Despite an 11th-hour reprieve that delayed the Federal Reserve's loan officer compensation rule from taking effect at least until Tuesday, the mortgage industry's chances of overturning the rule are slim.
"Anytime you're suing a federal agency over a rule, it's always a long shot," said Glen Corso, managing director of the Community Mortgage Banking Project, which represents small lenders.
In granting a stay Thursday — the day before the rule was scheduled to take effect — the U.S. Court of Appeals for the District of Columbia said it needed more time to review the merits of an appeal by two broker trade groups. The court did not schedule a hearing on the motions.
"The court said there was enough to look at and they needed a little more time, but folks shouldn't read into it that the court will decide for the plaintiffs," said Richard Andreano, a partner at the law firm Patton Boggs who is not involved in the case.
Lawyers said the court is likely to focus on the National Association of Mortgage Brokers' challenge of a narrow section of the rule. (The National Association of Independent Housing Professionals, the other plaintiff in the consolidated case, challenged the rule in its entirety.)
At issue is a section that can be read as forbidding a loan officer from being a paid a commission when the borrower pays a commission directly to their brokerage firm. Yet the rule still allows banks to pay commissions to their employees which NAMB said would cause brokerages "irreparable harm."
"If the consumer pays the broker firm, the brokerage can only pay a salary or wage," said Andreano.
This much is clear: The rule allows a mortgage broker or loan officer to be paid by the borrower or the lender but not both. The rule bans any compensation tied to the interest rate or any other term or condition of the loan. It also forbids brokers to "steer" a consumer to a lender offering less-favorable terms in order to increase the broker's pay.
"The Fed's rationale was that if the consumer is paying the originator directly and it's negotiated between the two parties, then the originator cannot be compensated from any other sources," said Corso, whose trade group filed a friend-of-the-court brief supporting the plaintiffs. "In such a transaction, the brokerage firm and the employee are both originators and the rule says you can't collect from two sources, which implies that the employee loan officer cannot be compensated."
Francis X. Riley, a partner at Saul Ewing LLP, one of three law firms representing the NAMB, said the rule will put a majority of small mortgage brokerages — a category that he said accounts for 10% of all loan originations — out of business. "This rule will leave consumers to rely primarily on loan origination sources that the [Federal Reserve] Board has conceded many times costs the consumer more money, with less-flexible terms," he said.
Riley said he was "upset" that the lower U.S. District Court had found that brokers would suffer "irreparable harm" from the section in question, but chose not to issue a restraining order. The rule will result "in the loss of tens thousands of jobs," he said.
The Fed has until noon Monday to file a response and the broker groups have until 10 a.m. Tuesday to counter it. Lawyers expect a quick response by the court.
