Will National Banks Lose the Protection of Federal Preemption?

justice.jpgIf you are the director of a nationally chartered bank or thrift, there’s a date coming up real fast that you must pay attention to. 

One of the many changes mandated by the Dodd-Frank Act is a significant restriction in the protection that banks and thrifts with national charters have enjoyed from many state consumer protection laws. That protection—under a legal principle known as federal preemption—is set to change significantly on July 21. While much angst has been expressed over the disruptive impact that the new Consumer Financial Protection Agency could have on the banking industry, that agency is still getting organized and its impact at this point is—at best—speculative. The end of federal preemption, on the other hand, could have immediate ramifications for national banks and thrift.

The idea of federal preemption in banking is a creature of the National Bank Acts (there were actually two, one in 1863 and another in 1864 which superseded the original law), which among other things created a federal charter for commercial banks and placed them under the control of the Office of the Comptroller of the Currency (OCC). Preemption received a huge boost in 1996 when the U.S. Supreme Court issued a landmark ruling that invalidated a state law that prohibited national banks from selling insurance in small Florida towns. 

And in 2004, under former Comptroller John D. “Jerry” Hawk, the OCC issued rules that preempted national banks and their operating subsidiaries from state laws that “obstruct, impair or condition” their ability to make loans and take in deposits, and also granted sole authority to examine and supervise national banks to—itself!

An apt description of this royal doctrine might have been: “The divine right of the OCC,” and it comes as no surprise that legitimate state interests have railed against the agency’s protective stance ever since. Consider this one example: During the home mortgage boom some years back, national banks doing business in Georgia were exempted from that state’s robust anti-predatory lending law while state chartered banks were forced to comply. Needless to say, state attorneys general and legislatures have been among the most vocal opponents of the OCC’s stand on preemption.

Although Dodd-Frank does not invalidate federal preemption altogether, it does state that the OCC can no longer issue sweeping rulings like it did in 2004, but instead will have to make preemption decisions on a case-by-case basis. It’s also possible that the scope of protection under federal preemption will end up being more narrowly constructed under Dodd-Frank, although it might take years of litigation before national banks and thrifts know exactly how much protection they have against state laws.

Who should be most concerned about the Dodd-Frank restrictions on federal preemption, set to take effect on July 21? Logically, it would be large national banks and thrifts with multi-state operations that include branch banking, home mortgages and/or servicing, home equity lending, auto finance, student lending and credit cards–in short, practically any consumer lending or servicing business.

Being forced to comply with multiple—and differing—state laws will drive up operating and compliance costs for large multi-state banks. Worse yet, it will expose them to the wrath of state attorneys general who couldn’t touch them before. As Arthur J. Rotatori, a Cleveland, Ohio-based member at the McGlinchey Stafford law firm puts it, “The purpose of this provision in Dodd-Frank is to empower state attorneys general to go after national banks.”

And no doubt they will.

Why Smaller Banks Should Worry About Interchange Fees

If you’re a bank CEO or director, you’re probably getting a little tired of Uncle Sam reaching into your institution’s pocket and pulling out handfuls of cash. Last year it was the new federally-mandated restrictions on account overdraft fees, which threatened to deprive banks of an important revenue stream just as they were struggling to recover from the effects of a deep recession in the U.S. economy. Fortunately for the industry, a significant percentage of retail customers opted into their bank’s overdraft protection plan, so the economic impact has turned out to be less than feared.

But then along came the Dodd-Frank Act, which not only imposes a greater and more costly compliance burden on the banking industry, but also drastically reduces the interchange fee that big banks–defined as $10 billion in assets or larger–are permitted to charge merchants on debit card transactions. The Act directed the Federal Reserve to set the maximum rate for debit card transactions, and in December the Fed proposed a cap of 12 cents–down from an average of 44 cents per transaction today.

The Fed is still soliciting comments under its normal rule-making process, and is required by Dodd-Frank to finalize the new rate by April 21. A 12-cent cap would result in a 70 percent to 85 percent reduction in debit card income for large banks, according to an estimate by the consulting firm Raddon Financial Group.

As bad as that sounds (and it is bad), the outcome of this latest threat to bank profitability is far from clear.

Raddon Vice President Bill Handel says that large banks like J.P. Morgan Chase & Co. are already considering a variety of strategies to mitigate the impact. For example, J.P. Morgan is testing a monthly $3.50 debit card fee in Green Bay, Wisconsin. (Under the current system, merchants end up paying the interchange fee, while retail bank customers are able to use their debit card for free.) The bank is also testing a $15 monthly checking fee in Marietta, Georgia.

One possible outcome of the new fee cap is that large banks will have to start charging for things–like debit cards and checking accounts–that used to be given away for the purpose of attracting core deposits. “The ‘free’ environment that we have been operating under will cease to exist,” says Handel.

The only problem is, Raddon’s research shows that consumers have become so accustomed to getting their retail banking services for free that they will balk at paying a monthly debit card fee. Instead, they will be more likely to either reduce their debit card usage in favor of paper checks (which are more costly for the bank to process)–or look for a free debit card at a smaller bank that isn’t affected by the cap. And that would seem to give small banks a huge competitive advantage since they could still offer their debit cards and checking accounts for free.

Not so fast. Smaller banks might think they’re shielded by Dodd-Frank from the sharp economic impact that large banks will feel, but that protection might not hold up in the real world outside of Washington, D.C. Predicts Handel, “We don’t believe the less-than-$10 billion exemption will hold up over the long haul.”

Visa Inc., the country’s largest card payments company, has said it will adopt a two-tiered pricing system for debit card transactions, one for large $10-billion-plus banks that will reflect the new Federal Reserve mandated cap on fees, and a second system for smaller banks that does not place a cap on fees. But Visa and its smaller payments competitor – MasterCard Worldwide – are member associations dominated by the same mega-banks that will be most hurt by a 12-cent cap. Handel says it’s not logical to assume that large banks like J.P. Morgan Chase and Bank of America will passively sit by while they lose debit card and checking account customers to small banks that can afford to subsidize those products with their higher interchange income.

“[The card companies’] brands are backed by the big banks,” says Handel. “If the big banks say to Visa and MasterCard ‘You can’t continue to have a two-tiered system,’ they will have to listen.”

A company spokesman said yesterday that MasterCard had not yet made a decision on whether it will adopt a two-tiered system for debit card fees, but don’t be surprised if the 32-cent per debit card transaction advantage that smaller banks seem to enjoy thanks to Dodd-Frank ends up much, much less.

A Turnaround Year?

For the third time this week, I found myself on the FDIC’s website to start my day. A glutton for regulatory punishment? More a curiosity to see the agency’s latest report card. On the bright side, it shows that the banking industry checked in with an $87.5 billion profit in 2010 (up from a net loss of $10.6 billion a year earlier). Less rosy, four points worth noting as a follow up to my post on Monday about FDIC-assisted transactions:

  • Last year, the number of failed banks reached 157, an 18-year high.
  • The number of institutions on the FDIC’s “Problem List” rose from 860 to 884.
  • Total assets of “problem” institutions increased to $390 billion from $379 billion in the prior quarter, but are below the $403 billion reported at year-end 2009.
  • While the problem banks has grown for the fifth year in the row, it expects the number of failures to be fewer than last year.

Additionally, the report shows that lending remains weak: total loans and leases fell again during the fourth quarter. Not surprisingly, the agency’s chairwoman, Sheila Bair went on record with her expectation that “industry to take the next step, and begin to build their loan portfolios. The long-term health of both the industry and our economy will depend on a responsible expansion of bank lending.”  While not a surprising position, some might be reminded that the banking industry remains under considerable pressure from financial regulations that impact lending activity.

Top lobbyist to bankers: When the economy improves, the beatings will stop

Public officials will spend less time slugging bankers when the economy improves, but Dodd-Frank will stick around, changing the rules in fundamental ways, says one of the top lobbyists in Washington D.C., for the financial industry, Steve Bartlett.

Bartlett, the head of The Financial Services Roundtable, represents 100 of the nation’s largest financial companies, including Fidelity Investments and JP Morgan Chase.

Speaking to a crowd of hundreds of bankers at Bank Director’s Acquire or Be Acquired Conference in Scottsdale, Arizona two weeks ago, Bartlett said politicians have been criticizing the financial industry because the economy is hurting.


“The beatings will stop when morale improves,’’ he said. “It helps a lot for you to tell your story to members of Congress. Go to their town hall meetings and sit in the front row. They will be less inclined to beat the hell out of you the next time they make a public statement.”

Bartlett said he’s already noticed a change of tone in the Obama administration in the hiring of the president’s new economic advisor, Gene Sperling, and chief of staff Bill Daley, a veteran of JP Morgan Chase. Sperling once consulted for The Goldman Sachs Group. The Obama administration also has announced plans to review government regulations to weed out rules that seem burdensome to business and ineffective.

But the Dodd-Frank legislation passed by Congress last year is going to stick around, perhaps with only some changes here and there, Bartlett said.

He called the Durbin amendment’s limits on debit fees a “shocking” part of the legislation that will limit bank access to low and moderate income customers. (Editor’s note: Some bank analysts say more regulation is doing away with products like free checking for everyone, although free checking without a minimum balance requirement was getting dropped before Congress passed Dodd-Frank last year anyway).

But another fundamental change in Dodd-Frank is the shift away from simply requiring disclosure of the terms for financial products, Bartlett said. The new legislation requires that customers actually understand them, he said.

Dodd-Frank requires the new Consumer Financial Protection Bureau to end “abusive” practices and requires that disclosures be written in “plain language.” It goes on to say that the bureau should rely on consumer testing to figure out if those disclosures are understood. The specific language of Dodd-Frank asks the agency to consider evidence of “consumer awareness, understanding of, and responses to disclosures or communications about the risks, costs, and benefits of consumer financial products or services.”

Bartlett said Dodd-Frank will not just impact subprime loans, but other types of financial products.

“It’s no longer what you say to your customers but what your customers understand,’’ he said. “The statute says that you as a regulated entity will be held to the standard: Did the customer understand it? Not whether you said it plainly.”

Travis Plunkett, the legislative director at the Consumer Federation of America, did not attend the conference, and he disagrees with Bartlett.

“He is vastly overstating the impact,’’ Plunkett said, adding that he doesn’t believe companies will be punished just because a customer misunderstands something. He said the law is taking care of a minor gap in regulation that has allowed companies to create products that are so complex, they are designed to hide fees and charges from consumers, he said.

Elizabeth Warren, who is charged with setting up the Consumer Financial Protection Bureau, has said she wants to clean up disclosures and get rid of the “shrubbery” inside credit card disclosures. To see the interview she gave last month on the topic, read the Associated Press interview.

Banking regulation: what’s in the works and how to respond

dugan_mon.jpgJohn Dugan, the former Comptroller of the Currency, said Monday during a banking conference that his biggest fear during the financial crisis came in late 2008, during a meeting with the largest banks in the nation. He wondered whether they would accept billions of dollars and agree to let the federal government become major shareholders in their companies, as a way to stem the financial crisis.

“What struck me was how fast it was before everyone agreed to take the money,” Dugan said at Bank Director’s annual Acquire or Be Acquired conference in Scottsdale, Arizona.

Dugan said the quick consensus showed him that the financial crisis was even worse than he had thought. (Merrill Lynch CEO John Thain is on the record saying the federal government did not give the banks a choice).

“Things would be way worse now if that had not occurred,’’ Dugan said, defending the actions of federal regulators.

Dugan, who was appointed Comptroller in 2005 by then-president George W. Bush, went back to his former law firm, Covington & Burlig LLP, after leaving his job at the OCC in August.

During his speech Monday, Dugan detailed the aftermath of the financial crisis: the Dodd-Frank regulation for the financial sector that followed and what banks should do about it.

Dodd-Frank represents a fundamental shift in regulation: away from requiring disclosures and more toward telling financial institutions what products to offer and what to charge, he said. The pending regulation of interchange fees on debit cards is the biggest example of that.

“This was especially ill considered in my view,’’ he said.

Plus, it will take a long time for regulators to actually come up with rules based on the more than 800-page Dodd-Frank legislation, he said.

“I think you should prepare yourself for a relatively long period of uncertainty,’’ he said.

Not surprisingly, upcoming appointments for key regulatory positions will be important to how these rules turn out, Dugan said. A new head must be appointed for the OCC and for the Consumer Financial Protection Bureau.

One benefit of the CFPB is that its rules will apply to all financial institutions, he said. But they still have to define what practices are “abusive” to consumers, as well was what “abusive” means.

“The agency will have a single focus and purpose” and look at bank products in a way that a “prudential regulator would not do,’’ Dugan said.

Bottom line: greater regulation is here to stay, although there may be an opportunity to change things as time goes on, Dugan said. Capital requirements will be higher for banks and commercial real estate loan portfolios will undergo greater scrutiny on bank balance sheets.

Dugan told community bankers to “think hard” before making commercial real estate a major part of their strategy for the future. “In the post Dodd-Frank world, like it or not, regulation will play a bigger role for transactions or capital raising,” he said. “The center of the world is moving more toward Washington. I’m not saying that’s a good thing.”

Can Frank Keating Tame Dodd-Frank?

Frank-Keating.jpgFrank Keating started his new job this month as president and CEO of one of the largest lobbying groups in the country, the American Bankers Association.

The group is licking its wounds after losing a major legislative battle last year in the form of the Dodd-Frank Act.

Dodd-Frank Act was hugely unpopular with bankers.

The problem is: It was hugely popular with non-bankers. A USA Today/Gallup poll in August found that 61 percent of Americans supported financial reform, making it the most popular piece of major legislation to come out of Washington in the last two years. Health care reform got an approval rating of 39 percent.

So what can Frank Keating do about all this? Will his background as a former Republican governor of Oklahoma and co-chair of John McCain’s presidential campaign make him too polarizing a figure to deal with the Obama administration?

He once said during the presidential campaign that Obama should admit he was a “guy of the street,” had been “way to the left” and had used cocaine. Granted, this isn’t the worst thing any politician ever said about another. After all, the same was said about George Bush. The voters thought it had zero impact then, too.

Keating said in an interview with Bank Director this week that the “guy of the street” comment was not racial. Keating, a former FBI agent, said that meant Obama was a street organizer.

Keating said he was proud to be a Republican and didn’t consider himself a polarizing figure. But almost all of Keating’s financial support has gone to Republican candidates, according to OpenSecrets.org, which tracks campaign contributions. Keating said that in his most recent job as president and CEO of the American Council of Life Insurers, he was bipartisan and kept staffers with connections to both parties on his staff.

“Trade groups have to be bipartisan if they are going to be effective in Washington,’’ said Arthur Johnson, chairman of the search committee that selected Keating for the ABA. “That’s what Frank (Keating) told us right away. We have very effective people in our association staff at ABA that have both Democratic and Republican associations. (Plus, Keating) was the only two-term Republican in Oklahoma history. That didn’t happen without him being able to work with Democrats.”

After all, is it all that surprising that the new head of the ABA is a Republican? This isn’t Greenpeace, after all.

“From my standpoint the important thing for any organization is to have an important set of contacts from both parties,’’ said Steve Verdier, executive vice president of congressional relations for the Independent Community Bankers Association, another bank trade group that has often disagreed with the ABA.

ABA officials have said they think Keating will represent successfully the interests of bankers on Capitol Hill and that he has the experience needed to run a major trade organization (he spent eight years at the ACLI). He also served under presidents Ronald Reagan and George H.W. Bush in the U.S. Treasury, Department of Justice, and the Department of Housing and Urban Development, the last one working as general counsel and acting deputy secretary. He also comes from a family of bankers or bank directors that include his grandfather, father and twin brother.

Will all that be enough? Now that Republicans have control of the House, maybe Keating will have more ears in Congress. One problem is even the Republicans can’t be counted on to roll back Dodd-Frank. Banking opinion isn’t uniform, either. After all, the Independent Community Bankers Association wanted the government to break apart large financial institutions, under the idea they posed a risk to the economy. Not surprisingly, the ABA, which represents both large and small banks, was opposed to that.

At this point, it looks as if the best bankers can hope for are modifications that tone down Dodd-Frank, not repeal it. For example, could the new Consumer Financial Protection Bureau get some oversight by other bank regulators, as many bankers want? How will the new rules get interpreted by regulatory agencies?

Keating said the ABA is working on a list of legislative priorities. And while he may have an impressive background to lead the organization, the road ahead is tough and the past is littered with defeat.

Be Prepared To Tell Your Compensation Story

Off to a good start on day one of the annual Bank Executive and Board Compensation event, as the general session continued with the next panel members settling into their soft brown leather chairs to present their viewpoints on how the latest round of regulations was shaping compensation planning. Moderated by Jack Milligan, the newly-appointed editor of Bank Director magazine, the panelist included compensation industry experts Michael Blanchard, partner for compensation advisor Blanchard Chase, Thomas Hutton at the law firm of Kilpatrick Stockton and Charles Tharp, EVP at the Center on Executive Compensation.


With increased government intervention courtesy of the Dodd-Frank Act, here are five key insights on the level of impact facing today’s compensation committee shared by the panel. 

  1. Be proactive! You just may find yourself in the position of having to actually educate the regulators on the guidelines. Just goes to show that everyone is still trying to figure these new requirements out.
  2. It’s not about the what but the how! New regulation isn’t about shaping compensation but rather changing the process of designing performance based plans.
  3. An emerging trend among many banks is to have an independent compensation consultant attend the committee meetings. While there are no hard stats on file to date, this process may be looked at more favorably by shareholders.
  4. Before developing compensation plans, do your homework by researching what your peers and public banks are doing with their incentive packages.
  5. Private banks under $1 billion are more at an advantage than disadvantage with regulation requirements, but every institutions should be prepared for regulatory reviews.

It was clear throughout this session that being prepared and ready to tell your story was the best approach when dealing with the new regulations. Knowledge is power and having the right team on the board and in management will go a long way in staying ahead of the curve.

Extra Credit: If you need a place to start, download this eight point checklist, courtesy of the Center on Executive Compensation, for help planning a pay structure for your institution. You may even gain some inside knowledge on what the regulators will be looking for during their reviews.

Navigating the Sea of Financial Reform

navigate.jpgRecently, Bank Director and the American Banker presented the 2nd annual America’s Bank Board Symposium tailored to provide bank boards with the knowledge to develop, implement, and monitor strategies for their institutions. Several key industry speakers joined CEOs, board members and experienced financial leaders in Dallas to help navigate the sea of challenges facing bank directors today.

On the heels this event, I had the chance to catch up with one of the presenters, Susan O’Donnell, Managing Director with Pearl Meyer & Partners, an independent compensation consulting firm, to further explore her insights on what she believes are the top three issues concerning directors. Below is what she shared with me via email:

1. Responding to a Rapidly Changing Regulatory Environment
New regulations and requirements are coming at bank directors at an unprecedented pace, particularly in the last decade. Whether Sarbanes Oxley, recent banking regulatory agency guidance on risk assessment of incentive compensation practices, or new proxy disclosure requirements under the Dodd-Frank Act – there is a much greater need for board members to keep up with the rapid and constantly changing regulatory environment. This is particularly true of public banks that now have to meet even more disclosure requirements.

2. Understanding Changing Executive Compensation Trends, Including the Role of Risk Management
Keeping informed of the emerging best practices has also become a major challenge, as boards today must ensure their executive compensation practices reflect sound risk management, pay-for-performance alignment and align with shareholder interests. Board members (particularly compensation committee members) need to adapt their institution’s compensation practices, where appropriate, to reflect the new regulations and emerging best practices, while continuing to support their unique compensation philosophy.

What was ‘acceptable’ practice several years ago might be considered inappropriate today. For example, incentive compensation programs that place significant (or sole) focus on profits and top line growth may be perceived as potentially diverting banks’ focus on safety and soundness. Regulators are reviewing incentive plans with a new “set of glasses” and board must also review their executive compensation programs through these new lenses.

Severance/change in control benefits are also changing in response to increased scrutiny and transparency. Provisions such as the gross-up payments to cover the taxes to the executive under certain situations used to be common several years ago, but are no longer considered appropriate. And companies that continue to put such provisions in place with new contracts will come under increased pressure from shareholders and shareholder advisory groups, potentially impacting future Say on Pay votes. Boards need to be aware of these changing perspectives and the potential reaction from regulators and shareholders.

As executive compensation is under increased pressure, boards need to be ready to respond to the new level of scrutiny. More importantly, they will need to articulate their own compensation philosophy and develop programs that address their own unique needs, rather than chase historical market practice, which in many cases is no longer applicable or appropriate.

3. Responding to Increased Transparency, Disclosure and Shareholder Influence
The new disclosure requirements, starting in 2006 and culminating with many new requirements enacted through the Dodd-Frank Act, are placing a greater spotlight on executive compensation (and governance) practices. With a brighter light comes increased scrutiny.

With Say on Pay, shareholders will have an opportunity to vote their approval (or disapproval) of bank compensation programs. While non-binding, the votes will be public information, subject to media scrutiny. As such, boards will need to listen and be prepared to adapt or change in response to the feedback they receive.  It is critical that boards today focus on ensuring their proxy disclosure effectively communicates their compensation philosophy, programs, decisions, rationale for decisions and pay –performance alignment.

Boards will also need to know and understand their shareholders better. Say on Pay, Proxy Access and the loss of the Broker vote will increase shareholders’ influence on compensation programs and banks should be prepared for this new level of transparency and disclosure.

The Characteristics of Success

With all the new regulations and increased scrutiny within the financial industry, I was curious to know what characteristics would separate the winning banks from the losing ones over the next five years. O’Donnell highlighted these top three traits that she recommends bankers will need to make it through this period of reform:

1. Adaptability: Bank boards will need to be responsive to all the changes going on in the industry, including the new economic, business and regulatory requirements.

2. Leadership: Boards that exercise strong leadership as they navigate the bank through challenging times will more than likely come out on the winning side.

3. Focused: Boards must have clearly defined goals and strategies, knowing what needs to be done to execute them effectively.

One thing I’ve learned very quickly since joining Bank Director is that these are without a doubt some of the most challenging times the U.S. banking industry has experienced in quite some time. But with knowledge, flexibility and effective execution, I am confident that smart bankers will continue to excel at growing their financial institutions.

Loan Origination: Dodd-Frank And Your Lending Compensation Practices

The Dodd-Frank Wall Street Reform and Consumer Protection Act has a lot to say about banking practices. From systemic risk to consumer protection, the Act will have a major impact. But in light of the fact that many of the provisions require regulations or the completion of the Consumer Financial Protection Bureau, most of the requirements will not affect banks for a year or more. The limits on how you compensate your lenders, however, must be on your radar earlier.

Dos and Don’ts Paying Your Lending Staff

The Federal Reserve recently announced its final rule on compensation for loan originators. The rule will both implement some of the requirements of Dodd-Frank and do what the federal agencies have been anxious to do for quite a while—outlaw interest rate-based yield spread premiums. Effective April 1, 2011, the final rule will prohibit the practice of paying mortgage brokers, loan officers and others who originate mortgage loans based on the interest rate that is paid by the borrower, or any other term or condition of the loan other than the amount of credit extended. Further, while many banks may assume that the rules only apply to mortgage brokers, it is considerably broader, covering loan officers within the bank and even payments to the bank itself in table-funded transactions.

In addition to prohibiting compensation that is based on the terms of the loan, a bank also may not pay a loan originator based on a proxy for such terms. For example, a loan originator may not be paid based on loan terms, such as the interest rate, APR, or loan-to-value ratio. However, compensation that is based on proxies for the terms of the loan, such as the borrower’s credit score, debt to income ratio, or credit risk, is also prohibited. What is allowed is compensation that does not vary based on the loan’s terms and conditions, such as a fee based on:

  • The total number of loans originated;
  • The total amount of credit that was extended;
  • The long-term performance of the loans;
  • An hourly fee for the actual hours worked;
  • Legitimate business expenses, such as overhead;
  • Whether the borrower is a new or existing
  • The percentage of applications submitted by the originator that result in closed loans;
  • The quality of the loan files;
  • A payment that is fixed in advance for every loan arranged; and
  • A fixed percentage of the loan amount.

The new limits on compensation do not apply if a loan originator is paid by the consumer. However, the new rules prohibit an originator who is compensated by the consumer from being paid by anyone else. The Federal Reserve also explained that the final rule is not intended to prohibit creditors from changing their compensation arrangements with mortgage brokers, their loan officers, and other loan originators. However, the creditors cannot change the agreements or selectively enforce them in a way that will result in the loan originators’ payments varying based on the terms and conditions of the loan.

Lender Compensation vs. Terms of Loans Offered

The new regulation also includes an anti-steering provision that prohibits loan originators from steering a borrower to a mortgage loan based on the fact that the originator will receive higher compensation, unless the loan is also in the consumer’s interest. Loan originators may offer a loan that results in them receiving the same amount or less compensation than they would receive with other loan options. However, if they offer a loan that results in them receiving more compensation than they would with other loan options, they will be required to establish that the loan that was offered was in the consumer’s best interest. The rule provides a safe harbor that an originator may use to meet these requirements, but the documentation and procedures that will be required to rely on the safe harbor will be extensive and cumbersome.

More Compensation Rules to Come

The Federal Reserve’s final rule will significantly change the way that banks and other creditors compensate mortgage brokers and their own employees. However, it’s important to note that more changes are on the way. Under the Dodd-Frank Act, there are restrictions on the kinds of loans that a loan originator may offer, how they “steer” the consumer to loan products, and how they are compensated when the consumer pays upfront fees. As a result, the Federal Reserve’s final rule is a major change in lender compensation, but it is not by any means the last.