Consumer Watchdog Finally Flexes Its Muscles

     SALT LAKE CITY (CN) – The Consumer Financial Protection Bureau sued Castle & Cooke Mortgage in Federal Court, claiming it paid loan officers more than $4 million in bonuses to steer consumers into unfavorable mortgages, in violation of Federal Reserve Board rules.
     The new federal bureau also sued Castle & Cooke Mortgage president Matthew A. Pineda, and its senior vice president of capital markets, Buck L. Hawkins. It claims the company illegally tied loan officers’ bonuses to interest rates on customers’ loans: the higher the interest rate, the higher the bonus.
     Castle & Cooke, which employs 330 people at 45 branches, funded $1.3 billion in mortgage loans in 2012. Nearly 99 percent of the loans originated through one of two warehouse lines of credit, the Bureau says in its complaint.
     Since borrowers did not directly compensate Castle & Cooke’s loan officers for loan-origination services, the company allegedly paid its employees quarterly bonuses based on the interest rates of loans they offered.
     The lawsuit states: “For years before the recent mortgage crisis, loan originators often steered consumers into mortgages with terms that were less favorable to the consumer but more profitable for the loan originator.
     “Seeking to stop this practice, in September 2010, the Federal Reserve Board amended Regulation Z to prohibit certain compensation schemes for loan originators (the ‘Compensation Rule’). The Compensation Rule, which became mandatory on April 6, 2011 (‘Implementation Date’), prohibits any person from compensating a loan originator based on a term or condition of a mortgage loan.
     “Defendants have violated the Compensation Rule by paying the Company’s loan officers quarterly bonuses in amounts based on terms or conditions of the loans they close, thus incentivizing loan officers to steer consumers into mortgages with less favorable terms, the very practice the Compensation Rule sought to prohibit.”
     The complaint adds: “Before the Implementation Date, the Company paid its loan officers commissions that were based on the interest rates of the loans they offered to consumers – the higher the interest rates, the higher the loan officers’ commissions.
     “Defendants knew as early as 2009 that the proposed Compensation Rule would prohibit the Company’s then-existing commission structure.
     “Still wanting to pay officers the same levels of compensation after the Implementation Date, Defendants developed and implemented a scheme by which the Company would pay quarterly bonuses to loan officers in amounts that varied based on the interest rates of the loans they originated – the higher the interest rates of the loans closed by a loan officer during the quarter, the higher the loan officer’s quarterly bonus.”
     From July 2011 to April 2012, Castle & Cooke paid more than 500 quarterly bonuses totaling more than $4 million, according to the complaint. It continued paying the bonuses after May 2012, the CFPB claims.
     It says these payments violate the compensation rule and the Consumer Financial Protection Act of 2010.
     “Using a formula that incentivizes loan officers to steer consumers into mortgages with less favorable terms, [defendant] Hawkins calculates the amount of quarterly bonuses that the Company pays its loan officers, and Pineda authorizes the bonuses each quarter,” the 10-page complaint states.
     “While the Company maintains payroll records of the quarterly bonus amounts paid to loan officers since the Implementation Date, at all times material to this Complaint, the Company has failed to maintain a written policy explaining the method Hawkins uses to calculate the amount of the loan officers’ quarterly bonuses.
     “While the Company maintains employee agreements with each of its loan officers, at all times material to this Complaint, those employee agreements have failed to identify, explain, or refer to the existence of the Company’s quarterly bonus program.”
     The Consumer Financial Protection Bureau, launched in 2011 after passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulates financial products and services under federal consumer financial laws.
     It seeks restitution, civil penalties, and fees and costs.
     Plaintiff’s lead counsel is the bureau’s enforcement director Kent Markus.
     Republicans in Congress have bitterly fought the establishment of the Consumer Financial Protection Bureau, delaying confirmation of a director for more than two years. They are still trying to rein it in or cripple it. The California-based legal support services firm Morgan Drexen sued the bureau on Monday in District of Columbia Federal Court, claiming the CFPB collects constitutionally protected attorney-client material, including personal financial information.

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