The Community Mortgage Banking Project (CMBP) has argued that a new Federal Reserve Board (FRB) regulation, despite being positioned as pro-consumer, will instead have the perverse effect of denying consumers who comparison-shop for mortgages the opportunity to obtain a lower cost mortgage. CMBP made the arguments in an amicus brief in a case challenging the regulations, which are due to take effect April 1, 2011. CMBP argues from the perspective of independent mortgage banking companies in its amicus that the Fed rule was passed hastily and without regard to the Federal Reserve’s actual legal authority to issue rules.
“The Fed rule was supposed to address the issue of loan officers who raise the cost
of a mortgage in order to increase their compensation,” said Glen Corso, managing director of the CMBP. “But it has ended up depriving loan officers of the ability to discount the mortgage rate to the consumer and absorb the cost of that discount by reducing their compensation. That’s a competitive choice and what a healthy market is all about. Independent community mortgage lenders want to be able to vigorously compete on cost, but in a bizarre twist of poorly conceived regulation, the Fed rule prevents that."
The brief filed by the CMBP is closely related to two separate lawsuits filed by both the National Association of Mortgage Brokers (NAMB) and the National Association of Independent Housing Professionals (NAIHP) which also seek to prevent the implemenation of the Federal Reserve's rule on April 1. The Federal Reserve has requested a consolidation of similar lawsuits filed by both NAMB and NAIHP.
“We are fully supportive of the CMBP’s amicus brief in this case” said Scott Stern, chairman of the Community Mortgage Lenders of America (CMLA). “Consumers in the market for a new mortgage regularly comparison-shop to get the best price. Loan officers, especially those affiliated with independent community mortgage lenders, regularly reduce their compensation in order to discount the price of a loan to be competitive.”
Other compensation variations that benefit consumers are also adversely impacted by the rule. For example, bank-affiliated lenders often pay incentives to encourage their loan officers to originate more complex, difficult-to-originate loans, such as those eligible for credit under the Community Reinvestment Act (CRA). However, the Fed’s rule specifically prohibits the payment of such incentives for CRA loans.
“Rather than drafting rules focused exclusively on eliminating inappropriate compensation incentives for loan officers, the Fed ’s rule instead prohibits any variation in compensation to loan officers based on loans terms—even when it benefits the consumer,” said Corso.