A company that paid bonuses to its loan originators for steering borrowers into home loans with high interest rates has agreed to a settlement.
Franklin Loan Corp. says it is a full-service mortgage banker that services real estate professionals, home builders and prospective borrowers.
The Palm Desert, Calif.-based company operates 18 offices across Southern California and one in Chicago. Originations totaled $0.887 billion from 2011 until 2013.
During that period, 32 loan officers were paid $730,000 in quarterly bonuses on more than 1,400 loans, according to an announcement from the Consumer Financial Protection Bureau.
A portion of those bonuses was based on interest rates charged to borrowers; the higher the rate, the higher the bonus.
Such payments are in direct violation of the Federal Reserve Board’s Loan Originator Compensation Rule. The rule was required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The rule, which went into effect in July 2011, prohibits compensation that varies with the loan terms — preventing originators from earning more because they convince a customer to take a mortgage with a higher interest rate.
Franklin agreed to a consent order with the CFPB that requires it to pay $730,000 in borrower redress. It also promised to stop paying loan originators based on the interest rates they sell.
No civil penalty was required due to Franklin’s financial condition and because the CFPB prefers to maximize relief directly from Franklin Loan to affected consumers.
“Today’s action will put $730,000 back in the pockets of consumers who may have never suspected that they had been harmed,” CFPB Director Richard Cordray said in a written statement. “Paying bonuses for steering borrowers into more expensive loans violates their trust and is against the law.”