The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Information on this website may not be current. This website may contain links to other third-party websites. Such links are only for the convenience of the reader, user or browser; we do not recommend or endorse the contents of any third-party sites. Readers of this website should contact their attorney, accountant or credit counselor to obtain advice with respect to their particular situation. No reader, user, or browser of this site should act or not act on the basis of information on this site. Always seek personal legal, financial or credit advice for your relevant jurisdiction. Only your individual attorney or advisor can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, contributors, contributing firms, or their respective employers.
Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.
Home borrowers got a reminder Thursday that the mortgage process remains a potential minefield.
A nationwide mortgage firm accused of paying employees bonuses to steer borrowers into less-favorable mortgage terms has agreed to pay $13 million in penalties to settle the charges, the Consumer Financial Protection Bureau announced Thursday.
Utah-based Castle & Cooke was accused of paying quarterly bonuses to employees that ranged from $6,100 to $8,700, based on their ability to get borrowers to accept higher interest rates than they qualified for.
Such bonuses, which create perverse incentives that work against consumers, were banned by the Federal Reserve in a regulation that took effect in 2011. The CFPB enforces that regulation, and this is the first legal action it has taken in accusing a firm for breaking the rule.
“We are taking action against the type of practices that precipitated the financial crisis,” said CFPB Director Richard Cordray when the suit was filed. “Consumers should be able to get a mortgage without worrying about how the financial incentives of their loan officers may cause them to pay higher rates than they actually qualify for.”
Castle & Cooke admitted no wrongdoing in a statement issued to Credit.com, saying it was “committed to legal and regulatory compliance.” A non-bank lender, Castle & Cooke originated $1.3 billion in loans during 2012, operating in 22 states, including California, Arizona, Colorado and Texas.
Before the rule took effect, it was common for brokers and lenders to grant sales staff a per-loan bonus each time a borrower was steered towards a loan with higher rates, an arrangement sometimes called a yield-spread premium.
Castle & Cooke was not accused of that, but rather tying quarterly bonuses to more profitable loans. According to the CFPB lawsuit, an estimated 1,100 bonuses were paid to 215 loan officers.
“(The firm) 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,” the lawsuit said.
The lawsuit also accused the financial institution of not keeping proper records about the bonus program.
“The company does not refer to the quarterly bonus plan in any written policies (and) has failed to maintain a written policy explaining the method (an executive) uses to calculate the amount of the loan officers’ quarterly bonuses,” the suit alleged.
Castle & Cooke has agreed to pay $9 million into a restitution fund. Approximately 9,400 borrowers will receive compensation for mortgage overpayments. The firm will also pay a $4 million civil penalty.
“With today’s resolution we are pleased that we can now focus our undivided attention on our core mission: extending high quality loans and superior service to borrowers,” the firm said in an email. “The regulations are complex, but we are committed to legal and regulatory compliance in our lending.”
Several steps in the mortgage process may involve commissions that create the potential for perverse incentives which work against consumers. The only way for buyers to truly protect themselves is to engage in competitive bidding. Buyers should always get Good Faith Estimates from at least three lenders/mortgage brokers, and compare the total loan coasts. While new federal regulations ban yield-spread premiums and other bonuses paid based on selling higher-cost loans, other financial arrangements between third parties can add unnecessary costs to a mortgage. Comparison shopping is the best defense.
Image: iStock
December 13, 2023
Mortgages