It’s called “upselling” — steering home mortgage applicants into higher-cost terms that increase the lender’s profits — and it was rampant during the housing boom years. It worked like this: Rather than putting borrowers into loans at the lowest rates and fees for which they were qualified, loan officers convinced them to sign up for more expensive ones. Loan officers who successfully squeezed more juice, or profit, out of their applicants got extra pay for doing so.
The Federal Reserve Board banned abusive practices like this in 2011. But a lawsuit filed last week by the Consumer Financial Protection Bureau suggests that hidden, backroom upselling ploys might still be alive and well.
The CFPB alleged that a large mortgage company with 45 branches spread among 22 states paid loan officers more than $4 million in bonuses “based on the interest rates of the loans they originated — the higher the interest rates of the loans closed by a loan officer … the higher the loan officer’s quarterly bonus.”
The suit, filed in U.S. District Court in Salt Lake City, charged Castle & Cooke Mortgage LLC and two top executives with violations of the Fed’s rule barring compensation to loan officers that is tied to interest rate or other loan terms. Despite the federal ban, the suit alleges, Castle & Cooke “developed and implemented a scheme” to pay bonuses based on the higher interest rates obtained by loan officers in company branches. Under the plan, according to the CFPB, a Castle & Cooke loan officer could “increase the amount of his or her quarterly bonus” by putting consumers into loans that yielded the company higher profits. The firm kept no written records on the bonus scheme, the suit alleged, which also constitutes a violation of federal loan officer compensation rules.
Asked for comment, Jeff Bell, a company spokesman, said Castle & Cooke “has been cooperating with the CFPB in its investigation for more than a year, and anticipates an amicable resolution in this complex regulatory matter.” He denied that the firm’s bonus system rewards loan officers based on the mortgage terms they obtain from applicants. The CFPB’s case is based on the findings of an investigation conducted by the Utah Department of Commerce’s Real Estate Division.
Federal officials allege that the mortgage company rewarded loan officers who participated in the upselling plan with quarterly bonuses that ranged from $6,100 to $8,700. To collect the extra money, loan officers had to upsell borrowers above a benchmark interest rate established for their branch offices. Loan officers who did not deliver clients at higher than benchmark rates received no extra compensation. Last year, according to the CFPB, Castle & Cooke funded approximately $1.3 billion in new mortgage loans. The agency is seeking restitution of the money allegedly overcharged to consumers by virtue of the undisclosed bonus system.
Putting aside the specifics of the allegations, what does this case mean to mortgage shoppers? Most mortgage industry experts agree that as a result of intensive federal regulatory scrutiny, upselling schemes are less commonplace today than during the early years of the last decade. Back then, some lenders circulated rate schedules for loan officers — especially in the subprime arena — with sliding scales of the extra money they could earn by putting unsuspecting applicants into higher-priced deals. For example, clients might be qualified for a 30-year fixed rate of 7 percent, but if the loan officer could convince them that the best available rate was 7 1/2 percent or 8 percent, the loan officer would earn more.
Bill Kidwell, head of a mortgage advisory firm in Denver, says that most companies “know that you can’t base compensation on interest rates” any more as the result of rule changes and the arrival on the scene of an aggressively pro-consumer regulator in the form of the CFPB.
But Kidwell argues that mortgage companies, like other businesses, need to be able to compensate employees based on their financial performance for the firm, and that current federal rules “lack clarity” on how to accomplish that.
Bottom line for consumers: Your best bet to avoid overpaying is simply to know more. Shop the marketplace intensively for rates and loan fees, keyed to your specific credit scores, down payment, capacity to repay, bank reserves and other factors that determine your perceived risk. If you have a firm understanding of what you qualify for and deserve, it’s going to be a lot tougher for anybody to upsell you.
Kenneth Harney is executive director of the National Real Estate Development Center.