The Consumer Financial Protection Bureau has entered into a consent order with another lender that had been violating the loan officer compensation laws. Franklin Loan Corp. violated the compensation rule by paying quarterly bonuses based upon the terms of closed loans into “expense accounts” for use by the loan officers, according to the CFPB. The Consent Decree requires the company to pay $730,000 in damages based upon the allegation that the company improperly paid 32 loan officers these bonuses. In addition for up to five years, the company will have to provide the consent decree to any person associated with the company whose job duties are impacted thereby. In addition, a lender can eventually face a civil lawsuit for the same alleged violations.
If in fact these allegations are accurate, it is not surprising that regulators found such a compensation plan to violate the LO comp rules. Whether paid as arrears or paid as expenses, compensation that is predicated on the terms of loans is unlawful. What may surprise many lenders, however, is that Franklin is not a massive company. Indeed, the violation in question involved fewer than 40 loan officers. Hence, the myth that smaller companies do not need to worry about the CFPB and/or compliance is once again proven wrong. Once again, there is also proof a lender cannot outsmart the agency through inaccurate titles and/or “bonuses.”
When it comes to Regulation Z, lenders of all sizes should realize that compensation plans that are unlawful will be discovered no matter how small the lender is and no matter how elaborate the attempts to avoid such violations being apparent on the face of a plan. The worst thing for lenders that get caught is that they are fined for paying money to others, and in many cases they only did so to accommodate the desires of their current staff. Lenders are best served by a long-term business view, realizing that capitulating to the demands of staff on matters of lawful compensation is not a risk worth taking.