On June 4, 2015, the Consumer Financial Protection Bureau (CFPB) filed a complaint in the United States District Court for the Northern District of California against RPM Mortgage, Inc. (RPM), and its CEO, Erwin Robert Hirt. RPM is a residential mortgage lender headquartered in California that operates about sixty branches across six states in the western United States. The complaint alleges that RPM - in violation of the Loan Originator Compensation Rule, 12 C.F.R. § 1026.36(d)(1)(i), and Section 1036 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. § 5536 - paid bonuses and higher commissions to loan originating officers who steered consumers toward loan products with higher interest rates. Specifically, the Loan Originator Compensation Rule prohibits incentivizing loan originators from steering consumers to costlier mortgages, and violations of this rule would constitute violations of the CFPA.
According to the CFPB, “[RPM] sought to mask this interest rate-based compensation by filtering it through ‘employee expense accounts.’” RPM deposited profits from an originator’s closed loans – profits that were directly tied to the loans’ interest rates – into an expense account set up for the originator. RPM used the expense accounts to pay bonuses and higher commissions to its loan originators. The company also allowed loan originators to tap their expense accounts to offset interest rate reductions or give credits to certain customers to avoid losing the transactions to competitors.”
Along with the complaint, the parties submitted a proposed Stipulated Final Judgment and Order. Without admitting any facts or fault, the stipulation requires:RPM to pay $18 million in redress to consumers affected by the company’s unlawful compensation practices. The CFPB will notify eligible consumers and send refund checks in the mail. RPM and Hirt each to pay $1 million to the CFPB’s Civil Penalty Fund. According to the complaint, “Hirt was responsible for managing the design and implementation of RPM’s employee-expense-account plan, including all unlawful compensation paid out of it.”
The Stipulated Final Judgment and Order was signed by the district court on June 9, 2015.
The enforcement action is particularly noteworthy given the reaction by RPM, Hirt and industry commentators. According to an RPM press release: “The company chose to settle this matter without an admission of wrongdoing in order to avoid the cost and distraction of litigation. RPM values its reputation as a respected mortgage lender and has maintained from the beginning of the investigation that all of its compensation policies were and are fully compliant with the law.” Hirt also specifically noted that Buckley Sandler, a well-respected law firm in the consumer financial services space, reviews RPM’s loan origination compensation policies every six months to ensure they are in compliance with CFPB directives. So why did RPM settle instead of fight the CFPB in court? According to Hirt, “The decision was not an easy one but, at the end of the day, I felt it was better to move forward and focus solely on the needs of our customers.”
David Stevens, president of the Mortgage Bankers Association (MBA), echoes some of Hirt’s concerns. According to Stevens, this enforcement action “is emblematic of a larger concern – the [CFPB’s] pattern of issuing dense and complicated rules and then declining to provide written supervisory guidance to clarify issues of common concern in the industry. The rule at play here – the Loan Originator Compensation rule – was originally issued by the Fed in 2010 and then taken over by the CFPB in the wake of Dodd Frank. The rule has long been a subject of industry confusion because of its broad and prescriptive reach into the smallest details of lender compensation plans and the lack of clear guidance on how to comply.” In fact, Stevens notes that the MBA sought guidance from the Fed and CFPB on some of the very same issues addressed in the RPM complaint.
The takeaway from this Complaint, and Stipulated Final Judgment and Order, is that the CFPB continues to aggressively enforce its mandate, and businesses in the consumer financial services space can - and should - expect this trend to continue.