CFPB Takes Action Against Franklin Loan Corporation for Steering Consumers into Costlier Mortgages

WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) ordered a California mortgage lender, Franklin Loan Corporation, to pay $730,000 for giving its employees illegal bonuses for steering consumers into loans with higher interest rates. The Bureau has asked a federal district court to approve a consent order requiring the company to end its illegal compensation system and refund the consumers it harmed.

"Today's action will put $730,000 back in the pockets of consumers who may have never suspected that they had been harmed," said CFPB Director Richard Cordray. "Paying bonuses for steering borrowers into more expensive loans violates their trust and is against the law."

Franklin Loan is a residential mortgage lender with 18 locations across Southern California and one in Chicago. Franklin Loan originated approximately $887 million in loans between 2011 and 2013. From June 2011 to October 2013, Franklin Loan paid at least $730,000 in quarterly bonuses to 32 loan officers based in part on the interest rates on the loans they provided to borrowers; the higher the interest rate of the loans closed during the quarter, the higher the loan officer's quarterly bonus.

The CFPB found that these bonus payments violated the Federal Reserve Board's Loan Originator Compensation Rule, which the Bureau has enforced since July 21, 2011. The rule prohibits mortgage lenders from paying loan officers based on loan terms such as interest rate. Franklin Loan violated the rule by tying its loan officers' quarterly bonuses to the interest rates on the loans they offered to borrowers. Franklin Loan's unlawful bonus practices affected more than 1,400 borrowers.

Today's consent order will ensure that all affected consumers are repaid and that no more consumers are harmed by the illegal compensation system. Franklin Loan has agreed to end its practice of incentivizing loan officers to upcharge consumers by paying quarterly bonuses based, in part, on the interest rates of loans they originated. Franklin Loan will also pay $730,000 in redress to affected consumers. The CFPB did not seek a civil penalty based on Franklin's financial condition and the Bureau's desire to maximize relief directly from Franklin Loan to affected consumers.

What this means for your fair lending review

Franklin Loan was not a discrimination case. The CFPB found it paid 32 loan officers quarterly bonuses based in part on the interest rates of the loans they closed, which violated the Loan Originator Compensation Rule. A pay plan like that also gives officers a reason to use every bit of pricing discretion they have, and discretion is what a fair lending exam tests.

HMDA data collected since 2018 carries each originator's NMLSR ID next to rate spread, total loan costs and lender credits. Group your LAR by originator, one loan product at a time, and look for officers whose pricing runs consistently above the rest. Then lay that list beside your compensation plan. Comply Fair Lending runs pricing regression on your own LAR, so you can see whether a gap holds once credit factors are controlled for.

Our guide to a fair lending self-assessment covers what to do with what you find.

Source: Consumer Financial Protection Bureau