Last week, the CFPB filed a federal complaint against Castle & Cooke, a Salt Lake City-based mortgage bank, alleging it paid quarterly bonuses to loan originators who steered borrowers into higher-cost loans but did not have a written policy describing the bonuses. The company has denied the allegations.
Nearly every post-mortem of the financial crisis has cited the mortgage industry’s past practice of allowing commissioned loan officers and mortgage brokers to steer borrowers into higher-priced loans even if the customer would have qualified for a conventional lower-cost mortgage.
"The CFPB is clearly sending a message that they are going to actively investigate loan officer compensation plans," says Mitch Kider, chairman and managing partner at the law firm Weiner Brodsky Kider PC, who has no involvement in the case. "This is likely the first of a number of enforcement actions and cases that the CFPB is going to bring."
In 2010, the Federal Reserve amended Regulation Z to prohibit loan officers from being compensated based on a loan's terms. They now cannot be paid more if a consumer takes out a loan with a higher interest rate, a prepayment penalty or higher fees.
The CFPB is now in charge of enforcing Reg Z and lenders are reexamining their loan officer compensation policies to avoid getting caught in the agency's crosshairs. But others said they were glad to have a cop on the beat.
"As much as the industry fears the CFPB, for those of us that have painstakingly spent time and money to do things right, it's refreshing to know they now have teeth and are policing the industry," says David Zugheri, an executive vice president and co-founder at Envoy Mortgage, a Houston mortgage lender. "Obviously lots of mortgage companies are watching this case to see what happens so they can fine-turn what they're doing."
Fred Kreger, a branch manager at American Family Funding, a Santa Clarita, Calif., mortgage bank, says his company had seemingly endless discussions about the loan officer compensation rule and took part in CFPB webinars that explicitly stated that compensation could not change based on the borrower.
"In this day and age lenders have to be very, very careful," says Kreger, a past president of the California Association of Mortgage Professionals. "The statute says that compensation cannot be arbitrary and the reason they want written procedures is to have clearly defined rules that loan officers abide by, so they cannot charge borrowers differently."
Zugheri says the rule has made life simpler because now loan officers are paid the same on each transaction, typically between 1% to 2% of the loan amount.
"If they turn in a jumbo loan or a $50,000 [Federal Housing Administration] loan, you have to pay them the same amount no matter what," he says.
The 10-page complaint against Castle & Cooke, which is owned by David H. Murdock, the chairman and chief executive of Dole Food, says the company "developed and implemented a scheme" to pay bonuses to loan officers "in amounts that varied based on the interest rates of the loans they originated—the higher the interest rates…the higher the loan officer's quarterly bonus."
Donald Lampe, a partner at Morrison & Foerster, says the case appears to be about the company "not being able to demonstrate that it followed its own policies and procedures rather than the company not having adequate policies and procedures in place to start with."
The CFPB also specifically targeted the company's two top executives, Matthew A. Pineda, Castle & Cooke's president, and Buck L. Hawkins, the firm's senior vice president of capital markets, calling each "a related person," who can be held liable. The CFPB estimates that the company paid 500 bonuses totally more than $4 million from July 2011 to May 2012. The bonuses ranged from $6,100 to $8,700 and the agency is seeking restitution for borrowers that were allegedly harmed as well as civil penalties.
"The CFPB is looking to see who is responsible for these practices and they are making it clear that if they believe someone is responsible, they are going to pursue them," says Kider.
Mortgage lenders are being advised by lawyers to review terms of their liability insurance policies and try to negotiate enhancement to their existing coverage. Many insurers will try to deny claims for CFPB investigations and enforcement actions.
"The simple lesson is that if you come up with a [loan officer] comp plan, you've got to follow it," says Richard Gottlieb, a partner at BuckleySandler. "For those banks and lenders that are following their plans to the letter, this is a non-event."