U.S. mortgage broker groups failed in an 11th-hour push to block a Federal Reserve overhaul that will limit a type of compensation that became controversial during the housing boom.
The industry warned that the new rules would further thin its ranks and limit credit for consumers.
U.S. District Court Judge Beryl Howell for the District of Columbia on Wednesday denied the National Association of Mortgage Brokers’ request for a temporary restraining order before April 1, when new compensation rules will take effect, the NAMB said.
The Fed rule is meant to protect consumers from abusive practices by eliminating the so-called yield spread premium, a form of compensation for brokers that can rise based on the interest rate. This gave brokers the incentive to steer customers toward high cost products, according to the Fed and other regulators.
But brokers assert new rules prohibiting payments based on the loan’s interest rate or other attributes will put them at a deep disadvantage to bank retail lending. If a bank lowers a rate on its retail side, brokers say they will not have the flexibility to match the price by cutting their own fees.
“That was shocking to us in hearing this decision,” said Mike Anderson, president of Louisiana-based Essential Mortgage and head of government affairs for the NAMB. The NAMB is working on an appeal, he said.
The National Association of Mortgage Brokers filed a lawsuit against the Fed on March 9, arguing the rule could be a death knell to small mortgage brokers, and limit credit to consumers. The National Association of Independent Housing Professionals also asked for a restraining order and preliminary injunction.
Ranks of mortgage brokers have already been sharply depleted since the housing boom as banks reduced reliance on the “wholesale” channel, in favor of their retail operations. Banks have blamed mortgage brokers for delivering faulty loans, while brokers claim they were merely selling the products offered by the lenders.
“This is great for the big banks,” said Anderson, who estimated broker-related employment has dropped about 30 percent from the peak of the housing boom.
Essential Mortgage may stop initiating loans below $75,000 because they won’t produce enough revenue under the new rules, in which loan officers receive a flat percentage fee from lenders, Anderson said.
The Fed in an earlier response to the brokers’ lawsuit acknowledged that consumers can benefit if brokers use their fees to cut closing costs, and therefore win business. But it concluded that consumers are generally not able to police the market to be sure that happens.
“Although NAMB’s demonstration that its members face substantial irreparable harm is compelling, the court must consider the plaintiff’s harm against both the public interest furthered through the rule, Judge Howell said in the decision.
The Fed also said brokers would soon have to conform to the Dodd-Frank Act that prohibits the same type of commissions. But those regulations would likely be less onerous, Anderson said.