A California lender has been fined $730,000 for paying illegal bonuses to their loan originators.
According to the CFPB Filing:
“Franklin Loan Corporation (Franklin or the Company) violated the
Compensation Rule by paying its loan officers quarterly bonuses in amounts based on
terms or conditions of the loans they closed. Franklin’s quarterly bonus scheme provided
financial incentives to loan officers to steer consumers into mortgages with less favorable
terms, the very practice the Compensation Rule sought to prohibit.”
“The Company paid its loan officers a
“commission split” – typically between 65% and 70% of the “gross loan fees,” which
included the origination fee, discount points, and the retained cash “rebate” associated
with the loan.”
“Franklin offered loan products at a variety of interest rates, and each interest
rate was associated with a specific cash rebate. Loans with higher interest rates generated
higher rebates. Franklin’s loan officers had complete discretion in determining whether to
pass on the cash rebate to the borrower. Any rebate they declined to pass on – i.e., the
retained rebate – was included in the gross loan fees and increased their compensation.”
“Franklin’s new compensation scheme, which was implemented immediately
after the Compensation Rule went into effect, provided for (1) an upfront commission
based on a set percentage of the loan amount and (2) a quarterly bonus paid from loan
originators’ individual “expense accounts.”
“The upfront commission, which was paid on each loan, included a floor and
ceiling that dictated the minimum and maximum amounts loans officers could earn on
this component of their compensation.”
“The quarterly bonus was based in part on the retained rebate generated from
each loan. Franklin would track the origination fees and retained rebate generated from
each loan. It then would set aside 65-70% of that amount (sometimes referred to as the
“adjusted total commission”) to determine the contributions it would make to the loan
officer’s individual “expense account.”
“Specifically, for each loan, Franklin would place in the loan officer’s
individual “expense account” the difference, if any, between the “adjusted total
commission” and the upfront commission. Franklin would make a contribution to the
account only if the origination fees and retained rebate exceeded the amount of the
upfront commission earned on the loan.”
“Thus, Franklin funded the loan officers’ individual “expense accounts” in
amounts that were based in part on the interest rates of the loans the officers’ closed.”
“At the end of each quarter, Franklin typically paid 50% to 60% of the
amount in the individual “expense account” to the loan officer as a bonus. “
When it says “steering consumers into loans with higher interest rates” it becomes clear that after reading complaint there are a few lessons that lender’s should pay attention to.
1. Loan officer discretion of any kind is a risky proposition. Better to configure your pricing engine to lock that down. The more discretion the higher the risk!
2. Above par pricing that is kept in any form or fashion is highly risky, whereas, the policy of above par goes to the client is the least risky.
3. The obvious was used against this lender. Of course the higher the rate the higher the premium!
4. Good Fair Lending practices would have stopped most of this. If there is a reason a rate is higher based on the risk of the individual consumer versus then monitoring and documenting of this could have saved them a lot of money.
5. Folks, if any of you are following the above practices in any way shape or form, stop, analyze, re-mediate and save yourselves a lot of aggravation and time.
To Read The Complaint, CLICK HERE
