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.
