Payer Comp reform update: Dissolved delay

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Just in case you've missed any of these developments or just needed a refresher, here is the latest on originator compensation reform.

On Friday, April 1st, the US Court of Appeals granted a stay on Fed's LO Compensation rule. This delayed the implementation of the rule until the Court was given time to hear additional responses from the Fed and NAMB/NAIHP. Here is an excerpt from the court order:

"Upon consideration of the emergency motion for expedited relief and the emergency motion to stay implementation of final rule pending appeal, it is ORDERED that the implementation of the rule under review in these consolidated cases, 12 C.F.R. § 226.36(a), (d), and (e), be stayed pending further order of the court. The purpose of this administrative stay is to give the court sufficient opportunity to consider the merits of the motions for emergency relief and should not be construed in any way as a ruling on the merits of those motions. See D.C. Circuit Handbook of Practice and Internal Procedures 32 (2010).  It is FURTHER ORDERED, on the court’s own motion, that the government file a combined response to both motions by 12:00 noon, Monday, April 4, 2011, not to exceed 20 pages. Appellants may file a joint reply to the government’s response by 10:00 a.m., Tuesday, April 5, 2011, not to exceed 10 pages. The parties are directed to hand-deliver the paper copies of their submissions to the court by the time and date due."

The Fed offered their response on April 4th. Here are a few excerpts from the Fed's appeal...

"The Board promulgated the Rule under authority granted in section 129(l)(2) of TILA, 15 U.S.C. § 1639(l)(2), to “prohibit acts or practices in connection with mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions” of section 1639. 75 Fed. Reg. at 58513. Appellants err in arguing that section 1639(l)(2) does not authorize the Rule. Their claims that the subsection relates only to high-cost loans defined in 15 U.S.C. § 1602(aa), and permits regulation only of “creditors” and only by disclosures, not substantive limitations, are inconsistent with both the plain statutory language and with the Board’s interpretation of TILA.

Section 1639 was added to TILA as part of the Home Ownership and Equity Protection Act of 1994, Pub. L. 90-321, 108 Stat. 2191 (“HOEPA”).In addition to authorizing the Board to prohibit unfair or deceptive practices in connection with mortgage transactions, section 1639 required special disclosures and limitations on the terms of certain high-cost mortgage loans. The statutory provision is carefully drafted: in each of the substantive provisions requiring specific disclosures or prohibiting substantive terms, the statute refers explicitly to “a mortgage referred to in section 1602(aa) of this title [defining high-cost loans].” See 15 U.S.C. § 1639(a), (c)-(i). Subsection 1639(l)(2) is distinctly different. It authorizes the Board to prohibit, by regulation or order, “acts or practices in connection with – (A) mortgage loans that the Board finds to be unfair [or] deceptive ….” Nothing in the language of the subsection refers to “a mortgage referred to in section 1602(aa)” or limits the Board’s authority to creditors or to disclosure. The general purposes or structure of TILA or HOEPA as a whole cannot override the express exclusion in subsection 1639(l)(2) of the limits appellants seek to impose. Thus, there is no reason even to go to the second step of the Chevron analysis because the “the intent of Congress is clear, [so] that is the end of the matter.” Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984).4 Moreover, to whatever extent the language of section 1639(l)(2) could be said to be ambiguous, the Board’s interpretation, as expressed in the preamble to the Rule, 75 Fed. Reg. at 58513, is entitled to reference from this Court. Ford Motor Credit v. Milhollin, 444 U.S. 555, 565 (1980) (“deference is especially appropriate in the process of interpreting the Truth in Lending Act …. Unless demonstrably irrational, Federal Reserve Board staff opinions construing the Act or Regulation should be dispositive”). Appellants thus have failed to show a likelihood of success on this argument.

AND....

"A plaintiff must show that his injury is “certain, great and actual” – not “theoretical” – and “of such imminence that there is a ‘clear and present need’” for extraordinary equitable relief to prevent harm." ....... "It must be noted at the outset that appellant NAIHP failed, in the district court, to show irreparable harm stemming from the Rule as a whole."

AND...

"It is certainly the case that the public interest favors allowing the Rule to take effect to put a stop to practices that the Board has found to be “unfair.” As the Board found, the current system causes “consumers [to] suffer substantial injury by incurring greater costs for mortgage credit than they would otherwise be required to pay.” 75 Fed. Reg. at 58515. Each day that the Rule’s effective date is postponed is another day consumers will suffer this harm, and their injury, too, is irreparable."

NAMB/NAIHP filed their response to the Fed's appeal today. Here are a few excerpts....

The Board Lacks Requisite Authority Under HOEPA: The Board claims that reference to ancillary rulemaking authority contained at the end of Section 151 subsection (d) (creating Section 129, 15 U.S.C. § 1639) contains no limit on the Board.s authority to constrain any ..acts or practices in connection with . (A) mortgage loans that the Board finds to be unfair [or] deceptive... Board Br. at 7-8. In attempting to manufacture this rulemaking authority, the Board asks this Court to ignore general purpose and structure of HOEPA and TILA and to reach an interpretation that would grant the Board nearly limitless authority to regulate the entire real estate industry, both creditors and non-creditors, as well as any aspect of any industry where a federally-related mortgage loan is involved

AND...

The Board supported its rule by stating that .ield spread premiums present a significant risk of economic injury to consumers.. 75 Fed. Reg. at 58,515. However, as the Board itself stated, the creditor generally controls the yield spread premium funds.. Board's Br. at 6 (emphasis added). As NAIHP's motion already explained (at 9-13), the Board'ss decision to regulate mortgage brokers, while effectively exempting creditors that control 90% of the mortgage origination market was arbitrary and capricious. The district court and the Board also concede that NAIHP and NAMB members provide consumers with disclosures that make clear that they are independent contractors, are not the consumers agents, and .cannot guarantee the lowest price or best terms available in the market.

AND...

The Board Failed To Meaningfully Conduct the Regulatory Flexibility Act Analysis: With respect to the Section of the Rule challenged by NAMB, the Board cannot escape its responsibilities under the RFA 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 RFA.  Board Br. at 16. 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.

With both the Fed's appeal and NAMB/NAIHP's response in the hands of the Court, we are now stuck in a waiting game. The Court has five days to announce new orders, until then,  originator compensation reform is still delayed.  Here are the latest updates from NAMB...

April 5, 2011 5:55pm

April 5, 2011 3:38pm

April 5, 2011 12:06pm

It is MND's opinion that originator compensation reform should be
delayed at least until the Consumer Financial Protection Bureau is fully
up and running in July.From Originator Compensation: Putting the Cart Before the Horse:
"By limiting the consumer's choice of originator compensation methods
to either rebate through a premium note rate or paying points to buydown
the note rate, we are also limiting their "best execution" financing
options. This would imply, based on the segmented nature of the mortgage
market, that some consumers might end up paying more than they would
have for the same note rate before these regs were implemented (no
lender prices the same as another). Then again, the final rules clearly
prohibit a mortgage broker or loan officer from “steering” a consumer to
a lender offering less favorable terms in order to increase the
broker’s or loan officer’s compensation. Yikes. I'm not sure how that
rule will be monitored or enforced from the perspective of the
consumer's most efficient buydown structure. If there is no rebate
standard/originator commission standard, then how do we regulate the
industry? I believe we need a better definition of what constitutes
steering a consumer away from an expensive buydown (good) vs. steering a
consumer toward a higher rate just to increase commission (bad)"

UPDATED AT 6:20PM: L.O. COMPENSATION DELAY DISSOLVED

BAD NEWS: THE DELAY HAS BEEN LIFTED. ORIGINATOR COMPENSATION RULES ARE IN EFFECT. From the Court Order: "Upon consideration of the emergency motion for expedited relief and the emergency motion to stay implementation of final rule pending appeal, the response thereto, and the reply, it is ORDERED that the administrative stay entered on March 31, 2011, be dissolved. It is FURTHER ORDERED that the motions be denied. Appellants have not satisfied the stringent standards required for a stay pending appeal. See Washington Metro. Area Transit Comm’n v. Holiday Tours, Inc., 559 F.2d 841, 843 (D.C. Cir. 1977); D.C. Circuit Handbook of Practice and Internal Procedures 32 (2010)."

Geithner biennial sets target for housing finance reform

Secretary of the Treasury Timothy f. Geithner saidF.
House Committee on financial services today that Congress must meet reforming
Freddie Mac and Fannie Mae, or Government-sponsored enterprises (companies)
will only return to their old form.

Geithner prepared testimony before the
The Committee was based on the Administration the white, Obama has delivered two weeks
to outline its vision for reforming housing financing market.  In this vision, "said the Secretary of the Treasury
the basic role of the Government of will be limited to consumer protection and supervision,
targeted assistance to low-and moderate-income-interest and renters; (i)
targeted capacity to promote market stability and crisis response.

In other words, is the administration of the
DETERMINED the system of private market subject to the supervision of the strong, consumers and
the protection of investors and where the private market, not American taxpayers
bear the burden for loss.

Geithner
criticized for a long time the role of Government in housing finance for supporting incentives
that created significant market distortions, moral hazard and ultimately
left taxpayers responsible for the resulting MESS.  While all Americans should have access to
affordable quality housing , said the objective should not be for every American
To become just thecicielem House for rent.  Targeted and
effective support should be available for families who have a financial
the ability to own a home but are billion private market coupled with the
the range of options for the Americans, who rent.

On
with winding stressed important and Freddie, Fannie, and the careful
the pace of the intended as no shock there is already a fragile housing market and the said
This can be achieved by:

• Gradually
  increase of the price guarantee for enterprises as if they were held to
  the same standards of capital as a private institution;
• To Reduce The
  conforming loan limits by allowing temporary increases enacted in 2008 to
  expire as scheduled on October 1, 2011
• Gradually
  an increase in the amount of private capital that the risk of losing ahead of taxpayers through
  credit losses in the economy and gradually increased down payment requirements;
• Still
  the wind, as a general rule, investment portfolio companies amounting to not less than ten
  per cent per annum.

As
Decreased presence of enterprises, Geithner said the Administration will also
Scale Back FHA "to his more traditionally-oriented role."  The maximum size of the loan should be reduced, and
After the return to the levels of pre-2008, should consider whether further reduction
are justified.  The pricing of FHA
mortgage insurance should also increase beyond two rounds of price increases
already adopted, both to reinforce the account capital reserves and align its
Structure about pricing and availability of a more appropriate relations with the private sector.

The
The Administration also supports reform of the Federal home loan banks (FHLBs) by
initiating a single division membership, limiting the level of advances to each
institution and the reduction of the FHLB investment portfolio.

The Government Of
Administration reform, Geithner said, is only half the picture.  "We have also achieved reforms,
restore confidence in the mortgage market among borrowers, lenders, and
investors. "  Laid down in the Act of Dodd-Frank
laying the foundations for many of these reforms and the Treasury is to coordinate changes
on the securitization market will require creators and securitizers to
maintain financial risk shortly adopt the Bureau of consumer protection
authority of the occurrence of abuse and to promote thechoice for consumers.  Carried out are also changes to the capital of the Bank
standards and reform to the servicing industry.  National include design
support for standards and identify ways to reduce conflicts of interest between
holders of mortgages the first and second and improving incentives for servicers to
Working withthe troubled borrowers.

Geithner
He said the Administration has set out three possible options for the structure of Government
support in the housing finance market, where the private sector is dominant
Supplier credit and mortgage risk bearer. 
In each, would support the Government's "clear, explicit, and
Limited "and each would help FHA and similar Government
initiatives that help targeted groups such as the low-and moderate income households
families, farmers, and veterans.

The
The first option would limit the role of the Government almost exclusively to these targeted
assistance initiatives.  The Vast
The majority of mortgages should be financed by the private sector, and not
take advantage of the Government guarantee.

The
the second option would complement targeted aid although FHA and other initiatives
to backstop the Government with a view to promoting stability and access to mortgage loans
credit market in times of tension.

The
The third option would be the Government, in addition to the FHA and targeted
initiatives to aid, the provision of reinsurance for certain securities, which would be
be backed by mortgages of high quality. 
These securities would be guaranteed by private strictly regulated
companies under stringent standards of equity and strict supervision and is reinsured
by the Government which would charge a premium to cover future claims and would be
After private guarantors are zaprzepaszczeniu only pay those claims.

Geithner said in his prepared remarks that he hoped financing reform of the legislation of the housing complex will pass congressional vote within two years. He added, "idle exacerbate market uncertainty and the risk of leaving many of the defects in the market
has brought us to this point firstly not included. "

After
overnight, members of the Committee questioned the Geithner about the costs associated
in these options.  , The Secretary said
that the costs to the consumer will be higher in each of the reforms, but
in accordance with the first reform would be higher than in the second or third.  Each
the medium-term reform presented will require action by Congress, the Secretary
He said, but by providing a set of options, and key criteria by which they
should be assessed, the Administration hopes that encourage conversation honest
about the pros and cons of each.

 

Below you can find quick reminder Geithner in response to Congressional questions which, after his prepared testimony.

RTRS-U.S. f. GEITHNER TREASURY SAYS 90 PCT ROLE for GOVT BACK MORTGAGES NECESSARY NOW, BUT NOT in the future

RTRS-U.S. TREASURY'S GEITHNER SAYS THE HOUSING SLOWDOWN WOULD BE MUCH MORE SEVERE WITHOUT THE SUPPORT OF FANNIE, FREDDIE

RTRS-U.S. TREASURY'S GEITHNER SAYS, LEAVING ONLY BACKER AS FHA MORTGAGES CANNOT ACTUALLY REDUCE TOTAL GOVT ROLE IN HOUSING MARKET

RTRS-F. GEITHNER-THE CONGRESS YOU CAN STIR THE OPTIONS PROPOSED BY THE TREASURY ON FANNIE, FREDDIE REFORM

RTRS-F. GEITHNER SAYS NO GUARANTEE THAT THE PRIVATE SECTOR WILL STEP BACK INTO THE MORTGAGE

RTRS-F. GEITHNER-IN ALL THE OPTIONS FOR REFORM, FHA MUST BE ABLE TO PROVIDE MORTGAGES FOR LOW/MODERATE INCOME FAMILIES WITH MODERATE PREPAYMENT

RTRS-F. GEITHNER SAYS TERMINATING MORTGAGE MODIFICATION PROGRAMS WOULD RESULT IN A LOT OF DAMAGE TO THE FRAGILE HOUSING MARKET

RTRS-U.S. TREASURY'S GEITHNER SAYS FANNIE FREDDIE GUARANTEE OPTION EXPLICIT HAS "A LOT OF MERIT"

RTRS-F. GEITHNER IS HARD TO KNOW IF THE HOUSING MARKET IN THE UNITED STATES HAS BEEN REVERSED

RTRS-F. HOUSING MARKET STILL GEITHNER-HAS A LOT OF DAMAGE TO ABSORB; NEEDS TIME TO RECOVER

RTRS-F. GEITHNER SAYS DON'T LOOK TO THE EUROPEAN SYSTEM OF HOUSING FINANCE AS A REFERENCE MODEL, A ROLE FOR THE UNITED STATES