I’ve thus far refrained from comment on the LO Compensation lawsuit issues, mainly because the situation was so fluid. However, I have been asked by a few folks to write a bit on it now that the rule is reality, at least for the time being, so here goes. As you’ve no doubt heard by now, a 3-judge panel from the U.S. Court of Appeals for the District of Columbia Circuit has dissolved the stay that was issued on March 31st, paving the way for the immediate implementation of the Federal Reserve’s Rule on LO Compensation. You can find a copy of the order (on the requisite letterhead complete with flowery, official looking font) here.
For the record, I (along with pretty much everyone in the industry) don’t like the rule. I believe it’s bad for the very consumers that it is ostensibly supposed to help. As I’ve said to pretty much every class I’ve taught since the rule was published in the Federal Register in September – any rule that has the effect of limiting consumer choice can’t be good for consumers! Choice breeds competition, competition breeds lower prices. It’s true for every product on the market today, INCLUDING mortgages. Many of the brightest minds in the industry have astutely pointed out that the rule will have the unintentional consequence of reducing transparency in mortgage transactions by merely changing the flow of money behind the scenes, and that doesn’t serve consumers either.
All of that doesn’t matter.
The problem is, speaking ONLY from a procedural perspective; the initial decision by Judge Beryl Howell (which you can find here) appears solidly grounded in law. This decision rejected the NAMB’s and NAIHP’s motions for temporary restraining order and injunction which would have delayed enforcement of the rule until a decision is reached on the merits of NAMB’s and NAIHP’s lawsuits. I know that many people have seized upon the fact that Judge Howell stated in her order that the NAMB and NAIHP were unlikely to succeed at trial as evidence that she must be inherently biased against the industry. Now, I love conspiracy theories too – probably more than most – but I simply don’t see one here. In any request for an injunction, the petitioners must prove that irreparable harm will occur if the injunction is not granted AND that they are likely to succeed on the merits when the actual lawsuit in question goes to trial. Judge Howell acknowledges that the NAMB proved that its members will suffer harm, but she was required to decide whether NAMB and NAIHP are likely to prevail in the end. Based on the limited information available to her now (compared to the full body of evidence that would be made available during a full discovery process and, ultimately, at trial), Judge Howell explains in clear terms that the petitioners failed to show that they are likely to win.
Here’s why that is, unfortunately, true:
Under well-established administrative law supported by U.S. Supreme Court decisions specifically addressing the Fed’s enforcement of TILA (and cited extensively by Judge Howell), parties seeking to invalidate an administrative rule must show that the rule was either issued outside the scope of authority of the agency or that it was issued in an “arbitrary and capricious” manner. In plain English – if the Federal Reserve Board wishes to issue a rule that will fundamentally change the mortgage industry and threaten consumer choice, they have the right to do so as long as they have been authorized by Congress to do so, think it through first and follow the appropriate procedures. In my opinion, the fact that the Fed has previously issued rules on this subject, and proceeded to withdraw them, worked against the industry. It served to show that the rule was thoroughly thought out before being implemented and, therefore, is not arbitrary. The system worked as it was designed to work, we’ve just been on the wrong end of it thus far.
On to the good news!
Remember, there are still a lot of people out there who need money. Loan originators sell money, AND there are over 60% fewer of us selling that money now than in 2005. The sky may feel like it is falling, but you can still make money! Additionally, despite the denial of the injunction, there is still a chance that the current NAMB/NAIHP lawsuits will succeed, OR that some future suit will be successful. I’ve said from the beginning that there are multiple ways to challenge this rule in court. One argument to be made is that Congress wrote the Dodd-Frank legislation so broadly that its intent cannot be determined and, therefore, the law is invalid. (Remember, this issue is likely to be revisited by the new Consumer Financial Protection Bureau under authority of that statute.) Regulatory agencies do NOT have the power to legislate and that is essentially what they are doing here as a result of Congress’ failure to do so. I agree with those finding that there are Constitutional arguments to be made as well. The bottom line is that any new arguments will take money to make – money that is in short supply right now. The NAMB and NAIHP are seeking all the help they can get to continue the fight. If you are motivated to support their arguments on behalf of your industry, get involved! Then go out and find a new client. Yes, a new rule is in place, but the fundamentals are still the same: YOU still control your own destiny. YOU still control your own client base. YOU still control your own income. Carpe Diem – SEIZE THE DAY!