Earlier this week, the Consumer Financial Protection Bureau (“CFPB”) filed a lawsuit in federal district court in Utah against a mortgage company that allegedly paid bonuses to mortgage officers based on borrowers’ interest rates. In light of the recent issuance of significant updates to mortgage originator compensation rules, financial institutions engaged in mortgage lending should heed the CFPB’s warning that it is focused on addressing this issue.
The CFPB alleges in the complaint that the mortgage company Castle & Cooke violated the Federal Reserve Board’s Loan Originator Compensation Rule that had a mandatory compliance date of April 6, 2011 (“2011 Rule”). The 2011 Rule prohibited compensation based on loan terms, such as the interest rate. The CFPB’s January 2013 loan originator compensation rule (discussed here), which is effective in January 2014, continues this prohibition and makes additional revisions.
In its press release, the CFPB stated that Castle & Cooke violated the 2011 Rule with its quarterly bonus program that paid 150 loan officers bonuses based on consumers’ election of more expensive loans. Allegedly, the average quarterly bonus ranged from $6,100 to $8,700, and those loan officers who failed to charge higher interest rates received no bonuses. The CFPB is asking the court to end the allegedly unlawful compensation practices and require Castle & Cooke to comply with records retention policies. Further, the CFPB seeks restitution and civil money penalties.
This lawsuit, which could have taken the form of an administrative action, is clearly a signal that the CFPB will aggressively pursue violations of the mortgage loan originator compensation rules. Financial institutions should take a comprehensive look at their policies related to mortgage loan originator compensation through Spilman or other knowledgeable counsel.