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It’s called “upselling” – steering home-mortgage applicants into higher-cost terms that increase the lender’s profits – and it was rampant during the housing boom years. It worked like this: Rather than putting borrowers into loans at the lowest rates and fees for which they were qualified, loan officers convinced them to sign up for more expensive ones. Loan officers who successfully squeezed more juice, or profit, out of their applicants got extra pay for doing so.
The Federal Reserve Board banned abusive practices like this in 2011. But a lawsuit filed last week by the Consumer Financial Protection Bureau suggests that hidden, backroom upselling ploys might still be alive and well.
The bureau alleged that a large mortgage company with 45 branches spread among 22 states paid loan officers more than $4 million in bonuses “based on the interest rates of the loans they originated – the higher the interest rates of the loans closed by a loan officer ... the higher the loan officer’s quarterly bonus.”
The suit, filed in U.S. District Court in Salt Lake City, charged Castle & Cooke Mortgage LLC and two top executives with violations of the Fed’s rule barring compensation to loan officers that is tied to interest rate or other loan terms. Despite the federal ban, the suit alleges, Castle & Cooke “developed and implemented a scheme” to pay bonuses based on the higher interest rates obtained by loan officers in company branches. Under the plan, according to the bureau, a Castle & Cooke loan officer could “increase the amount of his or her quarterly bonus” by putting consumers into loans that yielded the company higher profits. The firm kept no written records on the bonus scheme, the suit alleged, which also constitutes a violation of federal loan-officer compensation rules.
Asked for comment, Jeff Bell, a company spokesman, said Castle & Cooke “has been cooperating with the bureau in its investigation for more than a year, and anticipates an amicable resolution in this complex regulatory matter.” He denied that the firm’s bonus system rewards loan officers based on the mortgage terms they obtain from applicants. The bureau case is based on the findings of an investigation conducted by the Utah Department of Commerce’s Real Estate Division.
Federal officials allege that the mortgage company rewarded loan officers who participated in the upselling plan with quarterly bonuses that ranged from $6,100 to $8,700. To collect the extra money, loan officers had to upsell borrowers above a benchmark interest rate established for their branch offices. Loan officers who did not deliver clients at higher-than-benchmark rates received no extra compensation. Last year, according to the bureau, Castle & Cooke funded approximately $1.3 billion in new mortgage loans. The agency is seeking restitution of the money allegedly overcharged to consumers by virtue of the undisclosed bonus system.