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Brokers Respond to Fed Filing

NAMB, NAIHP file reply to Fed's response

April 5, 2011

By staff

U.S. mortgage brokers delivered their response to the Federal Reserve Board's filing yesterday in the brokers' lawsuit seeking to lift the stay on the loan originator compensation rule. The brokers, who are pleading to stop the rule from "decimating the mortgage brokerage industry," might have a chance changing one aspect of the rule, according to one expert.

The latest filing in the lawsuit came Tuesday from the National Association of Mortgage Brokers and the National Association of Independent Housing Professionals Inc.

The broker-appellants -- who are the plaintiffs in the original lawsuit that seeks to delay the rule's implementation -- disputed the Fed's assertion that their lawsuit has no chance of succeeding, according to the Appellants' Joint Reply Brief in Further Support of Their Emergency Motions filed in the U.S. Court of Appeals for the District of Columbia.

The brokers claim that the Fed cannot escape responsibilities outlined under the Regulatory Flexibility Act just
"by referring to the challenged section of the rule as an “insignificant consequence” and the board's failure to meaningfully examine the effect, as well as any alternatives to the challenged section of the rule is fatal to the board's claim that they complied with the board Br. at 16," the filing stated.

The brokers are challenging the rule's requirement that if a mortgage brokerage receives compensation directly from the consumer, then the loan originator in the transaction must be paid on an hourly basis and cannot receive commission, according to mortgage compliance expert and Patton Boggs LLP Partner Rich Andreano.

While Andreano sees a general strikedown of the rule as unlikely, he does see a small possibility that the brokers could win on this aspect of the rule, which the Fed informally clarified in early February and confirmed in its loan originator compensation rule Webinar last month.

"It's narrower, and ... I could see a court on that one scratching its head that, 'gee, you know that is kind of odd,'" Andreano explained. "The guts of the rule would stand. But this one, admittedly what appears to be an odd provision, would be taken down."

The brokers claim that the Fed was unable to provide any valid basis to undermine the lower court finding that NAMB will suffer irreparable harm in the absence of a stay.

"The board's “insignificant consequence” characterization is
contradicted by the real, catastrophic, and irreparable harm that the challenged section of the rule has been found to cause NAMB's members, as well as the board's own admission which acknowledges that entirely “new business models” would result," the filing continued. "The board's failure to make a “reasonable, good-faith effort to canvass major options and weigh their probable effects,” requires the court to remand the rule to the board."

The brokers say that the central bank is disregarding the more than 70,000 licensed mortgage originators who will be adversely impacted as a result of the rule. These originators will either lose much of their compensation or will be terminated.

Andreano described the district court's finding in NAMB's case that irreparable harm would be caused to NAMB's members "significant." He said there is a "glimmer of hope" on based on this lower court finding.

Finally, the brokers allege that the Fed completely ignores the harm that will be done to consumers when the mortgage broker industry is decimated.

"Consumers in both rural and urban markets will be most affected, as the b
oard itself has recognized that mortgage brokers’ serve to expand a lender’s customer base, “particularly in markets where creditors might not have a direct retail presence," the filing states. "Moreover, the decreased competition caused by the rule will allow lenders to increase the fees, interest rates and costs they charge consumers."

Andreano speculated that the appeals court will rule quickly.

Fed Fires Back in LO Comp Rule Lawsuit
The Federal Reserve Board filed its response to an appeal by mortgage brokers to have the loan originator compensation rule delayed. The Fed says that the brokers have not shown that they have a reasonable chance of winning their case and is asking to have an emergency order lifted.

National Association of Mortgage Brokers, Appellant, National Association of Independent Housing Professionals Inc., Appellant, v. Board of Governors of the Federal Reserve System, et al. Appellee.
Case No. 11-5078, 11-5079 (U.S. Court of Appeals for the District of Columbia).

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