Thursday, March 10, 2011

NAIHP vs. The Fed Rule

We end this week on the big industry news item of the week, which is the lawsuit that Mark Savitt and the National Association of Independent Housing Professionals have filed against the Federal Reserve to prevent the Fed Rule on Loan Originator Compensation from being enacted.  There have been rumors this week that the lawsuit was really a hoax, but "Housing Wire" has a link to the court documents on its website.  "Housing Wire" is also reporting that the National Association of Mortgage Brokers has filed a similar suit, and a press release issued by NAMB today confirms it.

First, let me say that I was a member of the National Association of Mortgage Brokers from 1998 to the end of 2007, when market conditions became too bad for me to justify the expense of involvement.  I helped to found the El Paso Association of Mortgage Brokers chapter in 1999, and I served as the President of the chapter from October 2001 to October 2002.  I participated in six national legislative conferences and attended state conventions up until 2005 when I began attending the Western Regional Conference in Las Vegas.  So I am very familiar with the organization.

While I do not know Mark Savitt personally, I have met and had conversations with him.  I have always believed him to be a good representative for our industry.

Having said all of that, if you are counting on these lawsuits to actually stop or even delay implementation of this bill, you need a new plan--immediately. The NAIHP lawsuit alleges that the new rule is "arbitrary and capricious" and "in excess of statutory jurisdiction and authority."  NAIHP wants the Federal Reserve to withdraw the rule and wait for the Consumer Financial Protection Bureau to implement its own regulations. (I have not seen a copy of the complaint filed by NAMB, although I did watch a video from the legislative chair who says that they are using an entirely different argument.  Since they did not clarify what that argument was, I will comment only on the NAIHP argument.)

One problem--the Consumer Financial Protection Bureau, when it is finally up and running, will be housed within the Federal Reserve.  So although the CFPB is autonomous, we can expect its thinking and its actions to pretty much mirror the thinking and actions of the Federal Reserve Board.

My second problem with this is the statement that the FRB rule is "in excess of statutory jurisdiction and authority."  Actually, its not.  The Dodd Frank bill opens the door for agencies like the FRB to exercise rule-making authority on many levels.  Really, Dodd Frank is just an enormous framework against which to write new legislation and to enact new rules.  While the bill itself does clearly set into law some new regulations--for example the Merkley amendment which caps loan originator compensation at 3% from all sources--much of the bill opens the door for the completion of a lot of studies, the creation of a number of powerful new governing entities, and the development and implementation of new statutory rules by those entities.  It is really just a huge backdrop for writing legislation without having to go back through Congress.

Anyone who reads the Dodd Frank bill is going to be struck by the amount of power that the bill gives to the various agencies--including power for the Federal Reserve to annihilate the independent loan originator.  And I believe that a judge is going to see this the same way--as long as Dodd Frank is the law of the land, the FRB and the other agencies now existing and soon to be created pretty much have the power to do whatever they want.

The final problem with the lawsuit is the last minute nature of the filing.  The Final Rule was released last August.  The industry has had over six months to react to it.  Filing a lawsuit now in March, three weeks before implementation, is a little bit like locking the barn door after the horse has not only gotten out but has run into the street and been hit by a car.  It's just simply too little too late.

Having worked on grass roots letter-writing campaigns and grass roots lobbies when NAMB worked against the RESPA reform rule, successfully from 2002 to 2004 and unsuccessfully in 2008 and 2009, I know that no amount of effort on the part of a trade group can guarantee results.  But if NAMB and NAIHP want to make a meaningful contribution to the financial services industry, they need to focus their next efforts on a public awareness campaign to get Dodd Frank repealed and to stop massive government takeovers of small business.  They would have better luck with that than they will arguing to a federal judge about why the Federal Reserve needs to be reigned in.  And, in the end, if successful, they would actually have made a huge contribution to the small business community and the future of housing finance in the U.S.

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  1. Alexandra, NAIHP's lawsuit alleging the Fed is operating "in excess of statutory jurisdiction and authority" stems from 'pre' Dodd-Frank statute. Specifically TILA Section § 129 (1) (2) (A) and (B).

    Dodd Frank Amends TILA Section 129B(c) in which the Fed alleges Congress codified the April 2011 compensation rule.

    The problem, legally, is that the Fed uses pre-amended statutes as a basis for the rule. Further, if the Fed cites the new Dodd-Frank statutes, the argument could be made that it's the CFPB's jurisdiction and NOT the Federal Reserves to implement this new rule.

    NAIHP desires this because… once the CFPB has jurisdiction, studies will be done to make sure any new rule will be in alignment with existing other laws (e.g. TILA, RESPA, etc). It also gives time for the industry to lobby for a more reasonable rule.

    A blind man can see that the compensation rule has problems with RESPA on lender paid broker transactions. As is, a broker can’t reduce his or her compensation to bring the GFE into tolerance per RESPA. This is a HUGE problem.

    NAMB's argument is excellent but narrow.

    If you read Dodd-Frank there is zero doubt that Congress 'intended' studies to measure the impact of new rules. That, for certain, is 100% codified.

    Let's hope the judge agrees with Dodd-Frank in letting the CFPB do their job.

  2. I appreciate the insights you have provided here into the legal basis for the NAIHP action.