The CFPB entered into a stipulated order and final judgment with Franklin Loan Corporation (Franklin) to settle allegations that Franklin paid its employee loan originators compensation based on the interest rates charged on mortgage loans in violation of the Regulation Z loan originator compensation rule.  Without admitting or denying the allegations, Franklin agreed to pay $730,000 in connection with the settlement.  The CFPB advised in announcing the settlement that it did not seek a civil money penalty based on Franklin’s financial condition and the CFPB’s desire to maximize relief available directly from Franklin to affected customers.

The alleged conduct occurred before January 1, 2014, and was subject to the original loan originator compensation rule adopted by the Federal Reserve Board under Regulation Z.  On January 1, 2014, a revised version of the rule adopted by the CFPB pursuant to Dodd-Frank became effective.

The CFPB alleges that before the original loan originator compensation rule became effective on April 6, 2011, Franklin would pay its employee loan originators a “commission split” that was between 65% and 70% of the gross loan fees, that included the origination fee, discount points and retained cash rebate.  According to the CFPB, the retained cash rebate was the portion of the rebate created by a premium interest rate set by the loan originator that was retained by Franklin and not credited to the borrower.  The CFPB asserts that this compensation method encouraged the loan originators to place consumers in higher interest rate mortgage loans.

The CFPB also asserts that Franklin realized that the loan originator compensation rule would prohibit this compensation method, as the rule does not permit a loan originator to be compensated based on the terms of a mortgage loan (other than compensation based on a fixed percentage of the loan amount).  According to the CFPB, Franklin wanted to continue to pay its loan originators financial incentives to originate high-interest mortgage loans, and devised a new compensation plan.  The CFPB alleges that under the new plan Franklin would pay its loan originators (1) an upfront commission based on a set percentage of the loan amount, and (2) a quarterly bonus paid from the loan originator’s individual “expense account,” and that contributions to the “expense account” were based on a percentage of the retained rebate on each loan.

The CFPB considered the contributions to the expense account, which ultimately were paid to the loan originator as a quarterly bonus, to be based on the interest rates charged on the originator’s loans.  The CFPB viewed the bonus payments as compensation that violated the loan originator compensation rule.  The $730,000 settlement amount was the total amount of quarterly bonuses that the CFPB asserts were paid by Franklin to its loan originators from
June 2011 to October 2013.

This is the second settlement entered into by the CFPB based on alleged violations of the loan originator compensation rule.  (We reported previously on the earlier settlement with
Castle & Cooke Mortgage.)

The mortgage industry should take note of CFPB activity in this area.  The CFPB likely will focus on loan originator compensation during examinations.