Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

National Association of Mortgage Brokers v. Board of Governors of the Federal Reserve System

March 30, 2011

NATIONAL ASSOCIATION OF MORTGAGE BROKERS,
PLAINTIFF,
v.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, ET AL.,
DEFENDANTS. NATIONAL ASSOCIATION OF INDEPENDENT HOUSING PROFESSIONALS, INC.,
PLAINTIFF,
v.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
DEFENDANT.



The opinion of the court was delivered by: Judge Beryl A. Howell

Judge Beryl A. Howell

MEMORANDUM OPINION

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")*fn1 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,*fn2 as well as the record currently before the Court,*fn3 accompanying declarations*fn4 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 pre-existing 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/dd83_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.*fn5

On July 30, 2008, the Board published a notice of a final rule that was intended to implement new consumer-protection regulations for mortgage lending and servicing. When proposing these rules, the Board withdrew its previous proposal to "prohibit creditors from paying a mortgage broker more than the consumer had agreed in advance that the broker would receive" and the associated model disclosures because it concluded that additional testing was needed on the issue. Federal Reserve System Final Rule, 73 Fed. Reg. 44,522, 44,523 (July 30, 2008) (to be codified at 12 C.F.R. pt. 226). Specifically, the Board found that the proposed disclosures did not reduce consumer confusion, but rather "presented a significant risk of misleading consumers regarding both the relative costs of brokers and lenders, and the role of brokers in their transactions." Board Notice of Final Rule, 75 Fed. Reg. 58,511. The Board indicated its intent to explore other options to address potential unfairness associated with loan originator compensation arrangements, such as Yield Spread Premiums. Id.; see also Federal Reserve System Final Rule, 73 Fed. Reg. 44,563 (July 30, 2008).

On August 26, 2009, the Board published another notice of proposed rulemaking in which it again proposed to add and amend several sections of Regulation Z, the Board's regulations implementing the Truth In Lending Act ("TILA"). Board Notice of Proposed Rule, 74 Fed. Reg. 43,232. Pursuant to its authority under TILA Section 129(l)(2), (codified at 15 U.S.C. §1639(l)(2)), to prohibit unfair and deceptive practices "in connection with" mortgage loans and mortgage refinancing, the Board sought to prohibit certain forms of mortgage broker compensation. Id. at 43,282-86. On September 24, 2010, the Board issued its Final Rule, which retained only those provisions from its 2009 notice of proposed rulemaking that prohibited "unfair" loan originator compensation practices. Board Notice of Final Rule, 75 Fed. Reg. 58,509. Specifically, the Rule prohibits (1) basing loan originator compensation on a loan's terms or conditions, other than loan amount, (2) compensating a loan originator from both the consumer and any third party for the same transaction (the "anti-split compensation provision"); and (3) a loan originator from steering a consumer to a particular loan in order to receive greater compensation (the "anti-steering provision").*fn6 Id.

In issuing this rule, the Board stated that its purpose "is to protect consumers in the mortgage market from unfair or abusive lending practices that can arise from certain loan originator compensation practices, while preserving responsible lending and sustainable homeownership." Id. at 58,509. These three new prohibitions are intended to eliminate incentives for mortgage brokers to offer consumers loans with less favorable terms. Id. at 58,514-15. The Final Rule becomes effective on April 1, 2011. Id. at 58,530.

D. NAIHP AND NAMB LAWSUITS

On March 7, 2011, twenty-five days before the Rule's effective date, NAIHP filed a Complaint challenging the Board's authority and reasonableness in prohibiting the loan originator compensation practices set forth in 12 C.F.R. § 226.36(d) and (e). Plaintiff NAIHP is a trade corporation that represents independent housing professionals, including loan originators, across the country. Savitt Aff., ¶ 1. NAIHP's specifically challenges the prohibition on (1) basing loan originator compensation on a loan's terms or conditions, other than the loan amount; (2) loan originator compensation from both the consumer and any third party for the same transaction; and (3) a loan originator from steering a consumer to a particular loan in order to receive greater compensation. NAIHP moved for a temporary restraining order and a preliminary injunction to enjoin the Board from implementing the Rule. No. 11-cv-489, ECF No. 3. At the Court's request, the parties filed a Joint Stipulation agreeing to a prompt briefing schedule, which the Court ordered. Minute Order, No. 11-cv-489, March 10, 2011.

Two days after NAIHP filed its Complaint, on March 9, 2011, NAMB filed its own challenge of the Board's Rule, but contested only the Board's authority and reasonableness in promulgating § 226.36(d)(2), the provision prohibiting loan originators from receiving other compensation when they are compensated by a consumer. NAMB Compl., ¶ 1. NAMB is also a national trade organization, but represents only the interests of the mortgage broker industry. D'Alonzo Aff., ¶ 4. Like NAIHP, NAMB immediately requested a temporary restraining order and preliminary injunction. No. 11-cv-506, ECF Nos. 3, 4. NAMB also moved for expedited discovery, seeking the Board's production of the entire administrative record and "any documents (electronic or hard copy) relating to the Rule's restrictions on loan originator compensation." NAMB Mem. Supp. Mot. Expedited Disc., No. 11-cv-506, ECF No. 5, at 3.

On March 10, 2011, the Board filed a notice of related case and a motion to consolidate NAIHP and NAMB's suits on the basis that both plaintiffs were challenging the same Rule on the same bases, namely, that the Board violated the Administrative Procedure Act by promulgating the Rule without statutory authority and, in any event, acted arbitrarily and capriciously. Board's Mot. to Consolidate the Civil Actions, Nos. 11-cv-489, 11-cv-506, March 10, 2011, ECF No. 10, at 3. The Court granted defendants' motion, consolidated the cases, and ordered all parties to abide by the expedited briefing schedule previously ordered to resolve the motions for injunctive relief. Minute Order, Nos. 11-cv-489, 11-cv-506, dated March 11, 2011.

Following consolidation of the cases, NAMB requested the Court to reconsider consolidation, arguing that NAMB's challenge is narrower in scope as it "is only seeking to challenge a small sub-section of the Board's final rule" and that abiding by the briefing schedule set forth in the NAIHP matter would cause "NAMB's members significant and irreparable harm and prejudice." NAMB Mem. Supp. of Mot. Expedited Recons., March 14, 2011, ECF No. 11, at 2. The Court denied NAMB's motion, explaining that NAIHP and NAMB's legal challenge involved the same questions of law and fact, and that consolidation of the cases will expedite, rather than delay, judicial review. Memorandum Opinion and Order, Nos. 11-cv-489, 11-cv-506, Mar. 21, 2011. In its opinion declining to reconsider consolidation of the cases, the Court also addressed NAMB's Motion for Expedited Discovery, granting in part and denying in part the latter motion. Specifically, the Court ordered the defendants to expeditiously produce the administrative record, but denied the NAMB's request for "any documents (electronic or hard copy) relating to the Rule's restrictions on loan originator compensation." Id.; NAMB Mem. Supp. of Mot. Expedited Recons., ECF No. 11, at 3.

The Court now considers both NAIHP and NAMB's motions for injunctive relief from the Board's Rule prohibiting certain loan originator compensation practices.

II.PLAINTIFFS' MOTIONS FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION

The court may issue a temporary restraining order ("TRO") when a movant is faced with the possibility that irreparable injury will occur even before the hearing for a preliminary injunction required by Federal Rule of Civil Procedure 65(a) can be held. FED. R. CIV. P. 65(b)(1). The purpose of a TRO is to maintain the status quo of a case until the court has an opportunity to hear a request for fuller relief. Id.; see, e.g., Hosp. Res. Pers., Inc. v. United States, 860 F. Supp. 1554, 1556 (S.D. Ga. 1994) (explaining that the purpose of a TRO is to preserve the status quo pending a hearing for a preliminary or permanent injunction). The factors that apply in evaluating requests for a temporary restraining order are identical to those that apply in evaluating requests for preliminary injunctions. See Al-Fayed v. C.I.A., 254 F.3d 300, 303 n.2, (D.C. Cir. 2001); Sobin v. Bechtol, 168 Fed. Appx. 452, 452 (D.C. Cir. 2005) (citing Jacksonville Port Auth. v. Adams, 556 F.2d 52, 57 (D.C. Cir. 1977)); Beattie v. Barnhart, 663 F. Supp. 2d 5, 8 (D.D.C. 2009);Morgan Stanley DW, Inc. v. Rothe, 150 F. Supp. 2d 67, 72 (D.D.C. 2001). In this case, the Court considers the motions for both the TRO and preliminary injunction together.

A.STANDARD OF REVIEW

To warrant injunctive relief, the plaintiff "must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Natural Res. Def. Council, 129 S.Ct. 365, 374 (2008); Gordon v. Holder, No. 10-cv-5227, 2011 WL 559002, at *1 (D.C. Cir. Feb. 18, 2011). The purpose of a preliminary injunction "is merely to preserve the relative positions of the parties until a trial on the merits can be held." Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981). It is an extraordinary form of interim relief, however, and "should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (internal citations omitted).

These four preliminary injunction factors "interrelate on a sliding scale," and the Court must balance the strengths of the factors against each other. Ass'n of Cmty. Orgs. for Reform Now v. FEMA, 463 F. Supp. 2d 26, 33 (D.D.C. 2006)(citing Serono Labs v. Shalala, 158 F.3d 1313, 1318 (D.C. Cir. 1998)). A particularly weak argument for one factor may be more than the other factors can compensate for, however. See, e.g., Taylor v. Resolution Trust Corp., 56 F.3d 1497, 1507 (D.C. Cir. 1995) (finding that given the inadequacy of the plaintiff's prospects for success on the merits, there may be no showing of irreparable injury that would entitle him to injunctive relief). In meeting the requisite burden for injunctive relief, "it is particularly important for the movant to demonstrate a likelihood of success on the merits." Konarski v. Donovan, No. 10-cv-1733, 2011 WL 383995, at *2 (D.D.C. Feb. 7, 2011). Without a "substantial indication" of the plaintiff's likelihood of success on the merits, "there would be no justification for the court's intrusion into the ordinary processes of administration and judicial review." Elite Entm't, Inc. v. Reshammiya, No. 08-0641, 2008 U.S. Dist. LEXIS 31580, at *4 (D.D.C. Apr. 18, 2008)(citing Am. Bankers Ass'n v. Nat'l Credit Union Admin., 38 F. Supp. 2d 114, 140 (D.D.C. 1999)). Assessing the likelihood of success on the merits, particularly where, as here, the full administrative record is not before the Court, "does not involve a final determination of the merits, but rather the exercise of sound judicial discretion on the need for interim relief." Nat'l Org. for Women, Wash. D.C. Chapter v. Soc. Sec. Admin. of the Dep't of Health and Human Servs., 736 F.2d 727, 733, (D.C. Cir. 1984) (footnote and internal quotation marks omitted).

For the following reasons, the Court DENIES plaintiffs' motions for injunctive relief because they have failed to establish a likelihood of success on the merits.

B.DISCUSSION

Plaintiffs' motions for injunctive relief require the Court to prospectively assess the merits of the plaintiffs' cases and their need for immediate judicial intervention. Although plaintiffs' affiants claim irreparable harm if the Rule becomes effective, the grounds plaintiffs have proffered for challenging the Rule do not appear to have a high likelihood of success. Judicial review of agency action is afforded considerable deference; and even though mortgage brokers will be substantially affected by the ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.