Loandepot, West Capital Lending to argue LO Comp Rule suit

A federal judge will soon weigh whether a lender can sue a competitor for violating the Loan Officer Compensation Rule and allegedly harming its business.

Loandepot and West Capital Lending will argue the former's motion to dismiss in a hearing next week, in the latter's lawsuit which it filed earlier this year. WestCap has accused loanDepot of violating California's Unfair Competition Law by tying originators' compensation to loan terms, and targeting certain rivals by granting price exceptions for loans in competition with those shops.

WestCap has involved the Truth in Lending Act's LO Comp Rule, although loanDepot recently argued that only consumers can sue a lender for a purported violation. The claims against the giant lender and servicer are somewhat similar to those by consumers in a pending TILA class action lawsuit, and separate from loanDepot's own fraud accusations against WestCap.

Housingwire first reported on loanDepot's follow-up to its motion to dismiss earlier this month.

The cases are rare complaints of a lender violating the LO Comp Rule, after the Consumer Financial Protection Bureau penalized some mortgage players for infractions a decade ago.

In its July 16 filing, loanDepot denied the allegations, and accused WCL of "smuggling" its business grievances under the guise of the complaint. Loandepot last fall sued WestCap for raiding its workforce and stealing its loans in-progress, in another pending lawsuit. 

A spokesperson for loanDepot referred National Mortgage News to the motion to dismiss, while an attorney for West Capital Lending didn't return a request for comment Tuesday. 

The LO comp rule question

While loanDepot maintains a "no-steering" policy, former employees declared to the court that the company cut compensation for production managers who failed to steer consumers into maximum-priced loans. 

Additionally, production managers allegedly granted any pricing exceptions, even if they were losing money on the loan, for customers who were weighing offers from competitors like WestCap. The smaller shop said the behavior has limited its market share, as it can't compete on pricing when it plays by the rules. 

In its reply this month, loanDepot said WestCap did not specify a certain transaction or lost opportunity stemming from the rival's business practices. In June, WestCap withdrew an earlier claim for monetary restitution, and is only seeking forward-looking injunctive relief to stop loanDepot's alleged behavior. 

The lender argued that courts have established that the LO Comp Rule's private right of action is only reserved for consumers impacted by non-compliance of the rule, not competitors.

Additionally, loanDepot suggests that its production managers allegedly in charge of the steering are not "originators" under the language of the CFPB's statute. It further argued that nothing in the law prevents it from charging any initial rate it wants or lowering it to match a rival's offer. 

"Accordingly, a mortgage lender can engage in the kind of pricing practice that WCL describes without violating the LO Comp Rule — it can simply direct loan originators to charge high rates and give discounts when necessary," wrote attorneys for loanDepot. 

Next steps

The sides are scheduled for a hearing next Thursday morning, according to the case docket. 

The Irvine, California-based Loandepot is one of the nation's largest mortgage lenders and servicers, and one of the industry's few publicly traded companies. The company however has come under scrutiny as it's traded closer to $1 per share recently. It reports quarterly earnings next Tuesday.

Neighboring WestCap is one of the nation's larger brokerages, with over 1,600 sponsored originators, according to Nationwide Multistate Licensing System records. The shop earlier this month agreed to a consent order with a Washington regulator and paid a $75,000 fine, over unlicensed origination activity and other smaller infractions in recent years.