A Bad Habit From the Real Estate Bubble Resurfaces

During the heyday of the housing bubble, mortgage sellers made a killing via kickbacks. They often got bonuses for steering borrowers toward more expensive mortgages.

Financial reform, including a strict rule that took effect in 2011 from the Federal Reserve known as the “Compensation Rule,” banned the practice of giving mortgage brokers or loan officers financial incentives for pushing higher-rate loans on consumers. But some mortgage sellers are reportedly still engaging in this practice.

The latest examples come from two lawsuits recently filed by the Consumer Financial Protection Bureau.

In the first, California-based RPM Mortgage – which at one time operated in 18 states — was accused of disguising higher-rate loan bonuses via an employee expense account.

“RPM deposited profits from an officer’s closed loans – profits that were a direct product of the loans’ interest rates – into the loan officer’s employee-expense account, and then used it to pay her bonuses and increased commissions,” the CFPB alleged.

The expense account structure was put into place in 2011 as a direct reaction to the Compensation Rule, which outlawed RPM’s old bonus structure, the CFPB said. More than 500 bonuses were paid out from the expense account, the CFPB says.

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To settle the allegations without admitting any wrongdoing, RPM has agreed to repay consumers $18 million and pay $2 million in penalties.

In a press release, RPM said it cooperated fully with the CFPB investigation. “The company has always taken great care to provide outstanding service and highly competitive rates while complying with the rules governing loan originator compensation, despite the limited and sometimes confusing guidance provided by regulators,” said RPM CEO, Rob Hirt.

In the second case, California-based Guarantee Mortgage Corp. was accused of funneling additional compensation to branch managers and loan originators through third-party marketing service firms.

“The owners of the marketing-services entities … drew the monthly fees as additional compensation. Marketing-services-entity owners included Producing Branch Managers as well as, in some instances, one or more other Loan Originators within the branch,” the complaint alleges. “Owners of marketing services entities received compensation based on the terms of loans they had originated.”

Guarantee, which is no longer operating, was ordered to pay a civil penalty of $228,000, according to the CFPB.

Giving bonuses to sales staff who get more money out of consumers is hardly a new practice. In fact, even the CFPB concedes that in a perfect world, such payments would be regulated by market forces.

“In a perfectly competitive and transparent market, competition would ensure that this incentive would be countered by the need to compete with other loan originators to offer attractive loan terms to consumers,” the agency says in its Loan Origination rule.

But the mortgage market is rarely transparent, particularly when consumers obtain home loans only a few times in their lives. In their most notorious form, financial incentives for loan officers and brokers can be particularly confusing or unclear to consumers. Before financial reform, mortgage brokers were allowed to “double-dip” — receiving payment from consumers in the form of closing costs as well as from banks in the form of “yield-spread premiums” earned by steering consumers into higher-cost loans. That practice is now banned.

However, the recent lawsuits show that it’s still important for consumers to protect themselves when obtaining a mortgage. The best way to do that is to shop around. Always get at least three bids — for now, Good Faith Estimates — from a mixture of lenders and brokers. (New forms simply called “Loan Estimates” will take effect Aug. 1.) An apples-to-apples comparison of bottom-line costs is the best way to make sure there aren’t hidden costs in your mortgage. Maybe the mortgage market can never be perfectly transparent – but vigilantly shopping around can help make the process more so for a consumer.

And before you shop around, make sure you know where you stand — how much house you can afford, what your down payment will be and where your credit score lies. (You can check your credit scores for free on Credit.com.)