CFPB settles lawsuit challenging loan officer bonuses

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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.