Franklin Loan Corporation
Documents in this case
- Complaint · · 7 p.
- Stipulation · · 8 p.
Case summary
NOV 13, 2014
CFPB ordered a California mortgage lender, Franklin Loan Corporation, to pay $730,000 for giving its employees illegal bonuses for steering consumers into loans with higher interest rates.
Complaint ()
PDF of this document (7 pages)
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ANTHONY ALEXIS, DC Bar #384545 (Phone: 202-435-7999) (Email: [email protected]) JEFFREY PAUL EHRLICH, FL Bar #51561 (Phone: 202-435-7598) (Email: [email protected]) NATALIE R.WILLIAMS, NY Bar #2422590 (Phone: 212-328-7017) (Email: [email protected]) MONAMI CHAKRABARTI, NY Bar #4728812 (Phone: 415-844-9790) (Email: [email protected]) THOMAS WARD, IL Bar #6291011 (Phone: 312-610-8966)
(Email: [email protected]) MAXWELL PELTZ, CA Bar #183662 (Phone: 415-633-1328) (E-mail: [email protected]) Consumer Financial Protection Bureau 1700 G Street NW Washington, DC 20552 Fax: (202) 435-7722
Attorneys for Plaintiff Consumer Financial Protection Bureau
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
Consumer Financial Protection Bureau, Plaintiff, v.
Franklin Loan Corporation, Defendant.
Case No. 5:14-cv-02324
COMPLAINT FOR PERMANENT INJUNCTION AND OTHER RELIEF
Case 5:14-cv-02324 Document 1 Filed 11/13/14 Page 1 of 7 Page ID #:1
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JURISDICTION AND VENUE 1.
This Court has subject-matter jurisdiction over this action because it is brought under “Federal consumer financial law,” 12 U.S.C. § 5565(a)(1), presents a federal question, 28 U.S.C. § 1331, and is brought by an agency of the United States, 28 U.S.C. § 1345.
2.
Venue is proper in this district because a substantial part of the events or omissions giving rise to the claims occurred here and Defendant resides here. 28 U.S.C. §1391(b); 12 U.S.C. § 5564(f).
INTRODUCTION 3.
For years before the recent mortgage crisis, loan originators often steered consumers into mortgages with terms that were less favorable to consumers but more profitable for the loan originator.
4.
Seeking to end this practice, in September 2010, the Federal Reserve Board amended Regulation Z to prohibit any person from compensating loan officers based on a term or condition of a mortgage loan. 12 C.F.R. § 1026.36(d)(1)(i) (2011) (revised 2014) (the Compensation Rule).
5.
This Complaint challenges conduct that occurred before January 1, 2014, and refers to the Compensation Rule promulgated by the Federal Reserve Board, 12 C.F.R. § 226.36, recodified at 12 C.F.R. § 1026.36(d)(1)(i), which was effective from April 6, 2011 (the Implementation Date) through December 31, 2013. 6.
Franklin Loan Corporation (Franklin or the Company) violated the Compensation Rule by paying its loan officers quarterly bonuses in amounts based on terms or conditions of the loans they closed. Franklin’s quarterly bonus scheme provided financial incentives to loan officers to steer consumers into mortgages with less favorable terms, the very practice the Compensation Rule sought to prohibit. Case 5:14-cv-02324 Document 1 Filed 11/13/14 Page 2 of 7 Page ID #:2
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PARTIES 7.
The Consumer Financial Protection Bureau (the Bureau) is an independent agency of the United States charged with regulating “the offering and provision of consumer financial products or services under the Federal consumer financial laws,” including the Consumer Financial Protection Act of 2010 (the CFPA) and the Compensation Rule. 12 U.S.C. § 5491(a).
8.
The Bureau is authorized to initiate federal district-court proceedings, by its own attorneys, to address violations of Federal consumer financial laws and to secure such relief as may be appropriate. 12 U.S.C. §§ 5564(a)-(b), 5565. 9.
Franklin is a California corporation, with its principal place of business at 44-800 Village Court, Palm Desert, California. As a significant part of its business, the Company offers and provides mortgage-loan products to consumers primarily for personal, family, or household purposes. Those activities are “consumer financial services or products” under the CFPA. 12 U.S.C. § 5481(5)(A), (15)(A)(i). The Company is therefore a “covered person” under the CFPA. 12 U.S.C. § 5481(6).
FACTUAL BACKGROUND 10.
Franklin is a residential-mortgage lender that offers and provides loan products, including conventional fixed loans, adjustable-rate loans, Federal Housing Act loans, and United States Department of Agriculture loans, to consumers seeking to purchase or refinance residential homes. Each of these loans is secured by the dwelling with respect to which the loan was provided.
11.
From 2011 through 2013, Franklin originated approximately $887 million in mortgage loans.
12.
Franklin has about eighteen offices throughout southern California and one in Chicago.
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13.
Each office employs loan officers who interface directly with borrowers. Franklin pays its loan officers to assist borrowers with obtaining and arranging credit to be secured by a dwelling.
14.
Loan officers take the initial loan applications, assess the borrowers’ creditworthiness, and determine the interest rates to offer borrowers for particular loan products.
15.
Borrowers do not directly compensate Franklin’s loan officers for the loanorigination services they provide.
16.
Before the Implementation Date, the Company paid its loan officers a “commission split” – typically between 65% and 70% of the “gross loan fees,” which included the origination fee, discount points, and the retained cash “rebate” associated with the loan.
17.
Franklin offered loan products at a variety of interest rates, and each interest rate was associated with a specific cash rebate. Loans with higher interest rates generated higher rebates. Franklin’s loan officers had complete discretion in determining whether to pass on the cash rebate to the borrower. Any rebate they declined to pass on – i.e., the retained rebate – was included in the gross loan fees and increased their compensation. 18.
The commission split thus created an incentive for loan officers to place consumers in higher-interest-rate mortgages – the higher the interest rate of the loan, the higher the retained rebate that could be generated, and the higher the loan officer’s compensation.
19.
Franklin knew in early 2010 that the proposed Compensation Rule would prohibit the Company’s then-existing commission structure. 20.
The Company, however, wanted to continue providing financial incentives to loan officers to originate high-interest mortgages. It devised a new compensation plan that still conditioned part of the loan officers’ compensation on the terms and conditions of the loans they originated.
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21.
Franklin’s new compensation scheme, which was implemented immediately after the Compensation Rule went into effect, provided for (1) an upfront commission based on a set percentage of the loan amount and (2) a quarterly bonus paid from loan originators’ individual “expense accounts.”
22.
The upfront commission, which was paid on each loan, included a floor and ceiling that dictated the minimum and maximum amounts loans officers could earn on this component of their compensation.
23.
The quarterly bonus was based in part on the retained rebate generated from each loan. Franklin would track the origination fees and retained rebate generated from each loan. It then would set aside 65-70% of that amount (sometimes referred to as the “adjusted total commission”) to determine the contributions it would make to the loan officer’s individual “expense account.”
24.
Specifically, for each loan, Franklin would place in the loan officer’s individual “expense account” the difference, if any, between the “adjusted total commission” and the upfront commission. Franklin would make a contribution to the account only if the origination fees and retained rebate exceeded the amount of the upfront commission earned on the loan.
25.
Thus, Franklin funded the loan officers’ individual “expense accounts” in amounts that were based in part on the interest rates of the loans the officers’ closed. 26.
At the end of each quarter, Franklin typically paid 50% to 60% of the amount in the individual “expense account” to the loan officer as a bonus. 27.
From June 3, 2011 through October 11, 2013, Franklin paid quarterly bonuses to its loan officers based in part on the interest rates of the loans provided to borrowers – the higher the interest rate of the loans closed during the quarter, the higher the loan officer’s quarterly bonus.
28.
From June 3, 2011 through October 11, 2013, Franklin paid at least $730,000 in quarterly bonuses to its loan officers. Case 5:14-cv-02324 Document 1 Filed 11/13/14 Page 5 of 7 Page ID #:5
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COUNT I Franklin’s Violations of the Compensation Rule 29.
The Bureau realleges and incorporates by reference paragraphs 1-28. 30.
The Compensation Rule provides that “[i]n connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in the amount that is based on any of the transaction’s terms or conditions.” 12 C.F.R. § 1026.36(d)(1)(i) (2011) (revised 2014).
31.
Franklin is a “person” under the Compensation Rule. 12 C.F.R. § 1026.36(d)(1)(i) (2011) (revised 2014).
32.
Each of Franklin’s loan officers is a “loan originator” under the Compensation Rule. 12 C.F.R. § 1026.36(d)(1)(i) (2011) (revised 2014). 33.
From June 3, 2011 through October 11, 2013, Franklin paid its loan officers quarterly bonuses that were based on terms or conditions of consumer-credit transactions secured by a dwelling, in violation of 12 C.F.R. § 1026.36(d)(1)(i) (2011) (revised 2014). 34.
Franklin directly or indirectly paid about 128 quarterly bonuses in amounts that varied based on the terms or conditions of consumer-credit transactions secured by a dwelling.
35.
Each quarterly-bonus payment made by Franklin constitutes a discrete violation of the Compensation Rule, 12 C.F.R. § 1026.36(d)(1)(i) (2011) (revised 2014).
COUNT II Franklin’s Violations of the CFPA 36.
The Bureau realleges and incorporates by reference paragraphs 1-28. 37.
Franklin’s violations of the Compensation Rule, described in Count I, constitute violations of section 1036 of the CFPA. 12 U.S.C. § 5536(a)(1)(A).
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PRAYER FOR RELIEF The Bureau requests that the Court: a. permanently enjoin Franklin from committing future violations of the Compensation Rule, 12 C.F.R. § 1026.36, the CFPA, 12 U.S.C. § 5536, and any other provision of “Federal consumer financial law,” as defined by 12 U.S.C. § 5481(14);
b. grant additional injunctive relief as the Court may deem just and proper; c. order Franklin to pay redress to consumers harmed by its unlawful conduct; d. order Franklin to disgorge all ill-gotten gains; e. impose on Franklin a civil money penalty; f. award costs against Franklin; and g. award additional relief as the Court may determine to be just and proper.
Dated: November 13, 2014
Respectfully Submitted,
Anthony Alexis (DC Bar #384545) Acting Enforcement Director
Jeffrey Paul Ehrlich (FL Bar #51561)
Deputy Enforcement Director
Natalie R. Williams (NY Bar #2422590) Assistant Litigation Deputy
/s/ Maxwell Peltz
Maxwell Peltz (CA Bar #183662)
Consumer Financial Protection Bureau 1700 G Street NW Washington, DC 20552 Fax: 202-435-7722
Attorneys for Consumer Financial Protection Bureau Case 5:14-cv-02324 Document 1 Filed 11/13/14 Page 7 of 7 Page ID #:7
Stipulation ()
PDF of this document (8 pages)
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UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA Consumer Financial Protection Bureau, Plaintiff, v.
Franklin Loan Corporation, Defendant.
Case No. 5:14-cv-02324-JGB STIPULATED FINAL JUDGMENT AND ORDER Hon. Jesus G. Bernal The Consumer Financial Protection Bureau (Bureau) commenced this civil action on November 13, 2014, to obtain injunctive and monetary relief from Franklin Loan Corporation (Franklin or the Company). The complaint alleges violations of the Loan Originator Compensation Rule, 12 C.F.R. § 226.36(d)(1)(i)(2011) (recodified as 12 C.F.R. § 1026.36(d)(1)(i) (2011)), and section 1036(a) of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. § 5536(a)(1)(A). The parties, by and through respective counsel, agree to the entry of this Stipulated Final Judgment and Order (Order).
THEREFORE, it is ORDERED:
FINDINGS AND CONCLUSIONS 1.
This Court has jurisdiction over the parties and the subject matter of this action.
2.
The Bureau and Franklin agree to entry of this Order, without adjudication of any issue of fact or law, to settle and resolve all matters in dispute arising from the conduct alleged in the complaint to the date this Order is entered. JS-6 Case 5:14-cv-02324-JGB-DTB Document 11 Filed 11/26/14 Page 1 of 8 Page ID #:46
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3.
Franklin neither admits nor denies any allegations in the complaint, except as specifically stated in this Order. For the purposes of this Order, Franklin admits the facts necessary to establish the Court’s jurisdiction over Franklin and the subject matter of this action.
4.
Franklin waives service under Rule 4(d) of the Federal Rules of Civil Procedure, and waives all rights to seek judicial review or otherwise challenge or contest the validity of this Order. Franklin also waives any claim it may have under the Equal Access to Justice Act, 28 U.S.C. § 2412, concerning the prosecution of this action to the date of this Order. Each Party will bear its own costs and expenses, including without limitation attorneys’ fees.
5.
Entry of this Order is in the public interest.
DEFINITIONS The following definitions apply to this Order:
6.
“Affected Consumer” means any person (i) who obtained a closed-end mortgage loan for personal, family, or household use through a Loan Originator and (ii) whose Loan Originator received an expense-account contribution and a quarterly bonus from the Company associated with such mortgage loan between April 6, 2011 and the Effective Date.
7.
“Effective Date” means the date on which this Order is entered. 8.
“Enforcement Director” means the Assistant Director of the Office of Enforcement for the Consumer Financial Protection Bureau, or his delegee. 9.
“Franklin” means Franklin Loan Corporation and any successors or assigns. 10.
“Loan Originator” means a “loan originator” as defined in the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and its implementing regulations, who is an employee of Franklin.
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ORDER A.
Injunctive Relief 11.
IT IS ORDERED that Franklin and its officers, agents, servants, employees, and all other persons in active concert or participation with them, who have actual notice of this Order, whether acting directly or indirectly, are permanently enjoined from paying compensation to a Loan Originator in violation of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and its implementing regulations. B.
Monetary Relief 12.
IT IS FURTHER ORDERED that a judgment for monetary relief is hereby entered in favor of the Bureau and against Franklin in the amount of $730,000. 13.
Within 10 days of the Effective Date, Franklin must pay to the Bureau, by wire transfer to the Bureau or to the Bureau’s agent, and according to the Bureau’s wiring instructions, $730,000 in full satisfaction of the judgment as ordered in Paragraph 12 of this Order.
14.
Any funds received by the Bureau in satisfaction of this judgment will be deposited into a fund or funds administered by the Bureau or its agent, according to applicable statutes and regulations, to be used for redress for Affected Consumers, including but not limited to refund of moneys, restitution, damages, or other monetary relief, and for any attendant expenses for the administration of any such redress. 15.
If the Bureau, in its sole discretion, determines that redress to Affected Consumers is wholly or partially impracticable or if funds remain after redress is completed, the Bureau may apply any remaining funds for other equitable relief (including consumer-information remedies) reasonably related to the violations alleged in the complaint. Any funds not used for such equitable relief will be deposited in the United States Treasury as disgorgement. Franklin will have no right to challenge any actions that the Bureau or its representatives may take under this paragraph. Case 5:14-cv-02324-JGB-DTB Document 11 Filed 11/26/14 Page 3 of 8 Page ID #:48
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16.
Payment of redress to any Affected Consumer under this Order may not be conditioned on that Affected Consumer waiving any right.
17.
In the event of any default on Franklin’s obligations to make payment under this Order, interest, computed under 28 U.S.C. § 1961, as amended, will accrue on any outstanding amounts not paid from the date of default to the date of payment, and will immediately become due and payable.
18.
Franklin must relinquish all dominion, control, and title to the funds paid to the fullest extent permitted by law and no part of the funds may be returned to Franklin. 19.
Under 31 U.S.C. § 7701, Franklin, unless it already has done so, must furnish to the Bureau its taxpayer identifying number, which may be used for purposes of collecting and reporting on any delinquent amount arising out of this Order. C.
Reporting Requirements 20.
IT IS FURTHER ORDERED that for 5 years from the Effective Date, Franklin must notify the Bureau of any of the following: a dissolution, assignment, sale, merger, or other action that would result in the emergence of a successor company; the creation or dissolution of a subsidiary, parent, or affiliate that engages in any acts or practices subject to this Order; the filing of any bankruptcy or insolvency proceeding by or against Franklin; or a change in Franklin’s name or address. Franklin must provide this notice at least 30 days before the development or as soon as practicable after learning about the development, whichever is sooner.
21.
Within 7 days of the Effective Date, Franklin must: a. designate at least one telephone number and an email, physical, and postal address as points of contact, which the Bureau may use to communicate with Franklin;
b. identify all businesses for which Franklin is the majority owner, or that Franklin directly or indirectly controls, by all of their names, telephone numbers, and physical, postal, email, and Internet addresses; and Case 5:14-cv-02324-JGB-DTB Document 11 Filed 11/26/14 Page 4 of 8 Page ID #:49
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c. describe the activities of each business, including the products and services offered, and the means of advertising, marketing, and sales. 22.
Within 90 days of the Effective Date, and again one year after the Effective Date, Franklin must submit to the Enforcement Director an accurate written complianceprogress report (Compliance Report), which, at a minimum: a. describes in detail the manner and form in which Franklin has complied with this Order; and b. attaches a copy of each Order Acknowledgment obtained under Section D of this Order, unless previously submitted to the Bureau. 23.
After the one-year period, and continuing for 5 years from the Effective Date, Franklin must submit to the Enforcement Director additional Compliance Reports within 14 days of receiving a written request from the Bureau. D.
Order Distribution and Acknowledgement 24.
IT IS FURTHER ORDERED that within 7 days of the Effective Date, Franklin must submit to the Enforcement Director an acknowledgment of receipt of this Order, sworn under penalty of perjury.
25.
Within 30 days of the Effective Date, Franklin must deliver a copy of this Order to each of its board members and executive officers, as well as to any managers, employees, service providers, any business entity that has common or overlapping ownership with Franklin, and other agents and representatives who have responsibilities related to the subject matter of this Order.
26.
For 5 years from the Effective Date, Franklin must deliver a copy of this Order to any business entity resulting from any change in structure referred to in Section C, any future board members and executive officers, as well as to any managers, employees, service providers, and other agents and representatives who will have responsibilities related to the subject matter of this Order before they assume their responsibilities.
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27.
Franklin must secure a signed and dated statement acknowledging receipt of a copy of this Order, ensuring that any electronic signatures comply with the requirements of the E-Sign Act, 15 U.S.C. § 7001 et seq., within 30 days of delivery, from all persons receiving a copy of this Order under this Section. E.
Recordkeeping 28.
IT IS FURTHER ORDERED that Franklin must create, for at least 5 years from the Effective Date, all documents and records necessary to demonstrate full compliance with each provision of this Order, including documents detailing the amounts, dates, and components of all compensation paid to Loan Originators and how such compensation was calculated, and all other submissions to the Bureau. 29.
Franklin must retain the documents identified in Paragraph 28 for at least 5 years.
30.
Franklin must make the documents identified in Paragraph 28 available to the Bureau upon the Bureau’s request.
F.
Notices 31.
IT IS FURTHER ORDERED that unless otherwise directed in writing by the Bureau, Franklin must provide all submissions, requests, communications, or other documents relating to this Order in writing, with the subject line, “In re Franklin Loan Corporation, File No. 2013-0913-02” and send them either: a. By overnight courier (not the U.S. Postal Service), as follows: Assistant Director for Enforcement Consumer Financial Protection Bureau ATTENTION: Office of Enforcement 1625 Eye Street, N.W.
Washington D.C. 20006; or b. By first class mail to the below address and contemporaneously by email to [email protected]:
Assistant Director for Enforcement Case 5:14-cv-02324-JGB-DTB Document 11 Filed 11/26/14 Page 6 of 8 Page ID #:51
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Consumer Financial Protection Bureau ATTENTION: Office of Enforcement 1625 Eye Street, N.W.
Washington D.C. 20006 G.
Cooperation with the Bureau 32.
IT IS FURTHER ORDERED that Franklin must cooperate fully to help the Bureau determine the identity, location, and any and all other available information which the Bureau deems relevant concerning each Affected Consumer. Franklin must provide such information in its or its agents’ possession or control within 14 days of receiving a written request from the Bureau.
33.
Franklin must cooperate fully with the Bureau in this matter and in any investigation related to or associated with the conduct described in the complaint. Franklin must provide truthful and complete information, evidence, and testimony. Franklin must cause its officers, employees, representatives, or agents to appear for interviews, discovery, hearings, trials, and any other proceedings that the Bureau may reasonably request upon 5 days written notice, or other reasonable notice, at such places and times as the Bureau may reasonably designate, without the service of compulsory process.
H.
Compliance Monitoring 34.
IT IS FURTHER ORDERED that, for purposes of monitoring Franklin’s compliance with this Order, Franklin must submit, within 14 days of receipt of a written request from the Bureau, additional compliance reports or other requested information, which must be made under penalty of perjury; provide sworn testimony; or produce documents.
35.
For purposes of this Section, the Bureau may communicate directly with Franklin, unless Franklin retains counsel related to these communications. Case 5:14-cv-02324-JGB-DTB Document 11 Filed 11/26/14 Page 7 of 8 Page ID #:52
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36.
Franklin must permit Bureau representatives to interview any employee or other person affiliated with Franklin who has agreed to such an interview. The person interviewed may have counsel present.
37.
Nothing in this Order limits the Bureau’s lawful use of compulsory process under 12 U.S.C. § 5526 and 12 C.F.R. § 1080.6.
38.
For the duration of this Order, Franklin agrees to be subject to the Bureau’s supervisory authority under 12 U.S.C. § 5514. Consistent with 12 C.F.R. § 1091.111, Franklin may not petition for termination of supervision under 12 C.F.R. § 1091.113. I.
Release 39.
The Bureau releases and discharges Franklin from all potential liability for law violations that the Bureau has or might have asserted based on the practices alleged in the complaint, to the extent such practices occurred before the Effective Date and the Bureau knows about them as of the Effective Date. The Bureau may use the practices alleged in the complaint in future enforcement actions against Franklin and its affiliates, including, without limitation, to establish a pattern or practice of violations or the continuation of a pattern or practice of violations or to calculate the amount of any penalty. This release does not preclude or affect any right of the Bureau to determine and ensure compliance with the Order, or to seek penalties for any violations of the Order. J.
Retention of Jurisdiction 40.
The Court will retain jurisdiction of this matter for purposes of construction, modification, and enforcement of this Order.
IT IS SO ORDERED.
DATED: November 26, 2014 _________________________________ United States District Judge Case 5:14-cv-02324-JGB-DTB Document 11 Filed 11/26/14 Page 8 of 8 Page ID #:53