CFPB Sues To Enforce Dodd-Frank Compensation Rule
When the mortgage industry collapsed along with our economy, lawmakers attempted to improve things by passing Dodd-Frank. While the bank lobby found ways to undermine the terms of Dodd-Frank, some provisions have remained in effect.
One such provision prohibits loan officer and mortgage broker compensation. Before the Compensation Rule went into effect, banks frequently paid loan officers and mortgage brokers bonuses based on the terms of the loan that a broker sold. A higher-interest loan with exotic terms meant more money for the mortgage broker. In most cases, these loans also cost the consumer more money. In many cases, brokers did not disclose less-expensive options to consumers, but instead steered them towards the ones that paid the best bonuses.
This practice ended up putting many consumers into loan products that they did not need because the consumers qualified for much better loan terms. Many of these loans included exotic terms like pick-a-pay loans and interest-only loans. These were loans that were almost designed to fail.
This behavior now violates the terms of the Consumer Financial Protection Act. The CFPB has sole enforcement power over the CFPA's terms. This means that the CFPB has to pursue lenders that violate the Act.
Yesterday, the CFPB announced that it has filed a lawsuit against Utah-based Castle & Cooke Mortgage, LLC. The complaint, which is rather brief, alleges that Castle & Cooke paid its loan officers quarterly bonuses based on the interest rates of loan sold by the officers. Although Castle & Cooke's internal documents did not mention source of the bonuses, the CFPB uncovered the behavior. The complaint names two corporate officers as well. In addition to alleging that Castle & Cooke maintained a secret bonus program, the complaint also alleges that the company failed to properly maintain records of its compliance with the Compensation Rule.
It may have taken several years, but it's nice to finally see a regulator take steps to prosecute companies that are still paying yield spread premiums to their brokers.