Final Rule Stayed - Interviews and Advocacy

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

"Sweet are the uses of adversity," said Duke Senior in Shakespeare's As You Like It, when he realized, now exiled and deposed and forced to adopt new ways of surviving, that those challenging circumstances, though dire, "Like the toad, ugly and venomous, Wears yet a precious jewel in his head." The Duke was not resigning, not giving up, not giving in; he was admitting change, but also recognizing a new type of freedom gained. 

Gaining freedom requires action! 

Economic freedom is the "precious jewel" the mortgage industry wants to preserve now in the face of the FRB's overreaching loan originator compensation rule, through the industry's mission entrusted not only for itself, but even more so for the benefit to consumers.

The disparate and far-ranging mortgage industry, consisting of participants with competing and shared economic interests, seems to have come together with the singular mission of preventing the TILA loan originator compensation requirements, as now promulgated, to be implemented – and with good reason.

On April 1, 2011, the mortgage industry learned of the stay (pending appeal) granted by the U. S. Court of Appeals - DC, in National Association of Mortgage Brokers and National Association of Independent Housing Professionals v Federal Reserve System (FRB).

The stay bars implementation of the FRB's final rule - specifically, 12 C.F.R. § 226.36(a), (d), and (e), the provisions in the TILA amendment concerning loan originator compensation.

The FRB's response is due today, Monday, April 4, 2011 (by 12 noon - EST).

The NAMB and NAIHP's response to the FRB is due tomorrow, Tuesday, April 5, 2011 (by 10AM - EST).

Three Interviews

You may be interested in listening to an interview I gave on Friday, April 1, 2011.

My interview was actually one of three interviews devoted to the stay and its implications.

The other interviewees were Robert Lotstein, of Lotstein Legal, and Rich Andreano, of Patton Boggs.

All interviews can be listened to for free, courtesy of Paul Donahue, Founder of Abacus Mortgage Training and Education, who conducted each interview.

Paul Donahue, who conducted the aforementioned interviews, is the Founder of well-respected Abacus Mortgage Training and Education, a leading provider of training and educational support to the mortgage industry. His company's Mastery Series provide venues for subject matter experts to discuss important industry related issues and ideas directly with other mortgage industry participants.

Click below to obtain a copy of the Mastery Series webcast, a panel discussion devoted to loan originator compensation, held on March 22, 2011.

Advocacy

Do not underestimate the power you have to strengthen your position in this dispute against the FRB. Do not underestimate the power you have to protect the consumer from the uncertainty caused by the loan originator compensation rule.

I have received many calls from members of the industry who want to voice their opposition to the FRB's Rule. 

If you are interested in expressing such views, or want to become more familiar with this controversy, visit Impact Mortgage Management Advocacy and Advisory Group (IMMAAG), which has organized advocacy responses and drafted the following proactive tools:  

• Draft Letter to Your Representative - Not on the House Financial Services Committee (HFSC)

• Draft Letter to Your Representative - Member of the HFSC

• Draft Letter to Your Senator - Not on Senate Banking Committee

• Draft Letter to Your Senator - Member of the Senate Banking Committee

• Draft Amendment Language including Talking Points

• Compensation Position Statement - Attachment 

NAIHP v. FRB: David v. Goliath

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

On March 7, 2011, the National Association of Independent Housing Professionals (NAIHP) filed suit against the Federal Reserve System (FRB). This lawsuit has been filed in United States District Court for DC. The complete filing, including exhibits, comes to 106 pages. The NAIHP seeks a temporary restraining order and a motion for a preliminary injunction that would prevent the FRB from enforcing the loan originator compensation rule, scheduled for implementation on April 1, 2011.

If successful, the filing will prevent the FRB from enforcing the rule while the court considers the case. There are just a few days remaining for a rapid response. 

Lawsuit Arguments - A Salient Selection

This Commentary offers a brief outline of selected arguments against the TILA Loan Originator Compensation rule (Rule). I am leaving out citations, where possible, for ease of reading. This outline is not meant to be comprehensive, authoritative, or relied upon for legal advice. It offers only a brief synopsis of the argumentation. For citations, exhibits, and argumentation, I suggest that you read the lawsuit. (See Below)

FRB Lacks Statutory Authority

The FRB lacks statutory authority under TILA to regulate loan originator compensation in the manner prescribed by the Rule. TILA's primary purpose is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit." [15 U.S.C. § 1601(a)] Therefore, the FRB is overreaching.

FRB Improperly Uses TILA § 129 For Authority

The FRB is relying on its authority under TILA Section § 129 (1) (2) (A) and (B) to prohibit acts or practices relating to mortgage loans that are unfair or deceptive, but an assertion of being "unfair" or "deceptive" practices does not make it so, since there is a long-standing, lawful practice of permitting consumers to defray a portion of the closing costs associated with home mortgages, including loan originator compensation, through a mortgage interest rate adjustment.

The FRB's assertion is put forward "without citing any evidence" to support it. Instead, the FRB states that "paying loan originators based on the terms or conditions of the loan, other than the amount of credit extended, or steering consumers to loans that are not in their interest to maximize loan originator compensation, are unfair practices."

In other words, by asserting Section 129 (cited) the FRB relies on "unsubstantiated allegations and supposition rather (sic) of empirical evidence supporting its finding that the current long-standing practice of compensating loan originators is unfair, deceptive or abusive."

Disadvantages Mortgage Brokers

The Rule "treats loan originators differently from other providers of real estate settlement services" such that "loan originators and mortgage brokers in particular will be at a permanent disadvantage in the marketplace, thereby reducing healthy competition to the detriment of consumers."

SRP Advantages Banks and Creditors

There is "no practical difference" between a yield spread premium (YSP) and the service release premium (SRP) that a bank, which originates a loan, receives when it sells that loan into the secondary market. But the FRB has excluded loan originating banks, as creditors; that is, consequently, "banks are free to charge consumers interest rates higher than their par rates with impunity and receive compensation from both the consumer and the purchaser in the secondary market."

The Rule has the effect of limiting the compensation of loan originators who are independent mortgage brokers (and those who are employed by banks), while "leaving the banks free to charge with impunity interest rates substantially above their par rate." Thus, eliminating banks from the requirements of the Rule creates a de facto "exemption [from] consumer protection for the vast majority of the mortgage origination market."

Therefore, there is constructively a "creditor exemption" favoring creditors and banks, but disadvantaging mortgage brokers. The notion that the Rule must become effective on April 1, 2011 in order to protect consumers is simply not credible, inasmuch as the FRB's Rule would exempt from coverage lenders - the banks, the creditors - who control 90% of the loan origination market place.

FRB Erroneously Denies That Disclosures Are Remedial

The FRB has erroneously concluded that, according to the suit, "the alleged harm of the current, long-standing loan originator compensation system cannot be remedied by disclosures and that current disclosures leave consumers confused about how the loan originator is compensated."

The FRB's position is derived from a limited study of the nature of the relationship between the consumer and the loan originator, a study that involves only 35 (sic) participants - and "that study actually contradicts the FRB's conclusion that disclosures are ineffective."

Arbitrary and Capricious

The Rule is arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with law, and in excess of statutory jurisdiction, and authority. Indeed, it has been adopted in contravention of the Regulatory Flexibility Act (RFA) which, among other things, requires agencies to consider the economic impact that a proposed rulemaking will have on small entities.

Among the arbitrary and capricious interpretations of the Rule, FRB Staff Comments on certain TILA revisions are "in direct conflict with the requirements of RESPA and ... effectively prevent mortgage brokers from competing for business in certain instances." This conflict leads to brokers having to "choose which regulations to violate in other instances."

The FRB has already deferred to the Consumer Financial Protection Bureau (CFPB) certain decisions regarding other Dodd-Frank requirements, rather than proceeding with implementation of these other provisions at this time. Dodd-Frank provides for the CFPB to consider and resolve the complexities addressed and created by FRB's "ill-considered Final Rule."

Dodd-Frank also addresses comprehensively, inter alia, the issue of loan originator compensation and the interrelationship between the disclosure, and substantive requirements of TILA, and the disclosure and substantive requirements of the Real Estate Settlement Procedures Act (RESPA) and to that end transferred the FRB's authority over such matters to the CFPB.

The FRB has failed to comply with the RFA requirements. Specifically, the Office of Advocacy of the Small Business Administration (SBA) has noted that "the Board acknowledges that the proposed rule will have a significant economic impact on a substantial number of small entities" and concedes that "there is not a reliable source for the number of small entities that will be impacted." But rather than undertaking "any type of impact analysis, the Board summarily concludes that any such adverse impact will be offset by consumer benefits." The SBA has stated that it is "concerned with [the Rule] going forward when so little is known about its potential costs, at a time when other major changes to the industry are on the horizon."

The FRB's action is arbitrary and capricious because the FRB insists on implementation of the Rule on April 1, 2011, even though (1) it has admitted the Rule will have "significant economic impact on small entities,"  but no impact study has been done pursuant to RFA requirements; and (2) there is a requirement for an "impending congressionally mandated broad regulatory review of the conflicting requirements of RESPA and TILA in connection with the implementation of the Dodd-Frank Act," but no such review has been consummated; and (3) the FRB's insistence upon going forward with the Rule is being taken prematurely, especially in view of its recent decision to defer to the CFPB other provisions of TILA currently under consideration.

David versus Goliath

The NAIHP seeks declaratory judgment that the Rule is contrary to law, arbitrary and capricious, unenforceable, and otherwise unlawful and that the Court grant permanent injunctive relief enjoining FRB from enforcing the Rule. This is a well crafted suit, with statutory support coming from many laws. Citing the RFA and the SBA's wish to properly implement it brings interagency scrutiny to the forefront and compels interpretation.

I suggest you visit the NAIHP website for more information. The organization is run by Marc Savitt, who has worked mightily on behalf of industry interests to delay and, if possible, eliminate the adverse features of the loan originator compensation issue.

Many other organizations have been involved in this dispute through negotiations with, and letters to, the FRB, as well as through meetings with politicians and their staff - but, up to the date of its filing, the NAIHP is the only organization to have actually taken up the challenge to resolve this matter in a judicial proceeding.

Our Library contains a copy of the lawsuit.

FRB: Mangles Affiliate Compensation

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions. He is the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

As if the confusion caused by the FRB's lack of substantive guidance regarding TILA loan originator compensation were not enough for the industry to absorb, the FRB now sallies into adversely affecting another market segment of the residential real estate finance industry: affiliates.  

It is one thing for the FRB to find regulatory means to implement Dodd-Frank; however, it is unacceptable to discombobulate affiliate relationships by an overreaching interpretation regarding loan originator compensation in a way that amplifies the confusion.

Action is eloquence. Coriolanus, Shakespeare

While so many market participants are rightfully concerned with the consequences following April 1, 2011, the effective date of the new TILA loan originator compensation requirements, I want to bring your attention to the FRB's stance with respect to affiliates, a core business relationship feature, and how affiliate compensation is being imperiled by the forthcoming TILA revisions.

Recently, several leading industry organizations announced that they had sent a joint letter to the FRB (Letter). The Letter - which is dated February 28, 2011 and addressed to Ben Bernanke, FRB Chairman, and Sandra Braunstein, Director of the FRB's Consumer and  Community Affairs Division - contests the FRB staff's interpretation and offers two reasonable alternatives.

Some media sources have mentioned the Letter, but they have provided scant information about it.

So I reached out to a trusted friend and leader in one of the Letter's sponsoring organizations, and was graciously given a copy. In my view, the points raised in the Letter deserve to be more fully known by the public, and the views therein expressed should be added to the other industry requests, previously placed with the FRB, to either delay the aforementioned effective date or provide credible, unambiguous, and supportable guidance prior to the effective date. A brief synopsis follows.

But before I discuss certain salient issues, permit me to list the signatories to the Letter:

• Community Mortgage Banking Project (CMBP)

• Consumer Mortgage Coalition (CMC)

• National Association of Homebuilders (NAHB)

• National Association of Mortgage Brokers (NAMB)

• National Association of REALTORS (NAR)

• Real Estate Services Providers Council, Inc. (RESPRO)

• The Realty Alliance 

These organizations are among the most prominent in the residential real estate finance industry, with substantial membership, and have dedicated themselves for many years to providing support, guidance, and advocacy to industry participants and the public.

True is it that we have seen better days. As You Like It, Shakespeare

The FRB's view can be stated, as follows: (1) the loan originator compensation rule prohibits payment to originators based on loan terms or conditions, and, further, (2) it prohibits "dual compensation" of loan originators, such as compensation received by entities for brokering loans to loan originators, and (3) an "affiliate" is a single person; therefore, as such and by extension, (4) an affiliate is subject to the "dual compensation" prohibition. 

I have already discussed elsewhere this "dual compensation" dilemma.

A clever sleight of hand is taking place here. By extending dual compensation to affiliates through the "single person" concept, the FRB maintains a certain consistency with respect to the final rule. Here's the logic: just as the FRB is attempting to prevent "circumvention" of the final rule by prohibiting a producing branch manager from participating in profits because they are derived from the rates and terms of loans, thus cannot be a basis for loan originator compensation, by extension, the same criteria can be applied to other participants in the loan origination, including affiliates, and for much the same reasons. I know that's convoluted, but it is what it is!

FRB's Scenario

Here is one "circumvention" scenario that the FRB uses:

[T]he rule would be circumvented, for example, if a parent company that has two mortgage lending subsidiaries could arrange to pay a loan originator greater compensation on higher rate loans offered by subsidiary A than the compensation it would pay the same originator for a lower rate loan made by subsidiary "B". To address this issue, the Board treats such subsidiaries of the parent company as a single person so that if a loan originator is able to deliver loan (sic) to both subsidiaries, they must compensate the loan originator in the same manner. Accordingly, if a loan originator delivers a loan to subsidiary B and the interest rate is 8 percent, the originator must receive the same compensation that would have been paid by subsidiary A for a loan with a rate of either 7 or 8 percent.

Our remedies oft in ourselves do lie. All's Well That Ends Well, Shakespeare

The Letter states that FRB staff has decided "they not only would consider all lending affiliates of an originator as one person as stated in the rule, but that they also would consider fees paid to a mortgage company's affiliated real estate brokerage and title/settlement service companies as one person, meaning that fees paid for the fair market value of services performed by these affiliated companies could be considered as loan compensation." (My emphasis)

The organizations allege that the FRB's interpretation would "for no justifiable reason" adversely impact "the use of a successful and long-established affiliated business model employed by many members of the undersigned associations that offers consumers one-stop shopping." The Letter states the fact that the "one-stop shopping" concept was contemplated by Congress in a 1983 amendment to RESPA.

Now, for some background, we must take a very cursory, but necessary digression from TILA (FRB's domain) to RESPA (HUD's domain). RESPA is primarily a disclosure and anti-kickback statute. With respect to anti-kickbacks, Section 8 of RESPA makes it a crime for settlement service providers to pay and for real estate brokers to receive fees for the referral of settlement service business.

RESPA provides an exemption to affiliated business arrangements (ABAs) that conform to specific guidelines. An ABA is a special combination of two or more legal entities which agree to carry out a single business enterprise for profit, and for which purpose they combine their property, money, effects, skill and knowledge. Partners to an ABA must satisfy, among other things, a multi-prong, safe-harbor test under Section 8(c)(4) of RESPA to get the exemption. One of the safe harbor prongs, for instance, requires that a partner's share of the profits corresponds to its ownership interest and payments may not be conditioned on the number of loans referred to the ABA.

Returning to TILA, it is significant that the Letter contends that "under the [FRB] staff's interpretation, bona fide and reasonable compensation paid by a seller/buyer for real estate brokerage services to that firm would be considered ... as direct compensation paid to the mortgage company, which would mean that the real estate broker's affiliated mortgage company could not broker any loans and be paid for such brokerage activity by the lender without violating the dual source compensation prohibition." (My emphasis)

Out, damn'd spot! Out, I say!-One; two: why, then 'tis time to do't.
Macbeth, Shakespeare

Here's the crux of the matter:

1) Dodd-Frank expressly exempts real estate brokers from the definition of loan originator. The interpretation of "affiliate" goes far beyond Dodd-Frank by considering real estate brokerage fees to be loan originator compensation, because Dodd-Frank specifically exempts real estate brokers from being considered a loan originator. So "to the extent that Dodd-Frank treats title agencies in a manner similar to that contained in the Board's the final rule, [Dodd-Frank] permits exemptions from these statutory rules." Thus, "when 'third party' bona fide reasonable charges were declared to be exempt, affiliates, by definition, would be excluded from treatment as a 'third party' because of a common ownership interest with the creditor/originator."   

2) Mortgage companies often have title agency affiliates and, if the FRB's interpretation holds, then if a buyer uses the mortgage company's title affiliate and if either the borrower or the seller pays part of the title or closing costs to the title affiliate, the lender with whom the title agent is affiliated could not broker any loans for payment by the lender without violating the "dual compensation" prohibition.

Here's the organizations' view:

1) Title insurance rates in forty-four states are set by the states, approved by the states, or are filed with the states. The established, approved, and/or filed rates are the rates that have to be charged. "For the overwhelming majority of transactions, there is no risk that an affiliated lender could circumvent the final rule by inflating the title rates."

2) Regarding third party charges, the FRB holds that the term "compensation" includes "amounts retained by the loan originator, but does not include amounts that the loan originator receives as payments for bona fide, third party charges, such as title insurance. . . ."  So, under the FRB's interpretation an "affiliate" does not qualify as a third party pursuant to this exemption. Even though in 90% of transactions the title fees of independent companies and affiliated companies are restricted or filed as a matter of state law, the FRB has "adopted an interpretation that in effect would preclude mortgage companies from brokering loans when the consumer uses an affiliated title company but permits it when the consumer uses a non-affiliated company that charges the exact same filed rate." Bona fide reasonable title charges of title affiliates would not be exempted, even if they are the same as bona fide reasonable charges of unaffiliated title companies.

3) The FRB's interpretation of the term "affiliate" would seriously disadvantage some real estate brokerage firms or title companies that are part of corporate holding companies, entities that may own other businesses such as utilities and insurance companies. Scenario: if, at closing, it is discovered that a consumer has paid a fee to one of these insurance companies or utilities - such fee would be subsumed under the "affiliates" term vis-à-vis Dodd-Frank's "common control" definition - and the FRB's interpretation would lead to preventing the mortgage company from receiving a fee from the lender to which it brokered the loan, because "the consumer's fee to the insurance company or utility also would count as loan originator compensation."

These organizations have it exactly right: the FRB's interpretation leads to "illogical consequences."

More matter with less art. Hamlet, Shakespeare

What is needed at this late date, just a few weeks before the April 1, 2011 effective date, is more substance and less rhetoric.

The above-mentioned signatories offer two resolutions, both quite reasonable, each consistent with existing law.

Solution # 1: Continue to define an "affiliate" as one person but interpret the term "third party" to include affiliates, so that the fees of third party title companies, appraisal companies, real estate brokers, et cetera (whether affiliated with the originator or not) may be exempted from loan originator compensation so long as they are bona fide and reasonable.

Solution # 2: Limit the definition of "affiliate" to include  mortgage lending and mortgage brokering businesses, as specifically stated in the rule, but not include non-mortgage providers in that definition.

It seems to me that, with either solution, the organizations are going out of their way to resolve the situation in a manner that provides continuing stability to the real estate finance industry. The FRB should meet immediately with representatives of these organizations. Relationships that are important to a well-functioning industry now are imperiled by the lack of FRB guidance.

When this Letter is added to the previous correspondence and communications to the FRB from the SBA Office of Advocacy, the MBA, the NAIHP, the IMMAAG, and the NAMB, the situation begs for the FRB's expeditious clarification of TILA loan originator compensation revisions or a determination to delay their implementation.

If you want to read the Letter in its entirety, a copy is available in our Library.

What do you think?

I would welcome your comments.
Please feel free to email me or leave your comments below.

Compensation: Coming or Going?

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions. He is the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

Prophecy is above my pay grade, but if I were a betting man - which I'm not! - I would bet on a postponement of the TILA loan officer compensation requirements currently scheduled to go into effect on April 1, 2011. Rarely have I seen such a messy roll out of a regulatory change that actually affects virtually all aspects of the mortgage banking industry in general, and mortgage brokers in particular.

Because I'm not a betting man, I hope for the best outcome for industry stability, but will prepare for the "alternative." Our clients will be as prepared as possible, whatever the situation, come April 1, 2011!

Perfect Storm - Exhibit 1: Congress

The Senate's Committee on Banking, Housing, and Urban Affairs, chaired by Tim Johnson (R-SD), is concerned that "regulators are not allowing adequate time for meaningful public comment on their proposed rules. We also believe that regulators are not conducting rigorous analyses of the costs and benefits of their rules and the effects those rules could have on the economy."

Dated February 15, 2011, the letter was sent by ten members of the Committee to Timothy Geithner of the Treasury, Gary Gensler of the CFTC, Sheila Bair of the FDIC, Ben Bernanke of the FRS, Mary Schapiro of the SEC, and John Walsh of the OCC.

In their letter, the Senators observe what has become abundantly obvious to most industry members: "the unprecedented scope and pace of agency rulemakings under the Dodd-Frank Act make it more important than ever that agencies engage in deliberative and rational rulemaking."

The letter enumerates five questions for the recipients to answer, and here is my abbreviated version:

1. Will the respective agencies provide at least 60 days for public comment on all proposed rules and studies required by the Dodd-Frank Act?

2. What steps are being taken to ensure that the rules you adopt under the Dodd-Frank Act are the least burdensome way to achieve the statutory mandate. (Provide how those steps satisfy the obligations under the Administrative Procedure Act and other applicable statutes to conduct cost-benefit and economic impact analyses.)

3. What steps are being taken to ensure that all empirical data and economic analyses submitted by commenters are thoroughly considered before a final rule is adopted.

4. What steps are being taken to ensure that the respective agency is acting in coordination with other agencies charged with adopting related rules? (How is this coordinating being established?)

5. Given the importance of rigorous cost-benefit and economic impact analyses and the need for due consideration of public comments, would additional time for adoption of the Dodd-Frank Act rules improve the respective agency's rulemaking process and the substance of its final rules?

Perfect Storm - Exhibit 2: SBA Office of Advocacy

The SBA Office of Advocacy has written not one, but two letters to the FRB, expressing concern that the "Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)" and recommending that the FRB prepare an initial regulatory flexibility analysis (IRFA).

The result of the first letter, dated January 13, 2011, brought forth from the FRB a "compliance guide" on January 26, 2011.

I put that FRB issuance in quotes, because (as previously noted) it is 'inadequate, incomplete, and regurgitates most features of the "already known" aspects of the Regulation Z final rule amendments affecting loan officer compensation.' Best as I can tell, the "compliance guide" seemed meant to be a rush-job response to SBA's January 13, 2011 letter. In other words, this "compliance guide" is 'a transparent attempt to satisfy a regulatory requirement, though the dubious result adds little to an overall resolution.'

In response to the FRB's "compliance guide," the SBA issued a second letter on January 26, 2011 to the FRB, noting specifically that the "guide may not meet the requirements of the Small Business Regulatory Enforcement Fairness Act (SBREFA)." The SBA letter points up the flaws in the "compliance guide," suggests that revisions should be made to it, and requests postponement.

The FRB's response to the SBA's second letter is, essentially, silence.

Perfect Storm - Exhibit 3: Lawsuits and Consternation

Several industry groups have expressed an intention to sue the FRB, or pursue some form of judicial recourse, with the aim of preventing implementation of the loan officer compensation rule on April 1, 2011. As but one example, the National Association of Independent Housing Professionals (NAIHP) is threatening to sue the FRB within the next few days. NAIHP has invited the NAMB to join them in their suit against the FRB. 

According to a statement posted on the NAIHP website, the organization has been preparing legal action against the FRB for almost 2 months. Marc Savitt, the organization's President, states that preparation for their lawsuit has included "interviewing law firms, lining up expert witnesses, research, countless hours of planning and most importantly, raising funds."

In December, the Mortgage Bankers Association (MBA) sent a 19 page, carefully written and comprehensive letter to the FRB's Ben Bernanke  and Sandra F. Braunstein of its Consumer and Community Affairs Division. Under the rubric of "Questions on Federal Reserve Loan Originator Compensation Rule," the MBA lists 42 (sic) topics, plus sub-topics, of concern, confusion, and uncertainty, mixed with requests for clarity, interpretive guidance, and statutory support.

The Impact Mortgage Management Advocacy & Advisory Group (IMMAAG) has been very involved in seeking to "delay implementation until the appropriate impact studies have been concluded "or at least delay implementation to allow for a 'real' guide to be published and to allow the industry to absorb it and get questions answered."

The National Association of Mortgage Brokers (NAMB) has weighed in mightily and has intimated their interest in pursuing a legal remedy if nothing else will work. The NAMB is also threatening now to take "legal action." (Video)

In January, Michael J. D'Alonzo, President of the NAMB sent a letter to the FRB's Bernanke and Braunstein, requesting a delay in implementation of the loan officer compensation requirements, based in part on alleging that the FRB "has no legal basis for treating mortgage broker companies differently than other firms  carrying out the same or substantially similar business operations" and expressly seeking "clarification as to why the Rule permits  one class of mortgage market participants to: (1) receive incentive compensation based upon the type of loan originated; (2)  reduce their own compensation or income in order to capture more business; and (3) remain exempt from restrictions and  prohibitions set forth in the Rule, while other classes of market participants are held to significantly different standards."

Perfect Storm or Safe Harbor

The new loan officer compensation requirements have produced a plethora of webinars, lectures, training videos, questionnaires, surveys, so-called automated solutions, breakout sessions, magazine and news articles - a virtual cottage industry of Google Ads proclaiming "End-to-end mortgage automation solution for bankers and lenders," and "Confused About Dodd-Frank Changes? Sign Up For Onsite/Webinar Training."

In many of the aforementioned venues, speculation is a proxy for regulatory fact. Having a famous speaker or bigwig compliance professional opining on uninterpreted and unclarified TILA statutes makes me uneasy. There just is no replacement for regulatory guidance. Period!

Here's the reality: the largest loan originators and creditors will fend for themselves in this de facto unregulated environment, and all others will fall in line, unless and until the FRB provides clarification or delays implementation. Otherwise, the notion that the large originators get to make the interpretation of federal statutes, in the absence of the FRB interpreting them concisely, unambiguously, and cogently, is all a bit too Darwinian for my taste!

This is precisely why FRB regulations are promulgated: to assure a stable market and to avoid large companies determining for all the other companies what the FRB means. Furthermore, impact of the new loan officer compensation rules on the industry is a fundamental feature of any such foundational change to the residential real estate finance market. How is it even conceivable that such a change can be implemented without comprehensive impact studies required by federal statutes?

This is not a wave, but a tsunami of confusion with no safe harbor in sight - yet!

I am not a prophet, but betting on a delay seems like a good bet!

Be prepared to implement the loan officer compensation rules on April 1, 2011 - and be sure to consult competent compliance professionals for guidance - even if this dynamic environment continues to cause confusion and ambiguity. But, in the absence of the FRB adequately responding to its role in this debacle it is also wise to do what you can to stand up for the greater good of all market participants.

What do you think?

I would welcome your comments.

Please feel free to email me or leave your comments below.