Act (TILA) is scheduled to be transferred to the Consumer Financial Protection Bureau in July.

The Fed announced on Feb. 1 that it would not complete pending aspects of four rule-making proceedings, which included changes to TILA mortgage loan disclosures, restrictions on certain advertising practices and sales practices for reverse mortgages, and changes to the disclosure obligations of loan servicers.

The loan officer compensation rules were already finalized when the Fed made that announcement.

The Small Business Administration’s Office of Advocacy has cautioned that mortgage brokers may have difficulty determining if they are in compliance with the rules, despite additional guidance issued by the Fed in January.


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