The springtime implementation of new restrictions on yield spread premium-based mortgage loan officer compensation – universally opposed by mortgage brokers and lenders – is now in jeopardy thanks to recently intensified lobbying efforts by state and national trade groups.

It is now even being suggested that the Federal Reserve Board itself – in charge of overseeing loan officer compensation – may be in violation of the law for failure to provide adequate guidance on implementation of the controversial new regulations.

The latest rules take aim at the longstanding mortgage industry practice of paying yield spread premiums, or varying the rate at which a broker is compensated depending on the terms of the loan. Lenders and brokerages would be restricted from paying loan officers more for selling certain loans with particular features or interest rates, though it is acceptable to pay more for larger loan amounts. The new rules would also bar deals in which both lenders and borrowers contribute to paying a portion of the broker’s fee.

The changes are intended to prevent loan officers from steering customers into more expensive loans, a practice which critics charge contributed to the sub-prime mortgage meltdown.

Brokers and lenders, however, have been vociferously opposed to the new rule, which if implemented will force a sea change in how loan officers are compensated. Many complain it’s unclear both how the Fed intends to enforce the regulation and what new types of pay structures might be acceptable under its strictures.

“When you start getting to specific examples, I don’t think there’s been a lot of Q and A and a lot of clarity as to [which] compensation structures might be acceptable and which might not,” said Elizabeth Phelan, chair of the Massachusetts Mortgage Bankers Association (MMBA). “It’s taking 30 years worth of traditional compensation and obliterating it and starting over.”

Lack Of Guidance

The new rules were handed down in September, but lobbying efforts against the changes began in earnest in the past few months.

In December, the national Mortgage Bankers Association sent a letter to the Fed requesting further guidance on how best to implement the new compensation rules. Based on conversations the organization had with Federal Reserve Board staff, there seemed to be varying interpretations of how the rule should be implemented, the MBA said. There were also varying ways in which the requirements of the rule diverged from those of the recent Dodd-Frank financial reform legislation.

Without such guidance, the letter hinted, “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.”

Last month, the National Association of Mortgage Brokers (NAMB) and the Small Business Administration’s Office of Advocacy weighed in, demanding implementation of the rule be delayed.

NAMB declared itself “deeply concerned that the rule is flawed in certain respects,” while the SBA suggested that the Fed’s lack of clear guidance on the issue might mean it was in violation of the Small Business Regulatory Flexibility Act. That law requires federal agencies to issue a compliance guide “on the same date as the date of publication of the final rule or as soon as possible after that date.”

The Federal Reserve responded in the final days of January with the requested compliance guide, but brokers familiar with the document told Banker & Tradesman it still left many questions unanswered. On Feb. 1, the Office of Advocacy of the SBA issued another letter, stating that the group was still “concerned” that the Fed might not be in compliance with the flexibility act.

“Advocacy does not believe that the guide has sufficient information to enable a small entity to know when the requirements have been met,” the office wrote. “Small entities have advised Advocacy that the guidance answers almost none of the questions that the industry has about the rule.”

Stall Tactics

A finding by the SBA that the Fed was not in compliance with the flexibility act could force a delay in implementation of the rule, giving industry opponents more time to push its repeal.

The MMBA, for its part, has arranged a meeting with Massachusetts Sen. Scott Brown to address several issues related to financial reform, and “this will certainly be on our agenda when we sit with him,” said Phelan. The group also plans to address the issue with the Massachusetts congressional delegation, she said.

“We do think there are some things that ought to be postponed until you’ve got one regulator who can look at the whole picture,” she said.

If the implementation of the rule is delayed past its current April 1 start date, it may be many months before it gets off the ground again because of the July launch of the Consumer Financial Protection Bureau (CFPB).

The CFPB is charged with formulating many new consumer finance rules under the Dodd-Frank financial reform legislation, several of which overlap and may conflict with existing regulations, including the Truth In Lending Act (TILA), the law authorizing the Fed to oversee loan officer compensation.

Last month, the Fed declined to offer final versions of three new proposed TILA rules which would have affected the mortgage industry, leaving it up to the CFPB whether or not to go forward with the proposals.