For years, mortgage companies and banks steered consumers to higher interest loans. Those loans were frequently less favorable to borrowers but more profitable to lenders. Adding to the problems, many lenders paid commissions or bonuses based on the profitably of the loan. As everyone still remembers, the mortgage industry collapsed in 2007 – 2008. Unfair lending practices such as faulty compensation structures were part of the blame.
In the aftermath of the mortgage crisis, the Federal Reserve Board amended Regulation Z in 2010. Under the amendments, it is illegal to base bonus payments or compensate loan originators based on a term or condition of the loan. The so-called “compensation rule” of Reg Z became effective April 6, 2011.
Most banks and mortgage companies cleaned up their act. Some went underground, however.
In July of 2013, the newly created Consumer Financial Protection Bureau (CFPB) and the Justice Department took aim at Castle & Cooke Mortgage LLC of Salt Lake City, Utah. The government also named the company’s president and senior vice president. According to the government’s complaint, Cooke & Castle simply disguised their bonus program. Loan officers were still compensated in part based on the profitably of the loans they wrote. Instead of tying profitably to commissions, however, the company devised an off the books quarterly bonus plan. The bonus plan was hidden from regulators and not anywhere in the written compensation agreements with loan officers.
Once the government discovered the plan, both the company and top officers were sued. Rather than fight the allegations, the company agreed to permanently stop the illegal compensation arrangements, agreed to 3 years of federal monitoring and paid $13 million in sanctions and penalties. They were not required to admit to any wrongdoing, however.
Compensating loan officers based on the profitably of loans usually leads to higher interest rates and other unfavorable terms for borrowers. That, of course, ultimately leads to higher defaults. These defaults affect taxpayers since most residential mortgages are backed directly or indirectly by the federal government. It also means the banks themselves are weakened by any toxic paper they may hold.
The federal False Claims Act pays handsome cash awards to whistleblowers with original source information about fraud involving a federal or federally backed program. That means loan officers with knowledge of illegal commission or bonus schemes after April 2011 may have the necessary information to file a whistleblower suit in federal court.
Another federal law also pays whistleblower awards, the Financial institutions Reform Recovery and Enforcement Act (FIRREA for short), pays up to $1.6 million in whistleblower awards for information about any misconduct that harms or weakens a federally insured bank.
We are currently investigating several claims about mortgage companies that still use illegal compensation or bonus formulas*. If you have information about this or any other lender misconduct, give us a call. Let a whistleblower attorney from our firm review your information and see if you may qualify for an award under the False Claims Act or FIRREA. We presently represent the whistleblower in the largest pending mortgage company false claims act case, HUD’s $2.4 billion claim against Allied Home Mortgage.
If you believe you have a potential whistleblower claim, make sure that you first find a great whistleblower lawyer. The right attorney can often mean the difference between the government not taking your case and a multimillion dollar whistleblower award. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct). Inquiries kept confidential.
For more information on these schemes, visit our loan officer compensation rule fraud cornerstone post.
(Whistleblower photo courtesy of Dave Winer – scriptingnews)