loan originator compensation

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.

 

On October 22 from 2:00 to 3:30 p.m., the FDIC’s Division of Depositor and Consumer Protection will host a teleconference as part of its periodic series of events for bankers on important banking regulatory issues in the compliance and consumer protection area.  According to the announcement, the upcoming teleconference will focus on common questions and answers regarding the implementation of the Ability-to-Repay/Qualified Mortgage and the Loan Originator Compensation Final Rules. Specifically, the teleconference will address issues raised by community banks about these rules.  The announcement provides no indication whether the CFPB staff will participate in the call.

The session is free, but registration is required.

For mortgage industry members wondering how serious the CFPB will be when enforcing the Regulation Z loan originator compensation rule (“LO Compensation Rule”) we now have an answer— $13 million dollars serious.  

As we reported previously, in July 2013, the CFPB filed suit in the U.S. District Court for the District of Utah against Castle & Cooke Mortgage, LLC and two officers of the company.  The CFPB alleged that the mortgage company maintained a bonus program for loan officers that violated the existing LO Compensation Rule.  (The existing rule will be revised effective January 2014, with the main prohibition against basing loan originator compensation on a loan term or proxy for a loan term continuing under the revised rule.)

The CFPB alleged that: 

  • The mortgage company devised a quarterly bonus system under which loan officers would receive greater bonuses for originating loans at higher interest rates.
  • The bonus system was not reflected in any compensation agreements.  While the company’s payroll records reflected the bonus payments, the CFPB claimed there was nothing indicating what portion of a loan officer’s quarterly bonus was attributable to a particular loan.            
  • The company violated the LO Compensation Rule’s record keeping requirements.  Under the rule, a company must maintain records of the compensation paid to a loan originator for a transaction and the compensation agreement applicable to the transaction. 

The company denied the allegations.  The proposed consent order provides for: 

  • A judgment for equitable monetary redress against the company and the two officers, jointly and severally, in the amount of $9,228,896.
  • A judgment for a civil money penalty against the company and the two officers, jointly and severally, in the amount of $4.0 million.
  • A permanent injunction against the company and the two officers enjoining them from violating the LO Compensation Rule.
  • A requirement for the company and its officers, agents and employees to retain evidence of compliance with the LO Compensation Rule. 

The proposed consent order is subject to approval by the court.  The size of the monetary relief likely is intended by the CFPB to send a strong message to the mortgage industry that violations of the LO Compensation Rule will be addressed in a serious manner. 

 

 

As expected in light of Director Cordray’s comments last week, on Friday, the CFPB finalized several amendments and clarifications to the mortgage rules, proposed on June 24, 2013 (see our previous Legal Alert outlining the amendments as proposed).  The amendments include revisions to the CFPB’s mortgage servicing rules, loan originator compensation rules, and ability-to-repay rules.  Certain of the changes are detailed below.

Mortgage Servicing

  • The amendments include a process for servicers to offer short-term forbearance plans to delinquent borrowers, without completing the full loss-mitigation evaluation process.  The rule permits a servicer to provide a six-month forbearance to a borrower who is suffering a short-term, temporary hardship, upon reviewing an incomplete loss mitigation application.
  • The amended rule clarifies which servicer activities are prohibited during the first 120 days of delinquency.  Under the final rule, servicers will be allowed to send certain early delinquency notices required under state law that may provide information regarding borrower counseling or other resources. 
  • The amendments include specific procedures for obtaining follow-up information in the event a servicer fails to identify and inform a borrower that information is missing, upon initial review of a loss mitigation application. 
  • The amended rule provides additional details on how to inform borrowers about the servicer’s contact address for the purpose of complaints and information requests.

Loan Originator Compensation

  • The amended rule clarifies activities that administrative employees of a creditor or loan originator may engage in without being considered loan originators.
  • The amended rule changes the effective date for most of the loan originator compensation provisions from January 10, 2014 to January 1, 2014.

Financing Credit Insurance Premiums

  • The amended rule includes clarifications regarding the prohibition on financing credit insurance premiums.  The rule now provides that credit insurance premiums are financed by a creditor when the creditor allows the consumer to defer payment of the premium past the month in which it is due.  Further, the amended rule clarifies how the rule applies to levelized premiums. 

Ability to Repay

  • The amended rule clarifies the types of fees and charges that must be counted toward points and fees thresholds under the ability-to-repay and high-cost mortgage rules.  As proposed, (1) points and fees items paid by third parties are included in the points and fees calculation as if paid by the consumer, (2) points and fees items paid by the seller are included in the points and fees calculation as if paid by the consumer, except for seller’s points which are excluded from points and fees, and (3) points and fees items paid by the creditor are excluded from the points and fees calculation, except for compensation paid to a non-employee loan originator which must be included in points and fees.

The text of amended final rule can be found here and additional resources can be found on the CFPB’s Regulator Implementation page.

It appears the CFPB wants to send a warning through the lawsuit it filed yesterday in a Utah federal court against a mortgage company and two of its officers for allegedly paying illegal bonuses to loan officers that were tied to the borrowers’ interest rates.  The CFPB’s decision to go to court rather than proceed through an administrative enforcement action also suggests that the CFPB feels confident about the strength of its case. 

The CFPB alleges in the complaint that the mortgage company violated the current loan originator compensation rule in Regulation Z that prohibits basing compensation on a term or condition of a loan, such as the interest rate, or a proxy for a term or condition of a loan (“LO Compensation Rule”).  The  LO Compensation Rule was adopted by the Fed in 2010 and had a mandatory compliance date of April 6, 2011.  The CFPB’s January 2013 loan originator compensation rule, which is effective January 10, 2014, continues the LO Compensation Rule’s prohibitions, with certain revisions. 

In the complaint, the CFPB alleges that after the LO Compensation Rule became effective, to continue compensating its loan officers based on borrowers’ interest rates, the mortgage company devised a quarterly bonus system under which loan officers would receive greater bonuses for originating loans at higher interest rates.   According to the CFPB,  the bonus system was not reflected in any compensation agreements.  While the company’s payroll records reflected the bonus payments, the CFPB claims there was nothing indicating what portion of a loan officer’s quarterly bonus was attributable to a particular loan.  The company denies the allegations. 

In addition to charging all of the defendants with violations of the LO Compensation Rule’s prohibition on compensating loan officers based on loan terms and conditions, the CFPB also alleged that company had violated the rule’s record keeping requirements.  Under the rule, a company must maintain records of the compensation paid to a loan originator for a transaction and the compensation agreement applicable to the transaction.  

The relief sought by the CFPB includes restitution for consumers who may have been upsold and civil money penalties for each bonus paid (with each bonus alleged to be a separate violation of the LO Compensation Rule).  The CFPB’s press release about the lawsuit notes that Dodd-Frank allows civil penalties of up to $5,000 for any violation; up to $25,000 for reckless violations; and up to $1,000,000 for knowing violations. 

The CFPB apparently wants to send a message that efforts to hide a compensation plan will not shield a company from liability for LO Compensation Rule violations.  Indeed, it seems likely the CFPB will be looking for significant restitution and civil money penalties in this case given that it appears to believe that the defendants’ violations were intentional. 

LO Compensation Rule violations can also be the subject of actions brought by consumers. Because the Fed adopted the rule under its HOEPA authority, a consumer can sue for damages that include all fees and finance charges paid.  Those damages can quickly become significant if a substantial number of consumers sue since, based on the current one-year statute of limitations (which goes to three years under the January 2013 rule), they would include all prepaid finance charges and the interest paid during the first year. 

 

The regulatory barrage continued last week with the CFPB issuing the last batch of mortgage-related rules it was required to finalize by the Dodd-Frank Act’s January 21 deadline.   

On January 17, the final rules implementing provisions of the Dodd-Frank Act that relate to mortgage servicing were issued. The servicing rules will take effect on January 10, 2014.    

On January 18,  the CFPB, the federal financial institution agencies (the FDIC, Fed, OCC, and NCUA),  and the Federal Housing Finance Agency adopted a joint final rule to implement Dodd-Frank appraisal requirements for higher-priced mortgage loans under the Truth in Lending Act. The final rule is effective on January 18, 2014. 

Another final appraisal rule issued by the CFPB on January 18 implements amendments to the Equal Credit Opportunity Act made by the Dodd-Frank Act that require creditors to automatically provide copies of appraisals and other written valuations for first lien mortgage loans.  The final rule will become effective on January 18, 2014. 

On January 20, the CFPB issued a final rule incorporating Dodd-Frank requirements into the existing Regulation Z loan originator compensation rule that applies to mortgage loans.  The final rule also implements Dodd-Frank qualification requirements for bank employee mortgage loan originators and the Dodd-Frank prohibition on mandatory arbitration clauses for mortgage agreements.  The final rule is effective January 10, 2014, except the mandatory arbitration prohibition is effective June 1, 2013. 

To provide further details, we have prepared legal alerts on the servicing rules, the higher-priced mortgages appraisal rule and the loan originator compensation rule.  We will also be issuing a legal alert on the ECOA appraisal rule. 

To assist the mortgage industry in implementing the CFPB’s new rules, Ballard Spahr’s Mortgage Banking Group will be conducting a series of webinars.  On January 30, we will hold a webinar on “Top 10 Takeaways from the Ability-to-Repay/QM, Servicing, and Loan Originator Compensation Rules.”   On February 5, the Mortgage Banking Group will hold a webinar on “The Ability-To-Repay/QM Rule—Important Regulatory and Litigation Considerations.” More information on the webinars and links to register are available here for our January 30 webinar and here for our February 5 webinar.