Fed Fires Back in LO Comp Rule Lawsuit

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MORTGAGE EXPERT
4 · 04 · 11

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.

A memorandum of law was filed Monday by the Fed in the U.S. Court of Appeals for the District of Columbia. The Fed wants an April 1 order lifted so that the compensation rule can be implemented.

The rule is an amendment to Regulation Z, which implements the Truth in Lending Act.

The Fed was responding to an appeal filed last week by the National Association of Mortgage Brokers and the National Association of Independent Housing Professionals Inc. On Thursday, the appellate court handed down an emergency order staying implementation of the rule pending appeal.

According to the central bank, the rule — which was supposed to go into effect last Friday — helps prevent originator abuse with yield spread premiums by prohibiting payments based on the terms of the loan except for the loan amount. The Fed noted that a conflict of interest is inherent with YSPs.

“One consequence of this prohibition is that in consumer-pay transactions, a mortgage broker may not pay a commission specific to that transaction to its loan originator employees,” the response says.

The rule also prohibits loan originators from steering borrowers to higher-priced lenders in order to increase their own compensation on the deal.

The Fed claims in its filing that the mortgage brokers have not proven that they have a reasonable chance of winning the case.

“Even assuming the district court correctly found that appellant NAMB had established irreparable injury, the court found that the other factors did not support preliminary relief,” the filing states. “Importantly, the court found that appellants were not likely to succeed on the merits of their challenge to the rule and that the rule furthered the public interest.

“The district court’s judgment was well-reasoned and supported, and should be upheld by this court.”

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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