Loan Originator Compensation: CFPB Grabs the “Steering” Wheel
Banking & Financial Services Alert
The CFPB took action against two mortgage companies for violations of the Loan Originator Compensation Rule (“LO Comp Rule”), which prohibits compensation to loan originators based on loan terms, claiming that the companies’ compensation structures encouraged loan originators to “steer” consumers into costlier mortgages. In each case, the CFPB also held individuals involved in the management or ownership of the mortgage companies (the CEO of one company, and the owners of the other) responsible for making certain payments. Each of these cases involved a finding by the CFPB that although the compensation systems may not have directly compensated officers for steering, the arrangements were essentially disguised means by which the loan originators could be paid higher compensation based on the profitability of their loans.
The LO Comp Rule prohibits compensation of loan originators based on the terms of a mortgage loan or multiple mortgage loans, such as interest rate. Because profits resulting from mortgage loans are directly tied to the terms of the loan, compensation based on profitability is prohibited, except in limited circumstances. The CFPB concluded that RPM Mortgage, Inc. (“RPM”), violated the LO Comp Rule by compensating loan originators based in part on the interest rates on the loans they closed. As described by the CFPB:
RPM disguised this interest-rate-based compensation by funneling it though so-called employee-expense accounts. RPM deposited profits from an officer’s closed loans – profits that were a direct product of the loans’ interest rates – into the loan officer’s employee-expense account, and then used it to pay her bonuses and increased commissions. RPM also allowed loan officers to use their employee-expense accounts to offset interest rate reductions or credits for RESPA-tolerance cures or appraisal costs they sometimes granted to avoid losing loans to a competitor.
The CFPB found that loan originators could receive higher amounts deposited into their individual expense accounts by steering consumers into higher-interest-rate loans and that loan officers with a “positive” expense-account balance could withdraw funds from such an account for deferred compensation in the form of bonuses.
The CFPB viewed the RPM arrangement through a wide lens in describing these expense accounts as allowing loan originators to “bank” profits, on loans made to certain consumers, that enabled them to close on and receive additional compensation from loans to future consumers. This approach by the CFPB would warrant a review by lenders of their compensation plans to ensure they have no similar components that the CFPB might view as an attempt to circumvent the “point-bank” prohibition.
In its other case involving the LO Comp Rule, filed by the CFPB against Guarantee Mortgage Corporation (“Guarantee”), the CFPB found that loan originators and “producing branch managers” (loan originators who managed a branch office) were permitted to own marketing-services entities associated with each branch office. The fees that were paid by Guarantee to the marketing entity were based on the profitability of the particular branch. The CFPB noted that certain loans generated more revenue (and more profits) based on the interest rate charged. Because the marketing entity was paid based on profitability of the associated branch and the producing branch manager of the associated branch owned the marketing entity, the producing branch managers were receiving compensation based on the terms of loans they originated, in violation of the LO Comp Rule.
The CFPB’s action against RPM requires RPM to pay $18 million in monetary relief and $1 million in civil money penalties. Significantly, the CFPB additionally found that RPM’s CEO was so integrally involved in designing and implementing RPM’s compensation plan that he individually violated the LO Comp Rule and should be deemed a “covered person” for purposes of the Consumer Financial Protection Act. Based on this finding, the CFPB found that the CEO personally should pay an additional $1 million civil money penalty.
In the Guarantee case, the CFPB required payment of $228,000 in civil money penalties. The CFPB noted that Guarantee was in the process of dissolving and might lack the financial resources to pay the penalty in full. In such event, the CFPB’s Order indicates that Guarantee “must obtain contributions from [Guarantee’s] individual owners sufficient to pay the full penalty.” The basis for the CFPB’s Order requiring these contributions from the owners of Guarantee is not expressly indicated, and so it could be based on the fact that Guarantee is in the process of dissolving as a corporation, in which event certain state laws can permit claims to be made against individual owners to the extent of assets being distributed. Regardless, the Guarantee and RPM cases indicate an intent by the CFPB to look beyond the corporate entity to officers (and possibly even owners) that may have had sufficient involvement to be deemed to have violated the LO Comp Rule and hold them responsible for penalties or other amounts.
Note further that RPM’s CEO will be required to pay the $1 million civil money penalty without reimbursement or indemnity. The stipulated court order requires that such payment be treated as a penalty paid to the government for all purposes and prohibits either RPM or its CEO from seeking any sort of tax deduction for such payment or, significantly, seeking or accepting, whether directly or indirectly, any reimbursement or indemnification for such payment from any source, even from an insurance policy.
These orders illustrate the extent to which the CFPB will look through a lender’s compensation programs with its originators to evaluate whether impermissible payments might be made indirectly to loan originators. Although the LO Comp Rule has a narrow exception that can permit certain profits-based compensation plans, in no event may an originator’s compensation be based directly or indirectly on the terms of such originator’s transactions. Mortgage lenders should be extremely cautious regarding any compensation program that directly, or indirectly through bonuses or payments to parties affiliated with loan originators, might be construed to include some component of profitability that could be tied back to the interest rate or other terms of a loan originated by the compensated party.