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
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.
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.