Catastrophic, devastating, immediate, irreparable, irrevocable harm.
That's what mortgage brokers say a new Federal Reserve rule that bars paying them via commission will cause.
In a suit filed yesterday in U.S. District Court for the District of Columbia, the National Association of Mortgage Brokers sued the Federal Reserve, objecting to changes in Regulation Z covering how loan officers are paid.
According to the complaint, filed by attorneys from Saul Ewing; the Sterbcow Law Group; and Herman, Herman & Katz, the rule, which goes into effect on April 1, will “leave mortgage brokers without the ability to originate the majority of their loans and ultimately the mortgage brokerage industry will become extinct.”
In the past, mortgage brokers were paid an origination fee for matching consumers with loans by the borrower, the lender or both. Under the new Fed rule, the broker can be paid by one or the other, but can no longer pocket money from both sides.
The rule also bars mortgage brokerages from paying their employees by commission. Previously, the broker who originated the loan typically got a commission based on a percentage of the fees paid to the brokerage.
According to the complaint, the rule will prohibit brokers from paying loan originators commissions for specific transactions. Brokers can still pay them a salary or hourly wage, but the trade group says this is “not workable because most mortgage brokers do not have sufficient loan volume to make salaried loan officers an economically viable option.”
The mortgage broker trade group also complains that the ban on commissions doesn’t extend to creditors like banks, which can still pay their individual loan officers via commission.
According to the Fed’s Compliance Guide to Regulation Z issued in January, the overriding goal behind the rule is to prevent brokers “from steering a consumer to consummate a loan that provides the loan originator with greater compensation, as compared to other transactions the loan originator offered or could have offered to the consumer, unless the loan is in the consumer's interest.”
The plaintiffs say the regulation is arbitrary and capricious, oversteps the Fed’s authority under the Truth in Lending Act, and contradicts the Dodd-Frank Act.