Joining the chorus of calls for delaying implementation of the LO Compensation rule, U.S. Senators David Vitter and Jon Tester have sent a letter to Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve Board warning of unintended potential harm cased to small business mortgage brokers if the rule proceeds as written.
Senators Vitter (R-LA) and Tester (D-MT) point out that even before the mortgage crisis, the home mortgage market was dominated by the three largest banks with 51% market share of residential mortgage originations. The letter states that small lenders and brokers have not been provided sufficient guidance on compliance with the new rule and the result could lead to further concentration of originations at the expense of the smaller entities.
An additional concern raised in the letter is the impact of the rule in combination with the defense of foreclosure provisions of the Dodd-Frank Act that take effect in July. With every loan originated under the new compensation rule becoming a potential liability for "enhanced penalties," larger lenders my be unwilling to acquire loans from smaller lenders and brokers along with the associated risk.
Noting that the Fed has already delayed finalizing three rules related to Regulation Z pending the transfer of authority to the new Consumer Financial Protection Bureau (CFPB), the letter suggests that the same standard should be applied to this rule, eliminating the potential for the rule to be rewritten in a short period of time. The Senators indicate that this rule should be coordinated with the TILA regulations that the CFPB will be tasked with.
While the regulatory environment for mortgage lending as tightened in response to the financial crisis, large institutions have grown larger while small institutions have disappeared. The goal of Congressional and regulatory action, the letter states, should not lead to "further consolidation of the mortgage market which will lead to higher consumer costs and fewer choices."