For the second time this week the Consumer Financial Protection Bureau (CFPB) has filed in federal court against a lender for unfair compensation practices. Today's complaint was levied against RPM Mortgage, Inc. and its CEO, Erwin Robert Hirt, for illegally paying bonuses and higher commissions to loan originators to incentivize them to steer consumers into costlier mortgages. The complaint was accompanied by a proposed order asking the court to require RPM to pay $18 million in redress to consumers and a $1 million civil penalty, and compel an additional $1 million civil penalty payment from Hirt.
RPM Mortgage, Inc. is a residential-mortgage lender headquartered in California and operating about sixty branches in six states. CFPB contends that, under a plan originated in April 2011, RPM provided its loan officers with different forms of compensation that were derived in part from the interest rates of the loans they closed.
"RPM rewarded its loan officers for steering consumers into mortgages with higher interest rates," said CFPB Director Richard Cordray. "Today we are putting an end to RPM's unlawful practices and holding Robert Hirt personally responsible for his involvement in them."
The complaint alleges that RPM sought to mask this arrangement by filtering it through so-called "employee-expense accounts," depositing profits from closed loans - profits that were directly tied to the loans' interest rates - into an expense account set up for the originator. RPM used the expense accounts to pay bonuses and higher commissions to its loan originators and allowed those originators to tap the accounts to offset interest-rate reductions or give credits to certain customers to avoid losing the transactions to competitors. RPM paid or financed millions of dollars in unlawful bonuses, pricing concessions, and supplemental commissions.
The announcement of the enforcement action from CFPB noted that the Loan Originator Compensation Rule has prohibited incentivizing loan originators to steer consumers to costlier mortgages since 2011 and that Hirt was responsible for managing the design and implementation of this illegal compensation plan.
The plan incentivized loan officers to saddle consumers with costlier loans to increase the loan officers' compensation violating not only the Loan Originator Compensation Rule but also the Consumer Financial Protection Act (CFPA) by:
- Funding millions of dollars in illegal bonuses: From April 2011 through January 2012 511 bonuses were paid to loan originators from their individual employee-expense accounts; funds based in part on the interest rates of the loans the originators closed.
- Paying tens of millions of dollars in higher commissions based on high-interest loans: At the end of 2011, RPM stopped paying bonuses from the employee-expense accounts. Instead, it allowed loan originators to use the employee-expense accounts to supplement their commissions on future transactions. Loan officers were able to reset their commission rates on future loans by using employee-expense account funds to cover the increased costs. In this way, profits from earlier high-interest loans were converted into tens of millions of dollars in commission income.
- Allowing loan officers to use expense accounts to pay for pricing incentives to close new mortgages: From April 2011 through December 2013, RPM allowed loan originators to use their expense accounts to finance thousands of pricing concessions that enabled the loan officers to close and earn commissions on transactions they otherwise would have lost. This "point bank" arrangement allowed loan originators to "bank" profits extracted from certain consumers that enabled them to close on and receive additional compensation from loans to future consumers.
On Monday CFPB along with the Department of Justice filed a consent order against Provident Funding Associates, another California lender, for $9 million in damages. Provident was accused of setting up a compensation arrangement that rewarded mortgage brokers for originating higher priced loans. That complaint carried with it additional claims of discrimination against African-American and Hispanic borrowers, prompting the Justice Department's involvement.
