The Federal Reserve Board is being sued over its loan originator compensation rule.
A complaint was filed Monday in U.S. District Court for the District of Columbia by the National Association of Independent Housing Professionals. Among the allegations are that the Fed acted outside its authority in finalizing the rule last August.
In a news release, the trade group says it wants to prevent the implementation of the Fed’s Regulation Z rule, which the association claims restricts compensation to mortgage brokers and loan originators. Reg Z implements the Truth in Lending Act.
The final rule also prohibits payments from any other party if the borrower pays the originator directly, according to a copy of the complaint provided by the association. In addition, the rule doesn’t allow originators to steer borrowers to more profitable programs even it the borrower would be better off.
The complaint alleges that mortgage brokers will be placed at a “significant and permanent competitive” disadvantage as a result of the rule because non-brokers can still charge a higher rate to earn servicing-released premiums in the secondary market and help borrowers avoid up-front fees. Brokers have already been subjected to full disclosure of their compensation since 1992, “unlike any other participants in the residential real estate market,” the lawsuit says.
“There is no practical difference between a YSP and the service release premium that a bank, which originates a loan, receives when it sells that loan into the secondary market,” the complaint states. “The Final Rule will have 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 the par rate.”
A spokeswoman for the Fed declined to comment on the case.
The rule’s implementation date is set for April 1.
The board allegedly violated its statutory authority under TILA because it asserts that allowing borrowers to defray a portion of the closing costs through yield spread premiums is “unfair” or “deceptive” as defined by Section 5 the Federal Trade Commission Act, 15 U.S.C. § 45. But it didn’t cite evidence to support the assertion.
The NAIHP, which reports that it “represents the interests of thousands of independent housing professionals,” said it also filed a Motion of a Temporary Restraining Order.
“This rule will have devastating consequences for consumers, small business housing professionals and the housing market,” Mark Savitt, president of NAIHP and past president of the National Association of Mortgage Brokers, said in the news release.
National Association of Independent Housing Professionals Inc., 601 Pennsylvania Avenue, N.W., Suite 900, Washington, D.C., 20004, Plaintiff, v. Board of Governors of the Federal Reserve System, 20th Street and Constitution Ave., N.W., Washington, D.C., 20551, Defendant.
March 7, 2011 (U.S. District Court for the District of Columbia).
