Most Americans are unfamiliar with the Administrative Procedures Act (APA), yet it reaches each of us through an assortment of rules that eventually lead to what some might consider red tape.  Some believe the APA is heavy-handed and will tell you the federal government uses it much too often to circumvent the will of Congress.  That comment is for a later discussion. 

The crux of the Act spells out the process by which agencies promulgate rules and regulations, among other responsibilities.  While there are several ways this can be accomplished, at the heart of the process is the belief that the public - critics and supporters alike - have a right to air their opinions. 

Certainly agencies must also articulate why a particular regulation is needed in the first place lest they risk being called "arbitrary and capricious."  As provisions created through Dodd-Frank and elsewhere find themselves in the rulemaking process, you can expect the public comments to be at a fever pitch.

You might be surprised to learn that a small office within the federal government routinely comments on proposed rules and regulations.  Yes, you read this correctly: one part of the federal government proposes a rule and another part offers an opinion either in support of or against it.

The office is an independent arm of the Small Business Administration and is referred to as the Office of Advocacy.  They proudly proclaim on their website that they are "the independent voice for small business in the federal government" and do so with less than 75 employees.

I know the Office of Advocacy well from my previous position at the Federal Housing Administration - especially from our work to reform the Real Estate Settlement Procedures Act (RESPA).  I can unequivocally state that they were rock solid in their defense of small business and went on record when they felt portions of the rule would negatively impact small businesses.  Because of their advocacy we made changes to the rule before going final.

Apparently, that same tenacity has continued into the Obama Administration.  In December 2010, the Office of Advocacy sent correspondence to the Federal Reserve asking them to postpone three pending Rules under Regulation Z prior to the transfer of authority to the new Consumer Financial Protection Bureau. They rightfully argued that little is known about the costs of implementation and that the rule could force many smaller mortgage companies out of business.

Regarding the controversial "Loan Officer Compensation" rule, the Advocacy office told Fed Chairman Bernanke in early February that their recent "guidance" regarding loan officer compensation was wholly inadequate.  The "LO comp rule" is designed to prevent loan officers from steering borrowers into higher cost loans and the Advocacy office felt that the Fed had done little to help small businesses prepare for its implementation and compliance hurdles.  In short, the Fed's response was go read the rule - again. 

Parts of the rule are somewhat murky, as can be seen in the myriad of clarification memos the mortgage industry has sent the Federal Reserve.

One example from qualitymortgageservices.com: "A creditor/lender has an incentive compensation plan for originators that is based on the originator's loan volume over a designated period of time. It is not tied to any loan terms, it is based on a fixed percentage of the aggregate principal balance of the loans originated by the originator during that period and, the second part to the question, can payment of the incentive compensation be conditioned on the company, region or branch reaching a certain level of profit during that specified period and, thirdly, what if the profit is calculated in whole or in part based on the aggregate value of the loans originated during a particular period?"

Clear as day, right?

On a separate track, in early March the start-up trade group National Association of Independent Housing Professionals (NAIHP) filed suit against the Fed stating that the LO comp rule is "arbitrary and capricious" and would cause their members "irreparable harm" and is "contrary to the public interest."

In filing the lawsuit, NAIHP president Marc Savitt said, "This rule will have devastating consequences for consumers, small business housing professionals and the overall housing market, if allowed to be implemented on April 1, 2011."

Days later, the National Association of Mortgage Brokers (NAMB) filed their own lawsuit against the Federal Reserve citing that the Fed failed to comply with the Regulatory Flexibility Act and exceeded their authority under TILA.  Further, NAMB believed the rule would cause their members "immediate, devastating, and irrevocable harm."

With good reason, the Office of Advocacy has asked the Fed to push back the April 1 implementation date.  The House Financial Services Committee is also considering legislating changes to the rule and recently said in a statement that the rule may "have an adverse impact on the ability of small businesses that originate mortgages to remain in business." And in early March, Senators Vitter (R-LA) and Tester (D-MT) asked Chairman Bernanke to delay the rules implementation in part because the Fed has not "fully evaluated the impact of the rule on the housing market."

On March 31, one day before the rule was supposed to go into effect, the US Court of Appeals for the District of Columbia stayed implementation of the rule signaling they needed more time to review the matter.  I believe this stay may be short-lived and from my perch, those impacted by the rule should be ready to proceed as planned sometime next week or soon thereafter.

But while the final outcome is unknown, the industry should know that the Office of Advocacy, the NAIHP, and NAMB are still in the fight.  While these groups lack the heavy firepower of larger and more influential trade associations, they did not shrink from taking on the behemoth Federal Reserve. 

The three groups believe strongly in preserving the ability of small businesses to prosper free of onerous regulation regardless of the industry.  Given the importance of small businesses to our economic recovery, it remains a fair question: when do new regulations become too much regulation?  Especially considering that consumers will ultimately have to bear the cost of implementation.