• CFPB Sues Mortgage Lender in Federal Court for Violations of Compensation Rule
  • July 26, 2013 | Authors: David N. Anthony; Virginia Bell Flynn; Nicola Harrison; John C. Lynch; Alan D. Wingfield
  • Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Tysons Corner Office ; Troutman Sanders LLP - Virginia Beach Office ; Troutman Sanders LLP - Richmond Office
  • The Consumer Financial Protection Bureau (“CFPB”) filed a lawsuit against a mortgage- loan company, its president, and its senior vice president (“Defendants”) in United States District Court for the District of Utah on Tuesday, July 23, 2013. The Complaint asserts that the Defendants violated the Dodd-Frank Act (“Dodd-Frank”) by paying the company’s loan officers quarterly bonuses in amounts based upon terms or conditions of the loans that the officers closed.

    An amendment to Regulation Z known as the “Compensation Rule” went into effect on April 6, 2011 (the “implementation date”), prohibiting compensation schemes for loan originators that are based upon terms or conditions of mortgage loans. 12 C.F.R. § 1026.36(d)(1)(i). By incentivizing its loan officers to direct consumers into mortgages with less favorable terms, the company allegedly engaged in the precise practice that the Compensation Rule was designed to preclude.

    The CFPB’s Complaint alleges that prior to the implementation date, the company paid commissions to its loan officers based directly on the interest rates of the loans that the loan officers offered to consumers. A higher interest rate loan resulted in a higher commission for a loan officer. After the implementation date, the company still wanted to compensate its officers at the same level of compensation. As a result, the company allegedly developed a quarterly bonus scheme in which a loan officer received a higher quarterly bonus if the loan officer closed loans with higher interest rates, which the CFPB asserts violates Dodd-Frank.

    The CFPB also alleges that the president and vice president of the company are “covered persons” and, therefore, liable for violations of the Compensation Rule and the Consumer Financial Protection Act as well. Finally, the CFPB alleges that the company violated Regulation Z’s record-retention requirements by failing to record what portion of each quarterly bonus was attributable to a particular loan and failing to reference the quarterly bonus program in each loan originator’s compensation agreement.

    The CFPB is requesting that the Court order the Defendants to pay restitution to the consumers who Defendants steered toward higher-interest loans and order Defendants to pay a civil penalty to the CFPB for each bonus paid.

    Practical Impact

    This lawsuit demonstrates the CFPB’s intent to actively investigate and pursue enforcement actions against lenders who fail to comply with applicable consumer protection laws. Moreover, the ability of the CFPB to file civil lawsuits seeking restitution and penalties is illustrative of the CFPB’s wide and powerful enforcement powers. Lenders should actively be reviewing their compensation and record-retention policies and procedures to ensure compliance with the applicable statutes and regulations. Active monitoring of compliance is especially important at this time because many amendments have recently been implemented and are continuing to go into effect throughout the next year.