Nat'l Ass'n of Mortgage Brokers v. Bd. of Governors of The Fed. Reserve System

• Decision Date: 30 March 2011
• Docket Number: Civil Action Nos. 1:11–cv–00506 (BAH),1:11–cv–0489 (BAH).
• Citation: 773 F.Supp.2d 151
• Parties: NATIONAL ASSOCIATION OF MORTGAGE BROKERS, Plaintiff,v.BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Defendants.
• Court: U.S. District Court — District of Columbia

773 F.Supp.2d 151

NATIONAL ASSOCIATION OF MORTGAGE BROKERS, Plaintiff,

v.BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, et al., Defendants.

Civil Action Nos. 1:11–cv–00506 (BAH)

1:11–cv–0489 (BAH).

United States District Court, District of Columbia.

March 30, 2011.

Shannon Hadley Rutngamlug, Saul Ewing, LLP, Washington, DC, for Plaintiff.

MEMORANDUM OPINION

BERYL A. HOWELL, District Judge.

Over the past few years, this country has grappled with an extended economic crisis, the roots of which have been attributed to failures in the home mortgage industry. In an effort to understand and correct failures in this market, Congress and the regulatory agencies overseeing the home mortgage industry held hearings, conducted studies, and ultimately proposed laws and regulations prohibiting industry practices deemed to be deceptive or unfair. In the case currently before the Court, two national trade organizations representing mortgage brokers and other independent housing professionals challenge the Federal Reserve Board's authority and reasoning in promulgating certain prohibitions. The National Association of Independent Housing Professionals, Inc. (hereinafter “NAIHP”) and the National Association of Mortgage Brokers (hereinafter “NAMB”) have requested the Court to issue a temporary restraining order and preliminary injunction to enjoin the Board of Governors of the Federal Reserve System (hereinafter “the Board”) ¹ from implementing a Final Rule, effective on April 1, 2011, that restricts certain compensation practices of loan originators relating to mortgage loans (hereinafter “the Rule”), 12 C.F.R. § 226.36(a), (d), (e); Federal Reserve System Final Rule Amending Regulation Z, 75 Fed.Reg. 58,533 (Sept. 24, 2010) (to be codified at 12 C.F.R. pt. 226). NAIHP Appl. TRO and Mot. Prelim. Inj., No. 11–cv–489, Mar. 7, 2011, ECF No. 3; NAMB Mot. TRO and Mot. Prelim. Inj., No. 11–cv–506, Mar. 9, 2011, ECF Nos. 3, 4. The plaintiffs allege that in promulgating this Rule, the Board exceeded its authority under the Truth in Lending Act (“TILA”) and the Home Ownership and Equity Protection Act (“HOEPA”), and, if the Board did have authority to issue the Rule, the plaintiffs allege that the Rule is arbitrary and capricious. NAIHP Mem. Supp. Mot. Prelim. Inj., ECF No. 3 (hereinafter “NAIHP Mem.”), at 14–19; NAMB Mem. Supp. Mot. Prelim. Inj., ECF No. 4 (hereinafter “NAMB Mem.”), at 24–39; see also 5 U.S.C. § 706(2).

After reviewing NAIHP and NAMB's motions for injunctive relief, the defendants' opposition papers, amicus briefs,² as well as the record currently before the Court,³ accompanying declarations ⁴ and applicable law, and following oral argument, the Court denies NAIHP and NAMB's motions for a temporary restraining order and preliminary injunction.

I. FACTUAL AND PROCEDURAL BACKGROUND

The plaintiffs claim that the Board's Rule exceeds its authority and is arbitrary and capricious. A general description of the industry and practices that prompted the Board's concern to promulgate the Rule provides a valuable context in evaluating these challenges.

A. The Work of Mortgage Loan Originators and Mortgage Brokers

Mortgage brokers are independent financial professionals who work with consumers and lenders to obtain mortgage loans. NAIHP Mot. Prelim. Inj., ECF No. 3, Ex. 1, Marc S. Savitt Aff. (hereinafter “Savitt Aff.”), ¶ 3. Mortgage brokers are typically small businesses, employing individual brokers and loan officers who “work with consumers to help them with the complexities of home purchases by taking the applications; performing financial and credit evaluations; collecting and preparing documents; working with realtors; ordering title searches, appraisals, and pay-off letters; assisting in remedying faulty credit reports or title problems; and facilitating loan closings.” Id.; see also NAMB Mot. Prelim. Inj., ECF No. 3, Michael J. D'Alonzo Aff. (hereinafter “D'Alonzo Aff.”), ¶ 9.

For many consumers, an obstacle to getting a home loan is the upfront cost of obtaining a mortgage. Mortgage brokers have thus created mechanisms to defer such costs. One method of deferring upfront cost is by utilizing a “yield spread premium” (“YSP”). A YSP is the present dollar value of the difference between the lowest interest rate a lender would have accepted for a particular transaction and the interest rate the consumer ultimately agreed to pay to the lender. See Federal Reserve System Final Rule Amending Regulation Z, 75 Fed.Reg. 58,511 (Sept. 24, 2010) (to be codified at 12 C.F.R. pt. 226) (hereinafter “Board Notice of Final Rule”); see also Savitt Aff., ¶ 4; NAIHP Mem., at 6; D'Alonzo Aff., ¶ 17. YSPs can be used to reduce the consumer's upfront closing costs, compensate loan originators for their services, or both. Board Notice of Final Rule, 75 Fed.Reg. 58,511; see also Savitt Aff., ¶¶ 4, 6.

Mortgage brokers may receive compensation for their services through YSPs, the loan proceeds, or from the consumer's preexisting resources. Board Notice of Final Rule, 75 Fed.Reg. 58,511; D'Alonzo Aff., ¶¶ 14–15. This compensation is provided either by the consumer, in “Consumer Pay Transactions,” by the lender in “Lender Pay Transactions,” or both. D'Alonzo Aff., ¶¶ 14–16. Most loan officers who work for mortgage brokers are compensated by their employers on a commission basis. Id. at ¶¶ 18–19. The commission-based compensation model for loan officers has been used in the industry for “decades, and it works well.” Id. at ¶ 19. The commission-based system is also pervasive because “many mortgage brokers are small businesses [and] [t]hese businesses often lack the capital reserves or transaction volume to justify paying loan officers on a salaried basis.” Id.

In recent years, the mortgage industry has transformed considerably. Savitt Aff., ¶¶ 5, 8. Previously, mortgage brokers would facilitate a consumer's purchase of a loan, with the loan ultimately residing with a specific lender. Today, lenders themselves often re-package, sell, and securitize loans for the secondary market. Id. Thus, “originators who in the past may have been distinguishable from mortgage brokers increasingly function as brokers.” NAIHP Mem., at 7; see also Savitt Aff., at ¶ 5 (“Mortgage markets have evolved in recent years and consequently mortgage professionals and entities may work in multiple capacities. Lenders often know at the time of closing that they will promptly sell the loan and they know how much they will make from that sale.”).

B. Regulation of Mortgage Brokers

Since 1996, mortgage brokers and non-bank loan originators (independent loan originators) have been required to disclose to consumers the details of their compensation and their relationship with creditors. Savitt Aff., ¶ 7. Standard disclosure forms inform consumers that the loan originator is “acting as an independent contractor and not as [the consumer's] agent.” Savitt Aff., Ex. A, Mortgage Loan Origination Agreement. The disclosure forms further indicate that the loan originator “cannot guarantee the lowest price or best terms available in the market.” Id. These disclosure statements also provide details regarding the mortgage broker's potential compensation, stating, inter alia, that “the retail price we offer you—your interest rate, total points and fees—will include our compensation.... In some cases, we may be paid all of our compensation by either you or the lender.... Alternatively, we may be paid a portion of our compensation by either you and the lender.” Id.

C. History and Promulgation of Board's Rule on Loan Originator Compensation

Since 2006, the Board has examined loan originator compensation and its effect on consumers. Over the course of four Board hearings, an advanced notice of proposed rule-making, two proposed rule-makings, and various studies, the Board reviewed options for protecting consumers from perceived unfair practices, and ultimately determined that the prohibitions reflected in the Rule would best protect consumers. See Federal Reserve System Notice of Public Hearing on the Home Equity Lending Market, 72 Fed.Reg. 30, 380 (May 31, 2007); Federal Reserve System Notice of Public Hearing on the Home Equity Lending Market, 71 Fed.Reg. 26,513 (May 5, 2006); Federal Reserve System Proposed Rule Amending Regulation Z, 73 Fed.Reg. 1,673 (proposed Jan. 9, 2008) (to be codified at 12 C.F.R. pt. 226); Federal Reserve System Final Rule, 73 Fed.Reg. 44,522 (July 30, 2008) (to be codified at 12 C.F.R. pt. 226); Federal Reserve System Proposed Rule, 74 Fed.Reg. 43,232 (proposed August 26, 2009) (to be codified at 12 C.F.R. pt. 226) (hereinafter “Board Notice of Proposed Rule”); Federal Reserve System Final Rule Amending Regulation Z, 75 Fed.Reg. 58,509 (Sept. 24, 2010) (to be codified at 12 C.F.R. pt. 226); NAIHP Mot. Prelim. Inj., Ex. 2, Macro International, Summary of the Findings: Consumer Testing of Mortgage Disclosures (hereinafter “Macro Study”) (July 10, 2008); Board Notice of Final Rule, 75 Fed.Reg. 58,511 n. 4 (referencing Kellie K. Kim–Sung & Sharon Hermanson, Experiences of Older Refinance Mortgage Loan Borrowers: Broker— and Lender–Originated Loans, Data Digest No. 83, 3 (AARP Public Policy Inst., Jan. 2003), available at http:// assets. aarp. org/ rgcenter/ post- import/ dd 83_ loans. pdf.). The Board held hearings regarding loan originator compensation in 2006 and 2007, and in December 2007 proposed a rule that would “prohibit creditors from paying a mortgage broker more than the consumer had agreed in advance that the broker would receive.” Federal Reserve System Proposed Rule Amending Regulation Z, 73 Fed.Reg. 1,672, 1,673 (proposed Jan. 9, 2008). The proposed rule would also have required the written agreement between the consumer and broker to contain disclosures which the Board subsequently subjected to consumer testing. ⁵

On July 30, 2008, the Board published a notice of a final rule that was intended to implement new consumer-protection...