Last week, the Bureau announced a $730,000 settlement with Franklin Loan Corporation (Franklin) based on alleged violations of the loan originator compensation rule in Regulation Z. That rule prohibits mortgage lenders from paying loan originators based on the terms and conditions of the loan. It is designed to eliminate loan originators’ incentives to steer borrowers to higher priced loans.
The Bureau alleged that Franklin violated the loan originator compensation rule by paying its loan originators quarterly bonuses based on the terms and conditions of the loans. The quarterly bonuses were paid based on a percentage of the funds in the loan originator’s expense account, which allegedly was funded in part by a “retained rebate” determined by the interest rate on the loan. The challenged conduct ended in October 2013.
The Bureau alleged violations of Regulation Z and the provision in Title X of the Dodd-Frank Act making it unlawful to offer consumers financial products that are not in conformity with federal consumer financial law. Franklin did not admit or deny the allegations in the complaint, and it issued a press release denying the Bureau’s allegations.
Although there are no allegations in the Bureau’s complaint indicating any consumers actually were steered to higher priced loans as a result of the challenged practices, it appears that the $730,000 in restitution constitutes the amount paid in bonuses. The Bureau did not require Franklin to pay a civil monetary penalty “based on Franklin’s financial condition and the Bureau’s desire to maximize relief directly from Franklin Loan to affected consumers.” The Consent Order includes the Bureau’s typical, onerous compliance obligations.
Loan originator compensation continues to be a hot-button issue for the Bureau. This is the second consent order that the Bureau has filed based on violations of these rules. Regulated entities should anticipate that the Bureau will focus on loan originator compensation issues in it’s examinations as well.