The Federal Reserve Board thought they cleaned up illegal loan officer compensation schemes in 2010 with the passage of amendments to Regulation Z and the enactment of the Loan Officer Compensation Rule. That rule says lenders can’t base bonus payments or compensate loan officers based on a term or condition of the loan.
For years, some banks steered consumers to higher interest loans. Those loans were frequently less favorable to borrowers but more profitable to lenders. By putting borrowers in loans with higher points or interest rates, the banks made more money.
Lest you think the lesson was learned, in June of last year, the Consumer Financial Protection Board (CFPB) fined Castle & Cooke Mortgage LLC $13 million for violation of the Reg Z compensation rule. A year and half later, the CFPB is back again, this time forcing Franklin Loan Corp to give its customers $730,000 representing bonus monies received by loan officers who pushed borrowers into loans with higher interest rates. 1400 customers appear to have been effected.
In announcing the settlement, CFPB director Richard Cordray said, “Today’s action will put $730,000 back in the pockets of consumers who may have never suspected that they had been harmed. Paying bonuses for steering borrowers into more expensive loans violates their trust and is against the law.”
Franklin is based in California where it has multiple branch offices. The company also writes loans in Chicago.
Lenders know they can no longer have blatant compensation schemes based on interest rates or points. Franklin thought it could outsmart regulators by creating a “bonus pool” arrangement. Close loans with high interest rates and you receive a big bonus check.
Clearly Franklin’s “bonus” plan violated the Regulation Z compensation rule.
We think these bonus pool arrangements offer good whistleblower opportunities. Let’s look at why.
Compensating loan officers based on the profitably of loans usually leads to higher interest rates. That can lead to higher defaults and more foreclosures. Since most residential mortgages are backed directly or indirectly by the federal government, higher foreclosures usually means taxpayers are stuck with part of the bill. The lender itself may also be weakened by its own bad loan portfolio.
The federal False Claims Act can pay handsome cash awards to a whistleblower with original source information about fraud involving tax dollars or federally backed program. That means loan officers with knowledge of illegal commission or bonus schemes after the April 2011 effective date of the loan officer compensation rule may be able to file a whistleblower suit and claim an award.
The Financial Institutions Reform Recovery and Enforcement Act (FIRREA) pays up to $1.6 million in whistleblower awards for information about any misconduct that harms or weakens a federally insured bank.
We are aware of no whistleblower suit yet filed for Reg Z violations but clearly the government is quite interested in making sure that loan officers don’t get rewarded for steering borrowers into bad loans. We would love to speak with you if you have inside information about a lender with illegal compensation schemes or know of someone else doing so. All inquiries are kept in strict confidence.
Mahany & Ertl – America’s Fraud and Whistleblower Lawyers