Federal Reserve Compensation Rule is Confusing and Vague says MBA

The Mortgage Bankers Association is asking the Federal Reserve to provide written guidance on its final rule on loan officer compensation because the association believes it’s vague and confusing, particularly for lenders seeking to comply with its provisions.

Without the additional guidance, 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 said the MBA.

“The Rule is far-reaching and requires major changes to long-operating compensation practices that heretofore have been both legal and prevalent,”said the letter. “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.”

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The rule —which requires compliance by April 1, 2011— prohibits basing compensation on a loans terms or conditions and prohibits steering a consumer into a higher rate to receive additional compensation.  Additionally, it prohibits loan originators from receiving compensation from both the consumer and another party for the same transaction.

The MBA said that while the Fed has provided verbal guidance to its members, this in itself is insufficient.  The letter also noted that 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,” the letter said. “Also, there are several differences between the Rule and the Dodd-Frank Act. 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 view a copy of the letter, see here.

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  • Having the Fed involved in mortgage lending seems somewhat out of place. With so many chefs in the kitchen it is remarkable that the result is not even more confusing than it is.

    It is time that there is one primary federal regulator of mortgagees and the rest — get out of the way. All mortgagees should be regulated by each and every state in which they do business in exactly the same way as all other mortgagees doing business in that state. The current system plays into the hands of those who shop to find the easiest way possible out of being regulated.

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