Winning the Future - Losing the Past

Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.

“Winning the Future!” By now, most of us have heard President Obama's new slogan for his 2012 re-election campaign. 

But for the mortgage industry and consumers, it seems like something very vital is at stake: causes of the recent financial meltdown are creeping and clawing their way back. 

Perhaps we are not so much Winning the Future as Losing the Past.

Famous Last Words

Here are the very last words of the 1616 page Senate's amendments to the House's financial reform bill, which together formed the basis of the Dodd-Frank Act (Dodd-Frank):

Amend the title so as to read: An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes. (My Emphasis) 

The nomenclature "too big to fail," otherwise known by the acronym TBTF, was placed into the legislative language right then and there!

But that phrase "too big too fail" itself never actually made it into the 2319 page Dodd-Frank Act.

Did it just disappear forever or merely reappear with a make-over?

What’s In A Name

Dodd-Frank saw to it that the pesky and politically unpopular term "too big to fail" disappeared, but the concept was craftily replaced with a shiny new term, known as a "systemically important financial institution," also prestigiously having an acronym of its very own: "SIFI." (Pronounced in the same way as you would pronounce SciFi!)

Is the SIFI a different kind of indomitable beast than the TBTF monstrosity?

Let's take a closer look, by reading some Dodd-Frank descriptions of this SIFI creature:

• Entities that are systemically important or can significantly impact the financial system of the United States.

• The terms 'systemically important' and 'systemic importance' mean a situation where the failure of or a disruption to the functioning of a financial market utility or the conduct of a payment, clearing, or settlement activity could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the financial system of the United States.

And here is one of several factors that may be taken into consideration, when deciding to protect us from the flailing SIFI:

• The effect that the failure of or a disruption to the financial market utility or payment, clearing, or settlement activity would have on critical markets, financial institutions, or the broader financial system.

Now you might argue that TBTF is a somewhat colloquial expression, a political and journalistic tool, but its successor, SIFI, is now enshrined into law along with certain actionable remediation. Conceptually, however, I see very little light between the meaning of the two terms.

So did Dodd-Frank conquer the "too big to fail" beast, wrestling the TBTF to the ground, casting it into chains, pulling off its griftopic mask, and finding underneath the "systemically important financial institution," that rapaciously attenuated SIFI?

Are We Safe From The SIFI?      

Let us presume that Dodd-Frank actually provides viable regulatory remedies for keeping this SIFI chained up. As you may know, I have written extensively about the breathtaking lack of formidable brakes in Dodd-Frank to avoid the SIFI debacle. Indeed, certain markets are still exposed to systemic failure, as that term is defined by Dodd-Frank. In some cases, certain markets are inadequately addressed by or they are not even regulated through Dodd-Frank.

In any event, let us just suppose that somehow Dodd-Frank actually has all the regulatory remedies it needs to keep the SIFI under control. What may happen in another meltdown?

Systemic Risk

One of the determinants of the effectiveness of protection from SIFIs is best described in a recent report from Standard and Poor's. It is entitled "The U. S. Government Says Support For Banks Will Be Different 'Next Time' -- But Will It?" Link Here – PDF

Although the title speaks for itself, or begs the question, the report offers the one and only factor that really counts when it comes to SIFIs running loose: government intervention inevitably will crowd out a regulatory framework and trumps everything else! So, inevitably, this is the outcome that may happen.

And I quote:

It would seem "too big to fail" has ended. But, has it really? Standard & Poor's Ratings Services believes that the primary goal of DFA is to make banks less risky and better capitalized so the need for extraordinary support is reduced. However, given the importance of confidence sensitivity in the effective functioning of banks, we believe that under certain circumstances and with selected systemically important financial institutions (SIFI), future extraordinary government support is still possible. The U.S. government has a long track record of supporting the banking system. But the government's authority to regulate and supervise hasn't always prevented bank failures or the need for selected bailouts or tailored assistance. Time and time again, the U.S. government has found ways - many times reluctantly - to contain systemic risk and limit economic fallout when large financial institutions are on the brink of failure. 

And then, referring to Dodd-Frank, comes this conclusion:

This legislation, in our view, has not addressed the demand side of risk, risk-mitigation efforts, or the fact that a two-tier regulatory system will likely continue to move risks into the loosely regulated shadow-banking system.

(My Emphasis)

Translation: S&P understands regulatory risk. The TBTF monster has shape-shifted into the SIFI monster and continues to have the hidden powers to destroy the country’s economic stability at some unspecified time in the future. The government will be expected to prop up the "too big to fail" financial institution, irrespective of the regulatory safety net.

Mortgage Industry Nemesis

Near its height, mortgage brokers alone accounted for more than 500,000 people, and originated between 68% and 70% of residential mortgage loans. Then came the wave of predatory lending accusations, attacks on the yield spread premium as a compensation source, allegations of mortgage fraud and steering, and so forth. This was accompanied by foreclosures that eclipsed the Great Depression.

By early 2010 more than 1 million homes were seized, defaults soared to more than 10% percent and foreclosures reached record numbers – in the first quarter alone! Along the way, the number of mortgage brokers shrank to 246,900 by the middle of last year, which is a drop of over 50% from its high. But this was not a shaking out of "bad" brokers over "good" brokers. Many believe that the decline had been due, in part, to more restrictive compliance standards.

And that is just a snap shot of what mortgage brokers have been going through, not to mention the regulatory burdens placed on mortgage bankers, banks, investors, and servicers - each with its own brand of significant and often costly challenges, just to survive and also comply with new regulatory compliance laws.

Wall Street operates by different standards, as it likely should - each market often marches to the beat of a different drummer. But the Credit Default Swap - the "shadow banking" favorite – has not gone away at all; in fact, the CDS market is bigger, more entrenched and far more pervasive than ever.

Other than a devastated mortgage industry and a legitimately wary consumer, and a blizzard of new regulations purportedly in response to the economic crisis, what has actually changed to fully prevent systemic failure?

Straddling Two Worlds

In my recent 2-part article, Ability-to-Repay: Regulating or Underwriting?, I discuss how this one area of legislation alone causes a substantial increase in government encroachment on underwriting, with the effect - intended or unintended - of rationing credit. My conclusions, based on a detailed analysis of this law, is:

1) There is gradual nationalizing of underwriting guidelines.

2) The imposition of an ability-to-repay requirement as a regulatory mandate is an assertion that market forces cannot discipline lenders or incentivize lenders to act in their own self-interest.

3) There is a substantial shift in liabilities, because this mandate shifts the burden of compliance to the lenders in order to assure that their contractually bound borrowers can pay back their loans.

4) The law imposes a new kind of theory for a regulatory framework.

5) This law infantilizes lenders by making them comply with a regulator's ad hoc way of rationing the extension of credit.

6) Rationing of credit leads to the diminution of arms-length, contractual counterparties.

7) The law changes the dynamics in the inherent, due diligence tension among the parties to a residential mortgage transaction and raises serious issues about the systemic consequences soon to be engendered.

And yet, the Mortgage Bankers Association sent an extensive letter to the Federal Reserve Board (dated 7/22/11 - one day after the CFPB received its statutory authority over the subject legislation - Link Here) which corroborates my aforementioned conclusions. Nevertheless, the MBA letter also manages to support the concept of the Ability-to-Repay provisions:

• MBA has long supported establishment of an ability to repay requirement for mortgage loans. However, since the requirement will apply broadly and bring considerable liability to lenders and assignees for any violations, it is essential that the rule's QM requirements include unambiguous definitions and means of compliance. Clear "bright line" requirements will ensure the provision of sustainable mortgage credit to the widest array of qualified borrowers at affordable costs.

• If these requirements are implemented incorrectly, however, we are deeply concerned that far too many borrowers will be excluded from affordable mortgage credit and/or will be subject to unreasonably increased financing costs, in turn harming the very people Dodd-Frank was intended to protect and undermining the nation's economic recovery.

Personally, I prefer clear and “unambiguous definitions;” however, the MBA's position seems too embracing, even if it recognizes the effect such legislation could have on rationing credit.

Losing The Past

The dramatic changes that the mortgage industry has gone through are partly of its own doing and partly due to the economic downturn caused by many macro- and microeconomic issues. Some legislation that has been made into law, such as Dodd-Frank, is supposedly a means to prevent another economic meltdown.

Without a stronger real estate market, there really cannot be much of a recovery. We are experiencing a recession that is being made worse by the lack of consumer demand. This is not a recession caused simply by the lack of consumer confidence. If the consumer does not have spending money, or feels the need to sit on the sidelines, the recession will become an ever expanding morass, lasting many years. Despite what the government and political leaders authoritatively proclaim, the recession did not really end, except in the most abstruse technical sense. Nothing could be more obvious! 

Laws that promise to prevent the spawning of TBTFs, or their progeny, the SIFIs, or whatever you want to call them, but also institute the wide-ranging set of regulations that are now clogging up the mortgage industry, only economically hurt the consumer, due to higher pricing, pressure on origination efficiency, and impediments to innovation. Many mortgage market participants must pass on their costs, due to the burden of higher overhead and lower profit margins.

Sometimes, over-regulating may be just as ineffective as under-regulating - especially when, in many cases, existing regulations just need to be enforced.

I am privileged to run the first mortgage risk management firm in the country. We navigate regulations day in and day out for our valued clients. Regulations are important to the safety and soundness of a financial institution and protect the consumer. But it is better to have a few, new, smart regulations than a plethora of mediocre regulations.

There is no way to really win the future by not looking back, gaining insights, correctly identifying errors, and then carefully, incrementally, intelligently, providing regulatory remedies that help to preserve the mortgage industry.

"Winning the Future" may be a catchy phrase. But an overbearing approach to regulatory risk will not win the future, though it may assuredly lead to losing the past.

What do you think?

I would welcome your comments.
Please feel free to join the forum below.

FRB: Mortgage Rulemaking Chart 2008 - 2011

Yesterday, we notified you about the testimony given by witnesses in the hearing held by the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."

The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets.

During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs, provided written testimony containing a table entitled "Summary of Federal Reserve Board Mortgage Rulemakings - 2008 through 2011."

I have removed the table from the written testimony and featured it separately in our Library.

MORTGAGE RULEMAKINGS - 2008 THROUGH 2011

FINAL RULES

• Home Ownership and Equity Protection Act (HOEPA): Final Rule
• Mortgage Disclosure Improvement Act, Part I: Final Rule
• Mortgage Disclosure Improvement Act, Part II: Interim Final Rule
• Helping Families Save Their Homes Act - Mortgage Transfer Disclosure: Final Rule
• Loan Originator Compensation: Final Rule
• Dodd-Frank Act - Appraisal Independence: Interim Final Rule
• Dodd-Frank Act - Escrow Account: Final Rule

PROPOSED RULES

• Regulatory Review of Disclosure Rules for Closed-end Mortgages (Phase I)
• Regulatory Review of Disclosure Rules for Home Equity Lines of Credit (HELOCs) (Phase I)
• Regulatory Review of Mortgage Disclosure Rules (Phase II)
• Dodd-Frank Act - Escrow Account Disclosures
• Dodd-Frank Act - Ability to Repay/Qualified Mortgages

LIBRARY

Summary of Federal Reserve Board Mortgage Rulemakings
2008 through 2011
Statement of Sandra F. Braunstein, Director
Division of Consumer and Community Affairs, Federal Reserve System
Insurance, Housing, and Community Opportunity Subcommittee
(Committee on Financial Services)
July 13, 2011

Hearing: FRB Testimony on LO Compensation

On Wednesday, July 13, 2011, the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."

The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets. 

During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs seemed to state that the loan officer employees of loan originators (i.e., brokers) would not be required to be paid only by a salary on consumer-paid transactions, but may also be paid "bonus" commissions.

Her testimony today actually supports my understanding of her statement to this Subcommittee.

[See page 8-9 of Director Braunstein's submitted testimony in our Library.]

Under the new TILA loan compensation rule, if a loan is brokered and the consumer is paying the broker fee, then the branch manager, the loan officer, and all the other employees may only be paid a salary or hourly wage.

Similarly, bonuses and referral fees to tellers, processors, and other staff are not be permitted for a brokered loan when the borrower pays broker fees or other origination fees to the broker.

Perhaps I did not understand fully Director Braunstein's remarks. But if that aspect of the Rule is changed, then this would be a significant relief to mortgage brokers. 

In any event, the details and facts must be considered. So further clarity will be needed to determine if this is actually a change in FRB policy.

 HEARING

The hearing consisted of two panels.

The full text of the testimony of each witness may be found in our Library.

 WITNESSES

Panel I

Sandra F. Braunstein, Director of Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System

Teresa Payne, Associate Deputy Assistant Secretary, Regulatory Affairs, Department of Housing and Urban Development

Kelly Cochran, Deputy Assistant Director for Regulations, Consumer Financial Protection Bureau , Department of Treasury

James R. Park, Executive Director, Appraisal Subcommittee, Federal Financial Institutions Examination Council

William B. Shear, Director of Financial Markets and Community Investment, Government Accountability Office

Anne Norton, Maryland Deputy Commissioner of Financial Regulation, on behalf of the Conference of State Bank Supervisors

Panel II

Steve A. Brown, Executive Vice President, Crye-Leike, on behalf of the National Association of Realtors

Henry V. Cunningham, Jr., CMB President, Cunningham & Company, on behalf of the Mortgage Bankers Association

Tim Wilson, President, Affiliated Businesses for Long & Foster Companies, on behalf of the Real Estate Services Providers Council, Inc.

Anne Anastasi, President, Genesis Abstract and President, American Land Title Association

Mike Anderson, President, Essential Mortgage, on behalf of the National Association of Mortgage Brokers

Marc Savitt, President, The Mortgage Center, on behalf of the National Association of Independent Housing Professionals

Sara Stephens, President Elect, Appraisal Institute

Don Kelly, Executive Director, Real Estate Valuation Advocacy Association (REVAA), on behalf of REVAA and the Coalition to Facilitate Appraisal Integrity Reform

Janis Bowdler, Director, Wealth-Building Policy Project Office of Research, Advocacy, and Legislation, on behalf of the National Council of La Raza

Ira Rheingold, Executive Director, National Association of Consumer Advocates

 Library

Insurance, Housing and Community Opportunity Subcommittee
(Committee of Financial Services)

"Mortgage Origination: the Impact of Recent Changes 
on Homeowners And Businesses"
 
Witness Testimony - Two Panels

July 13, 2011

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.