The Consumer Financial Protection Bureau (CFPB) announced that it has ordered California-based residential mortgage lender Franklin Loan Corporation to pay $730,000 in restitution for rewarding its employees with bonuses for suggesting loans with higher interest rates to borrowers.
Franklin Loan, which has 18 locations in Southern California and one in Chicago, originated about $887 million in mortgage loans between 2011 and 2013, according to CFPB. The Bureau's investigation revealed that during a period of about two and a half years, Franklin Loan paid out quarterly bonuses to 32 loan officers on the basis of the interest rates of the loans closed during a given quarter. The amount of bonuses paid totaled at least $730,000, and the loan officers were given higher bonuses for higher interest rates on the loans closed. According to the CFPB, more than 1,400 borrowers were affected.
The CFPB's investigation found Franklin Loan's actions of paying bonuses to employees based on interest rates to be in violation of the Federal Reserve Board's Loan Originator Compensation Rule, which prohibits mortgage lenders from compensating its loan officers according to loan terms, such as interest rates.
"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. "Paying bonuses for steering borrowers into more expensive loans violates their trust and is against the law."
According to the CFPB, the Bureau as requested a federal district court to approve a consent order that would require Franklin Loan to stop illegally compensating employees and refund the money to affected consumers. Franklin Loan has agreed to end the practice of paying bonuses to loan officers based on interest rates of the loans closed and will pay $730,000 in refunds to consumers who paid higher interest rates as a result of the practice.