Mortgage brokers have won what could turn out to be a brief reprieve from new rules governing loan officer compensation that had been scheduled to take effect today, with a federal appeals court agreeing to consider the merits of emergency motions filed Thursday by two industry groups.
The rules — intended to prevent loan originators from steering borrowers into higher-interest-rate loans — were drawn up by the Federal Reserve under its authority to enforce the Truth in Lending Act (TILA).
The new rules stipulate that loan officer compensation cannot be based on a mortgage transaction’s terms. Loan officers employed by mortgage brokers would be prohibited from collecting loan origination fees from consumers if they are also receiving rebates known as yield-spread premiums, paid by lenders.
Critics say yield-spread premiums, which are tied to a mortgage’s interest rate, have served as an incentive for mortgage brokers to steer borrowers into high-interest loans.
But yield-spread premiums can also give borrowers the option of financing their closing costs and loan origination fees by agreeing to pay a higher interest rate on their loan — a benefit recognized by the Department of Housing and Urban Development in drawing up new loan disclosures under the Real Estate Settlement Procedures Act (RESPA).
The Fed issued additional guidance in January on how it expects loan originators to comply with the rules. The Small Business Administration’s Office of Advocacy has said mortgage brokers may still have difficulty determining if they are in compliance.
The National Association of Independent Housing Professionals (NAIHP) and the National Association of Mortgage Brokers (NAMB) filed lawsuits to block implementation of the rules last month, arguing that the rules were "arbitrary and capricious" in their treatment of mortgage brokers.
The Fed, the groups said, also exceeded its authority by attempting to regulate the compensation of mortgage brokers, who the groups maintain are not subject to the Truth in Lending Act.
In a March 7 complaint, attorneys for NAIHP said the Fed "merely asserts that the long-standing lawful practice of permitting consumers to defray a portion of the closing costs associated with home mortgages" by accepting a loan with a higher interest rate "is ‘unfair’ or ‘deceptive’ … without citing any evidence to support that assertion."
NAMB, in its March 9 complaint, argued that the rules will drive mortgage brokers out of business, as their employees are lured away by banks.
The Fed’s definition of "loan originator" does not include creditors, NAMB said, so banks and other lenders who initially fund loans with their own money will still be able to pay loan officers commissions based on loan origination fees paid by consumers, commonly known as points.
Loan officers employed by mortgage brokers, the group said, will be forced to choose one form of compensation or the other: points paid by consumers, or rebates from lenders paid on high-interest-rate loans.
Historically, when consumers want a loan with the lowest possible interest rate, mortgage brokers have received fees from both the consumer and the lender, NAMB said.
The Fed says that by forcing loan originators to choose to be compensated by either the consumer or by the funding lender, the rule will prevent consumers from being steered into higher cost loans. In 2008, the Fed withdrew a proposal that would have allowed mortgage brokers to collect yield spread premiums only in cases where they had entered into written agreements with borrowers.
NAIHP and NAMB’s complaints were consolidated into a single proceeding. On Wednesday, U.S. District Court Judge Beryl Howell denied the groups’ requests for temporary restraining orders and preliminary injunctions preventing implementation of the Fed’s loan officer compensation rules on April 1.
Howell said the Fed had not overstepped its authority under the Truth in Lending Act, which gives it the power "to regulate all practices in connection with mortgage loans that (the Fed) finds to be unfair, deceptive, or designed to evade disclosure requirements."
Nor is the rule arbitrary and capricious, Howell ruled, noting that starting in 2006 the Fed conducted a number of studies, held four hearings, and issued two proposed rules governing loan officer compensation before publishing a proposed final rule in August.
Given those findings, NAMB and NAIHP hadn’t demonstrated they were likely to succeed in their challenge of the rule, Howell ruled — a necessary condition for issuing a temporary restraining order or injunctions.
Although Howell acknowledged that mortgage brokers may face "irreparable harm" if the rules are implemented, that harm must be balanced against the public interest — a position further supported by lawmakers’ passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which also includes prohibitions on steering incentives for mortgage originators.
NAMB and NAIHB quickly appealed the decision to the U.S. Court of Appeals, and on Thursday both groups filed motions for emergency stays of the rule.
In its emergency motion, NAMB said implementation of the rule would cause its members "immediate, catastrophic and far-reaching harm," and would cause "a significant number of mortgage brokers to immediately cease their operations and shut their doors for business beginning on April 1."
"As a direct result of the (rule), loan officers have already begun to resign their positions and leave for lenders and banks, who are not prohibited from paying (commissions to) these loan officers," NAMB said. "The exodus of these loan officers, who are the lifeblood of the industry and are relied upon to originate loans … are causing and will continue to cause severe and irreparable harm to mortgage brokers."
Although a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit on Thursday issued an order staying implementation of the rules, it warned that the order "should not be construed in any way as a ruling on the merits of those motions."
The court ordered attorneys for the Federal Reserve to file their response to both motions by noon, Monday, and said NAMB and NAIHB would be required to file a joint reply to the government’s response by 10 a.m. Tuesday — implying that the court intends to make a rapid determination on whether the stay will remain in place.
NAMB mounted an unsuccessful legal challenge of HUD’s RESPA disclosure requirements for yield-spread premiums, which took effect last year. NAMB argued that the requirements would put mortgage brokers at a competitive disadvantage.