The Consumer Financial Protection Bureau (CFPB) sued Utah-based Castle & Cooke Mortgage LLC for alleged violations of the Federal Reserve’s loan originator compensation rule. The bureau said the firm’s employees received bonuses for pushing consumers into loans with higher interest rates. The CFPB’s complaint, filed in the U.S. District Court for the District of Utah, Central Division on July 23, seeks restitution for some consumers as well as civil money penalties.
According to the CFPB, Castle & Cooke originated approximately $1.3 billion in loans in 2012. The company does business in roughly 22 states and maintains approximately 45 branches across the country.
The CFPB alleges that Castle & Cooke, through its president, Matthew Pineda, and Buck Hawkins, senior vice-president of capital markets, violated Fed rules banning compensation based on loan terms such as the interest rate of the loan. The rule took effect in April 2011.
According to the bureau, the company’s quarterly bonus program paid more than 150 Castle & Cooke loan officers greater bonus compensation when they persuaded consumers to take on more expensive loans. The average quarterly bonus ranged from $6,100 to $8,700. By contrast, those loan officers who did not charge consumers higher interest rates did not receive quarterly bonuses, the bureau said.
The CFPB estimated that more than 1,100 illegal quarterly bonuses were paid and that tens of thousands of customers may have been upsold since April 2011. By tying bonuses to the interest rate of the loans in this manner, the CFPB alleges that Castle & Cooke was in direct violation of the law.
The CFPB is looking to obtain civil money penalties for each bonus paid out, meaning the potential penalties could be severe. The Dodd-Frank Act allows civil penalty amounts to be determined under a three-tiered framework: up to $5,000 for any violation; up to $25,000 for reckless violations; and up to $1,000,000 for knowing violations. The bureau said in its complaint that the defendants “recklessly or knowingly” paid quarterly bonuses based on the loan terms or conditions.
“We are taking action against the type of practices that precipitated the financial crisis,” said CFPB Director Richard Cordray. “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.”
The CFPB also said Castle & Cooke failed to adhere to certain recordkeeping requirements set forth under Regulation Z (Truth in Lending Act) and Title X of the Dodd-Frank Act. Specifically, the bureau said Castle & Cooke violated laws that require companies to retain their compliance records for a certain period of time. Creditors are required to retain evidence of compliance with the rule. The complaint alleges that Castle & Cooke did not record what portion of each loan officer’s quarterly bonus was attributable to a particular loan and did not reference its quarterly bonus program in each loan originator’s compensation agreement, in violation of federal consumer financial law.
The CFPB received the case from the Utah Department of Commerce, Division of Real Estate.
The bureau finalized its own loan originator compensation rules in January. The new rules will take effect in January 2014.
View the CFPB’s complaint