WASHINGTON—In the wake of President Obama signing the massive regulatory reform bill, the Federal Reserve Board at press time last month was in a tentative position regarding pending rules on loan broker compensation—and giving no hints about which way it will go.
Last year the Fed proposed a rule to curb yield-spread premiums and place restrictions on mortgage broker and loan officer compensation. The comment period ended in December, leaving the central bank in a position to finalize changes to the Truth in Lending Act.
The Dodd-Frank legislation essentially endorses the TILA rule but with an unusual form of gratitude: it hands the Fed’s TILA rulemaking authority over to a new agency, the Consumer Financial Protection Bureau.
Democratic Sens. Jeff Merkley (Ore.) and Amy Klobuchar (Minn.) crafted an amendment to the Dodd-Frank regulatory reform bill that mirrors the TILA proposal. Under their bill (and TILA proposal) originator compensation cannot be based on loan terms, except the note amount.
If a borrower decides to finance the broker’s fee through the interest rate or YSP, the broker cannot receive additional income from the lender or anyone else.
Last month on Capitol Hill, Fed chairman Ben Bernanke testified about the transfer of the Fed’s rulemaking authority over TILA to the as-yet unformed CFPB. "We are going from a situation where the Fed was writing these rules to one where within six months to a year the independent bureau will be responsible, not the Federal Reserve," he said.
During that transition period, the Fed could finalize the compensation rule but Bernanke was not asked—and did not reveal—his intentions with respect to the TILA rule.
Nevertheless, the Fed plans to work with Treasury in transferring Fed consumer affairs staff and other resources to the CFPB.
During the transition period, the Fed will "continue to protect consumers and take actions necessary to make sure financial products are fair and well explained," Bernanke said.
Some observers expect the Fed will move ahead and finalize the TILA compensation rule. Even if the CFPB is up and running in six to 12 months, it would probably take another year for the new agency to complete rulemaking. A Fed spokeswoman declined to comment on the TILA rule.
Chris Dodd, the Senate Banking Committee chairman, plans to hold two days of hearings in late September on the regulators’ plans to implement the bill. He will want to know what the Fed intends to do and is supportive of the Fed’s compensation rule and the Merkley-Klobuchar amendment.
