New Loan Officer Rules Go Into Effect as Court Dissolves Stay

April 7, 2011

The Federal Reserve Board's regulations governing loan originator compensation went into effect April 6 after a federal appeals court dissolved a stay suspending implementation of the rule.

The U.S. Court of Appeals for the District of Columbia Circuit issued an order March 30 to stay the implementation of the Board's loan originator compensation regulations. However, on April 5, the appeals court on Tuesday ruled National Association of Mortgage Brokers and (NAMB) the National Association of Independent Housing Professionals (NAIHP) had not "satisfied the stringent standards required for a stay pending appeal," and dissolved its administrative stay of the rule.

The NAMB and NAIHP filed a lawsuit March 9 against the Board of Governors of The Federal Reserve System seeking to restrain implementation of a section of the Fed’s loan originator compensation rule. On March 30, Judge Beryl Howell denied NAMB’s request although she found the rule could cause irreparable harm. NAMB then appealed to the U.S. Court of Appeals, which then issued the stay on March 31, preventing the rules from going into effect April 1. The Federal Court then dissolved the stay after both NAMB and the Federal Reserve filed replies.

The three-judge appeals court panel also denied an emergency motion to stay implementation of the rule pending appeal, and denied a motion for expedited relief that sought to fast-track the appeal process.

Effective April 6, all compensation paid to loan originators on new loan applications must comply with the Board's rule.

Marx Sterbcow, managing attorney of The Sterbcow Law Group, one of the law firms representing NAMB, said this ruling gives the Federal Reserve extraordinarily broad powers to regulate any facet of the real estate industry it deems unfair where a mortgage is involved.

“We do not believe the Federal Reserve Board has the power to regulate real estate commissions, title insurance premium splits, property and casualty insurance brokers’ compensation, home warranties, etc.,” Sterbcow said.

The new Loan Originator Compensation rules, an amendment to the Federal Reserve Board's Regulation Z, which implements the Truth in Lending Act, were published in the Federal Register on Sept. 24. They are designed to protect mortgage borrowers from unfair or abusive lending practices that can arise from certain loan originator compensation practices. The new rules apply to compensation that is paid to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders. The rules also cover companies that originate and close loans in their own name using table funding from a third party.

The final rules, which apply to closed-end loans secured by a consumer's dwelling, prohibit:

  • payments to loan originators based on the loan's interest rate or other terms and conditions of the transaction, except the amount of credit extended;
  • any person other than the consumer from paying compensation to an originator in a transaction where the consumer pays the loan originator directly;
  • loan originators from “steering” consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such a loan;
  • and
  • provide a safe harbor to facilitate compliance with the prohibition on steering. A loan originator is deemed to comply with the anti-steering rule if the consumer is presented with loan options that include the following: The lowest interest rate for which the consumer qualifies; The lowest total dollar amount for points and origination fees, and The lowest rate for which the consumer qualifies for a loan with no risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first seven years.
The Federal Reserve recently held a webinar regarding the new rules and addressed payments made to third-party service providers that are affiliated with a loan originator. A provision of the rule states that affiliates are treated as a single person. This has generated some questions about the impact on compensation for loan originators when they are affiliated with a title company. The main question is if a consumer pays a title premium to a title company affiliated with a mortgage broker, does that constitute compensation to the broker paid by the consumer? According to the Federal Reserve, the answer is no.

“Provided the third party service (i.e., the title premium) is a legitimate ancillary service to the transaction and provided the charge the third party receives is a bona fide and reasonable amount,” Federal Reserve staff said during the webinar.

Contact ALTA at 202-296-3671 or