In good news for future homeowners and the safety of the mortgage markets, the CFPB yesterday announced a complaint and consent decree against Castle & Cook Mortgage, LLC, for allegedly paying bonuses to loan officers who had steered consumers into costlier mortgages. The consent order requires the company to pay more than $9 million in compensation to consumers and $4 million in penalties, in addition to ending its illegal practices. This action is the first enforcing new prohibitions against the payment arrangements that reward loan officers and brokers for putting borrowers into more expensive loans. Such payments helped fuel predatory lending and the pipeline of abusive mortgages that wreaked havoc on both individual homeowners and the whole economy.
Payment schemes like the one Castle & Cook has been ordered to stop were a very common feature of the pre-crisis mortgage market. In fact, such practices led to the mushrooming of subprime loans over the last decade-plus; studies have shown that at times over 50 percent of borrowers with credit scores high enough to qualify for conventional loans were instead steered toward expensive subprime loans. It is perhaps an indication of how normal this abusive practice had become that Castle & Cook apparently sought to maintain it, despite the new prohibitions, by disguising its bonus payments. Regulation Z was amended to “[prohibit] any person from compensating a loan originator based on a term or condition of a mortgage loan”; according to the CFPB complaint, however, the company tried to get around this rule by paying loan officers quarterly bonuses based on the terms and conditions of the loans they were able to close. These bonuses provided an incentive to steer consumers into suboptimal mortgages.
Homeowners continue to pay a high price for abusive mortgages: the Center for Responsible Lending has found that higher-cost loans – including loans originated by brokers, hybrid adjustable-rate mortgages, option ARMs, loans with prepayment penalties, and loans with high interest rates – lead to higher rates of foreclosure. So the CFPB truly deserves our thanks for making sure this new law of the land is followed, even by companies that would rather not..
— Rebecca Thiess