By: Kris D. Kully
The Consumer Financial Protection Bureau (CFPB) has once again charged a mortgage lender with paying compensation to loan originators based on loan terms, which is prohibited under the Truth in Lending Act and its Regulation Z. This week, the CFPB asked a federal court to approve an order requiring Franklin Loan Corporation (which lends in California and Illinois) to pay $730,000 for allegedly paying loan originators quarterly bonuses based on loan terms.
According to the CFPB’s complaint and proposed order, the mortgage lender revised its system for compensating its loan originators after the Federal Reserve Board issued its loan originator compensation regulations that became effective in April 2011. At that time, the company began paying regular commissions to those loan originators based on a fixed percentage of the loan amount (with apparently a minimum and maximum dollar amount of compensation for each loan originated). In addition, however, the company allegedly paid the loan originators a quarterly bonus based on the origination fees and retained “rebate” (an amount tied to the loan’s interest rate and that the loan originator allegedly could choose to pass through, in whole or in part, to the borrower) associated with the loans. Accordingly, the CFPB charges that the company paid quarterly bonus compensation to loan originators in amounts based on the terms of the loans originated by those individuals. The CFPB charges that this is “the very practice the Compensation Rule sought to prohibit.”
The CFPB is asking a federal court in California to approve an order seeking a payment of $730,000, the amount of the quarterly bonuses paid to loan originators from June 2011 to October 2013. The CFPB describes the amount as redress to the consumers who were harmed by the company’s practices (and payment for the administrative expenses of distributing that redress). It appears that approximately 1,400 borrowers will share in that amount. The CFPB states that it did not seek an amount for civil money penalties, purportedly due to “Franklin’s financial condition” and the CFPB’s desire to put as much money back in the hands of borrowers as possible. The CFPB also would force the company to submit compliance reports for five years and to provide notice of any changes in the company’s structure (to facilitate the CFPB’s oversight of compliance with the order).
The CFPB’s complaint, of course, makes this action appear to be a case of picking low-hanging fruit—after all, the first rule of loan originator compensation is that a lender cannot pay compensation based on a loan’s interest rate. We have only heard from one side in this action (the CFPB); the company does not admit to wrongdoing. Accordingly, we cannot really judge whether the facts are as clear as they seem. Nonetheless, CFPB enforcement officials have clearly indicated, here and in other actions and public statements, where their priorities lie. First, the officials are concerned about harm to consumers (both in the number of consumers affected and in the severity of the harm to each consumer). Here, it appears they judged the harm to consumers to equal the amount of the improper bonuses paid to the loan originators (which is purportedly the amount of rebate that was retained but could have been passed through). Second, the CFPB is not afraid to admit that they are out to make examples of “bad actors”—the CFPB considers the deterrent effect of its enforcement actions and of the relief and redress it demands. The message here is clear—if a lender pays its loan originators compensation based on interest rates or origination fees, the CFPB may order it to pay that amount (or more) to consumers as well.