The CFPB has entered into a proposed consent order with a mortgage company and its CEO to settle charges that the company paid bonuses and higher commissions to loan officers in violation of the Regulation Z loan originator compensation (LOC) rule. The consent order would require the company to pay $18 million in redress to consumers and a $1 million civil penalty, and would require the CEO to pay an additional $1 million civil money penalty.
The LOC rule prohibits mortgage lenders from paying compensation to loan originators that is based on a loan’s interest rate or other terms. The alleged conduct occurred before January 1, 2014, and was subject to the original LOC rule adopted by the Federal Reserve Board under Regulation Z. On January 1, 2014, a revised version of the LOC rule adopted by the CFPB pursuant to Dodd-Frank became effective.
In its complaint filed in a California federal court, the CFPB alleged that the mortgage company and CEO violated the LOC rule and the Consumer Financial Protection Act by implementing a compensation plan that incentivized loan officers to steer consumers into higher-rate mortgages. The complaint alleged that the company used the following unlawful compensation methods:
- The company created “employee-expense accounts” into which it deposited compensation based on the profits from a loan officer’s closed loans. Loan officers could receive periodic bonuses from these accounts or use the accounts to grant “price concessions” to consumers, such as interest-rate discounts and credits for RESPA-tolerance cures and appraisal costs. According to the CFPB, such concessions allowed loan officers to close and earn commissions on loans they would have otherwise lost to competitors.
- After eliminating the payment of bonuses from the expense accounts, in addition to allowing loan officers to continue using the accounts for price concessions, the company also allowed loan officers to use the accounts “to cover the cost of individual commission-rate resets.” According to the CFPB, the resets allowed the loan officers “to give themselves raises on future loan transactions” and “convert profits from earlier high-interest loans into commission income.”
In addition to ordering the mortgage company and CEO to pay monetary redress and civil money penalties, the consent order permanently enjoins them from paying compensation in violation of the LOC rule and CFPA.
In November 2014, the CFPB settled another loan originator compensation case in which a lender was alleged to have made contributions into “expense accounts” that were used to pay quarterly bonuses to its loan originators. The CFPB considered the contributions to be based on the interest rates charged on the originators’ loans.