The Consumer Protection Financial Bureau announced last week that it is taking action against Franklin Loan Corporation for violations of the Federal Reserve Board’s loan originator compensation rule. According to the CFPB, Franklin offered it’s loan officers bonuses for steering consumers into loans with higher interest rates. The terms of a proposed consent decree would require Franklin to repay over $730,000 to consumers. The proposed consent order can be found here.
The $730,000 figure represents the sum of illegal bonuses paid to 32 loan officers between June 2011 to October 2013. According to the CFPB complaint, found here, Franklin paid out higher quarterly bonuses for loan officers who had generated loan portfolios with higher-interest mortgage loans. The higher the interest rate average of the loans closed during the quarter, the higher the quarterly bonus slot designated for a loan officer. Franklin’s bonus policy affected more than 1,400 borrowers, and the consent order also requires Franklin to end the policy immediately. According to the CFPB, a civil penalty was not sought due to Franklin’s financial condition and the Bureau’s desire to maximize relief directly from Franklin Loan to affected consumers.
The CFPB’s action “will put $730,000 back in the pockets of consumers who may have never suspected that they had been harmed,” said CFPB Director Richard Cordray. “Paying bonuses for steering borrowers into more expensive loans violates their trust and is against the law.”
This is the second CFPB action targeting loan origination rules amended by the Federal Reserve in 2010. The rule, known as Regulation Z, made it illegal to increase the compensation of a loan officer based on any term or condition of a mortgage loan. The first action stemming from this change was back in 2013, when the CFPB disciplined Castle & Cooke Mortgage for a similar practice. That consent order called for $9 million in restitution payments to consumers and $4 million in civil penalties.
Prior to the publication of Regulation Z, Franklin’s loan originator compensation package directly rewarded loan officers by paying them a “commission split,” typically between 65 percent and 70 percent of the “gross loan fees,” which included the origination fees, discount points, and other costs associated with the loan. This was previously a common practice. It was directly proscribed by Regulation Z and is a practice that became a focus of the CFPB. The compensation package penalized last week was redesigned by Franklin after Regulation Z was published. The $730,000 fine levied is a clear indication that the CFPB has a strict definition of Regulation Z.