CFPB Brings First Action for Violations of Loan Originator Compensation Rule
By: Jonathan D. Jaffe, Rebecca Lobenherz
On July 23, the Consumer Financial Protection Bureau (CFPB) sued a national mortgage lender and two of its officers for allegedly violating Regulation Z’s loan originator compensation rule (the LO Comp Rule or the Rule) by paying bonuses to employees for steering borrowers to loans with higher interest rates. (See here.) The case was referred to the CFPB by investigators with the Utah Department of Commerce, Division of Real Estate. This is the first publicly announced judicial action the CFPB has brought enforcing the Rule.
The CFPB alleges in the complaint it filed in U.S. District Court for the District of Utah, Central Division that the company paid its loan officers quarterly bonuses if the loan officers sold borrowers loans with higher interest rates—the higher the interest rates, the higher the loan officers’ commissions. The complaint asserts that from July 8, 2011, through April 27, 2012, the company paid loan officers bonuses in amounts that varied based on loan terms or conditions, totaling more than $4 million.
According to the complaint, before the LO Comp Rule was implemented, the company paid its loan officers commissions that were based on the loans’ interest rates. The CFPB claims that to continue to pay the loan officers the same levels of compensation after implementation of the LO Comp Rule, the company and two of its officers developed what the CFPB referred to as a “scheme” to pay loan officers bonuses in amounts that varied based on the loans’ interest rates, in violation of the Rule. It appears the “scheme” the CFPB references allegedly involved the company (a) avoiding references to the bonus program in its written compensation agreements, written policies, and loan officer compensation agreements, and (b) not maintaining a written policy explaining the method used to calculate the bonuses.
The complaint also alleges that, in addition to making bonus payments based on loan terms, the company failed to maintain records of all compensation it provided its loan officers for a given loan transaction, which the complaint states constitutes a violation of the Rule (12 C.F.R. § 1026.25(a)). The CFPB’s recordkeeping findings appear to require the retention of not just payroll records of the quarterly bonus amounts paid to loan officers but also records of what portion of a loan officer’s quarterly bonus is attributable to a given loan.
The two individuals named in the complaint were the president and senior vice president. According to the CFPB, these two officers exercised actual control over and actively participated in the company’s bonus program.
The CFPB is seeking a permanent injunction against future violations of the Rule, restitution to consumers harmed by the unlawful conduct, civil money penalties, and payment of the CFPB’s prosecution costs. While the complaint does not specify the amount of civil money penalties the CFPB is seeking, the CFPB has the authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act to seek up to $5,000 for any violation, up to $25,000 for reckless violations, and up to $1,000,000 for knowing violations.