Originator Compensation: MBA Pushes for Postponed Implementation of New Regs
The MBA agrees with us, the mortgage industry is no where near ready to implement new originator compensation regs.
Originator Compensation Reform: Putting the Cart Before the Horse
From the MBA....
On Thursday, December 16, 2010, the Mortgage Bankers Association (MBA) sent the attached letter to Ben Bernanke, Chairman, and Saundra Bernstein, Director, Consumer and Community Affairs Division, of the Federal Reserve, requesting written guidance to help the industry implement the Board’s final rule on loan originator compensation and steering published on September 24, 2010.
In the letter, MBA President and CEO John Courson asks for written guidance confirming previous direction that the Board staff has graciously provided MBA and its members either verbally or in person. MBA, on behalf of its members, is seeking written guidance due to the significant liability that lenders would face under the Truth in Lending Act (TILA) for non-compliance with the rule.
Plain and Simple: If the intent of the Board is to foster implementation of the Rule in a compliant and uniform manner, the intent will not be served by leaving unaddressed the significant issues regarding the Rule that are presented in the MBA's Q and A’s. Silence will lead to varying interpretations that will not serve the Rule’s purpose. If the Board cannot provide written guidance prior to the implementation date, we respectfully urge that it postpone implementation of the Rule pending such guidance.
THE LETTER.......
The Honorable Ben S. Bernanke
Chairman
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, D.C. 20551
Sandra F. Braunstein
Director, Consumer and Community Affairs Division
Board of Governors of the Federal Reserve System
1709 New York Avenue, NW, Room 8021
Washington, DC 20006
December 16, 2010
Dear Chairman Bernanke and Director Braunstein:
The Mortgage Bankers Association writes today to respectfully request written guidance from the Federal Reserve Board of Governors (Board) to assist the mortgage industry’s compliance with the Board’s final rule on loan originator compensation and steering (the Rule) published on September 24, 2010.
The Rule is far-reaching and requires major changes to long-operating compensation practices that heretofore have been both legal and prevalent. Unfortunately, in our view, the Rule does not definitively address many matters of particular importance, and has engendered numerous questions from creditors and loan originators seeking to comply. Notwithstanding, it requires compliance by April 1, 2011.
Specifically, the Rule prohibits: (1) basing compensation to a loan originator on a loan’s terms or conditions, subject to a limited exception for loan amount; (2) compensation to a loan originator from both the consumer and a party other than consumer for the same transaction; and (3) an originator from steering a consumer to receive greater compensation.
While we appreciate that Board staff has been available to respond verbally and in person to questions from MBA and its members – and very graciously has agreed to participate in an MBA webinar – unfortunately verbal guidance in itself is insufficient. The Rule was issued pursuant to the Board’s authority to prohibit unfair and deceptive acts and practices and its violation can lead to substantial civil liability, criminal penalties and administrative sanction. In recognition of the significant potential liability under the Truth in Lending Act (TILA), Congress shielded from liability, creditors that in good faith follow Board or official staff interpretations. Lenders and investors, therefore, are wary of proceeding without written direction. If guidance is not forthcoming, many lenders may be forced to be very conservative and implement compensation and loan pricing structures that provide for fixed compensation for originators at a level that can only be supported by higher loan prices to consumers.
Additionally, we believe many of these informal conversations with staff have resulted in responses that go beyond or vary from the Rule, suggest interpretations of the Rule that are not evident from the proposed Rule, present unintended consequences or are otherwise unwise. Respectfully, we hope the process of reducing advice to written guidance will clarify staff thinking. Also, there are several differences between the Rule and the Dodd-Frank Act....
Examples include that Dodd-Frank prohibits several specific types of steering, including steering a consumer from a favorable loan to a less favorable loan regardless of the compensation of the loan originator or creditor. The Fed rule, however, takes a different view of steering, first by restricting steering based on compensation and then by interpreting its compensation rules as an anti-steering rule. Also, while Dodd-Frank prohibits compensation that varies based on the terms of the loan, it allows compensation to vary based on the principal amount of the loan without any conditions. In contrast, the Fed rule only permits the use of fixed percentage of the loan amount, subject to optional minimum and maximum dollar amounts that also must be fixed.
While we believe these differences would support withdrawal of the rule and a new rulemaking to reconcile these differences, at the very least, written guidance should be provided mindful of the future Dodd-Frank rulemaking.
To facilitate the process of preparing written guidance, we have taken the liberty of developing the attached set of questions and answers (Q’s and A’s) that: (1) reflects the verbal guidance Board staff has provided on some issues; and (2) what we believe the Board’s guidance is likely to be on other issues, including new questions submitted to MBA since we met with the Board.
Please note, in instances where we question whether verbal advice is appropriate, we have also provided what we strongly believe is a better response consistent with the Rule for the Board’s consideration. We have also provided responses for newer questions that have not been answered. We label these preferred responses and the responses for newer questions “MBA Proposed Response” for the Board’s consideration.
Generally, these Q’s and A’s do not address matters that are clearly addressed in the Rule though in a few cases such material is restated to provide context for follow-up questions. For reference, in this letter, we also provide a few examples of the many areas of concern and even consternation embodied in the Q’s and A’s.
For example, Board staff has indicated verbally that there cannot be differences in loan originator compensation for the origination of an FHA loan, a loan under a special program for low- and moderate-income families or a conventional loan program because of concerns about the possibility of steering. While the Rule provides guidance that originators may not be compensated based on product differences, it also indicates they may be compensated based on differences in hours worked or overhead. The Q’s and A’s include the verbal response of Board staff and also offer as an MBA Proposed Response that such compensation may differ where it can be shown based on a bona fide analysis that average costs and time spent to originate these differing products justify compensation differences. Notably, this position was rejected verbally by Board staff, without any apparent rationale for why bona fide computations of average costs and time are inappropriate while loan-by-loan determinations, which approach is operationally infeasible, apparently would be permitted. Inflexibility on this important point essentially reads out of the rule the ability to base compensation on costs and time spent to originate loans.
Similarly, Board staff has indicated verbally that compensation may not differ based on whether a loan is originated for a purchase transaction or for a refinance transaction for the stated reason of avoiding steering. The Rule did not address the issue. While the Q’s and A’s include the staff response, since we cannot conceive of any real possibility of steering a borrower in need of a purchase loan into a refinance, or vice versa, the Q’s and A’s offer as an MBA Proposed Response that such compensation may also differ based on cost experience justifying compensation differences.
Also, Board staff has indicated verbally that managers who originate any mortgage loans may not be compensated based on the revenues of their branches because branch revenues to some extent include compensation based on rate or terms. The Rule simply provides that managers are exempt from the restriction on compensation based on rate or terms. The Q’s and A’s include the response of Board staff, and offer a MBA Proposed Response that would permit a manager’s compensation to be based on revenues when the manager provides a de minimis number of originations, along the lines of the Board’s de minimis exception from TILA coverage. The Q’s and A’s also offer a response for situations in which a manager originates more than a de minimis number of loans – the response provides that in such situations compensation to a manager for loans originated would be excluded from any revenue based compensation to that manager.
As the Q’s and A’s make clear, MBA disagrees with several of the staff positions expressed verbally and would welcome an opportunity to discuss them further. Nonetheless, we strongly believe that written guidance should be made available as efficiently as possible well prior to the implementation date – even if we disagree with the answers.
If the intent of the Board is to foster implementation of the Rule in a compliant and uniform manner, the intent will not be served by leaving unaddressed the significant issues regarding the Rule that are presented in the Q’s and A’s. Silence will lead to varying interpretations that will not serve the Rule’s purpose. If the Board cannot provide written guidance prior to the implementation date, we respectfully urge that it postpone implementation of the Rule pending such guidance.
Thank you for your consideration of this letter and attached Q’s and A’s. We greatly appreciate the Board’s guidance on these important issues.
Sincerely,
John A. Courson
President and Chief Executive Officer
Mortgage Bankers Association Attachment
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Alright alright alright. Now we're cooking with gas.....