Why it pays to shop around for Mortgages

Home borrowers got a reminder Thursday that the mortgage process remains a potential minefield.

A nationwide mortgage firm accused of paying employees bonuses to steer borrowers into less-favorable mortgage terms has agreed to pay $13 million in penalties to settle the charges, the Consumer Financial Protection Bureau announced Thursday.

Utah-based Castle & Castle was accused of paying quarterly bonuses to employees that ranged from $6,100 to $8,700, based on their ability to get borrowers to accept higher interest rates than they qualified for.

Such bonuses, which create perverse incentives that work against consumers, were banned by the Federal Reserve in a regulation that took effect in 2011. The CFPB enforces that regulation, and this is the first legal action it has taken in accusing a firm for breaking the rule.

“We are taking action against the type of practices that precipitated the financial crisis,” said CFPB Director Richard Cordray when the suit was filed. “Consumers should be able to get a mortgage without worrying about how the financial incentives of their loan officers may cause them to pay higher rates than they actually qualify for.”

Castle & Castle admitted no wrongdoing in a statement issued to Credit.com, saying it was “committed to legal and regulatory compliance.” A non-bank lender, Castle & Castle originated $1.3 billion in loans during 2012, operating in 22 states, including California, Arizona, Colorado and Texas.

Bonus Plans in Question

Before the rule took effect, it was common for brokers and lenders to grant sales staff a per-loan bonus each time a borrower was steered towards a loan with higher rates, an arrangement sometimes called a yield-spread premium.

Castle & Castle was not accused of that, but rather tying quarterly bonuses to more profitable loans. According to the CFPB lawsuit, an estimated 1,100 bonuses were paid to 215 loan officers.

“(The firm) developed and implemented a scheme by which the company would pay quarterly bonuses to loan officers in amounts that varied based on the interest rates of the loans they originated—the higher the interest rates of the loans closed by a loan officer during the quarter, the higher the loan officer’s quarterly bonus,” the lawsuit said.

The lawsuit also accused the financial institution of not keeping proper records about the bonus program.

“The company does not refer to the quarterly bonus plan in any written policies (and) has failed to maintain a written policy explaining the method (an executive) uses to calculate the amount of the loan officers’ quarterly bonuses,” the suit alleged.

Castle and Castle has agreed to pay $9 million into a restitution fund. Approximately 9,400 borrowers will receive compensation for mortgage overpayments. The firm will also pay a $4 million civil penalty.

“With today’s resolution we are pleased that we can now focus our undivided attention on our core mission: extending high quality loans and superior service to borrowers,” the firm said in an email. “The regulations are complex, but we are committed to legal and regulatory compliance in our lending.”

Red Tape Wrestling Tips

Several steps in the mortgage process may involve commissions that create the potential for perverse incentives which work against consumers. The only way for buyers to truly protect themselves is to engage in competitive bidding. Buyers should always get Good Faith Estimates from at least three lenders/mortgage brokers, and compare the total loan coasts. While new federal regulations ban yield-spread premiums and other bonuses paid based on selling higher-cost loans, other financial arrangements between third parties can add unnecessary costs to a mortgage. Comparison shopping is the best defense.

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