In its first major legal action as a regulatory body, the Consumer Financial Protection Bureau (CFPB) has filed a complaint in federal district court against Utah-based mortgage company Castle & Cooke Mortgage, accusing the firm of giving bonuses to loan officers in exchange for steering consumers into higher-priced mortgages.
Richard Cordray, director of the CFPB, said the illegal practices that Castle & Cooke Mortgage allegedly engaged in were of the same variety that precipitated the financial crisis.
"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," Cordray said in a statement.
In its complaint, the CFPB is seeking restitution for consumers who were impacted by the scheme, as well as monetary penalties. Under the Dodd-Frank Act, the firm could be fined up to $5,000 for each violation. However, the maximum fine increases to $25,000 for each violation that was a result of recklessness and to $1,000,000 for each violation the firm carried out knowingly.
The complaint specifically charges two of the company's chief officers, Matthew A. Pineda, president, and Buck L. Hawkins, senior vice president of capital markets, with violating the Federal Reserve Board's Loan Originator Compensation Rule. The rule, which went into effect in 2011, banned compensation based on loan terms such as the interest rate of the loan.
According to the complaint, Castle & Cooke paid loan officers bigger bonuses when they persuaded consumers to take on more expensive loans. Quarterly bonuses to loan officers that engaged in the scheme ranged from $6,100 to $8,700, according to the complaint. Loan officers who did not engage in the scheme did not receive quarterly bonuses, the complaint states.
The CFPB estimates that more than 1,100 illegal quarterly bonuses were paid and tens of thousands of customers may have been upsold since April 2011.
Castle & Cooke, which has 45 branches in 22 states, originated approximately $1.3 billion in loans in 2012, according to the CFPB.
The CFPB also alleges that the firm failed to properly document its transactions, for example, the company did not record what portion of each loan officer's quarterly bonus was attributable to a particular loan.
The CFPB says it was alerted to the alleged violations by the Utah Department of Commerce, Division of Real Estate.
To download a copy of the complaint, click here.