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A new federal consumer protection agency filed its first lawsuit in Utah on Tuesday that alleges a violation of a federal rule prohibiting compensation to consumer loan officers based on term or conditions of mortgages.
The Consumer Financial Protection Bureau, created in July of 2010, sued Castle & Cooke Mortgage, company President Matthew A. Pineda and Buck L. Hawkins, senior vice president for capital markets.
The agency, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, alleges the Salt Lake City company's commission payments violate a beefed-up Federal Reserve regulation and consumer protection laws.
"The company has been cooperating with the CFPB in its investigation for more than a year, and anticipates an amicable resolution in this complex regulatory matter," Jeffrey Bell, Castle & Cooke marketing director, said in an email.
The company previously paid loan officers commissions that were based on the interest rates of the loans they offered to consumers, according to the lawsuit. But the Federal Reserve Board modified its Regulation Z to prohibit compensating a loan officer based on the terms or conditions of a mortgage loan, a change prompted by lending practices that contributed to the housing bust of 2007 and the Great Recession.
The new rule was made mandatory in April 2011. But, according to the lawsuit, officers of Castle & Cooke maintained their commission program for loan officers and continued to issue checks based on interest rates charged to consumers, though the arrangement was not part of any written compensation agreement.
"Defendants have violated the compensation rule by paying the company's loan officers quarterly bonuses in amounts based on terms or conditions of the loans they close, thus incentivizing loan officers to steer consumers into mortgages with less favorable terms, the very practice the compensation rule sought to prohibit," the lawsuit says.
It also alleges Castle & Cooke violated record-retention rules for compensation paid to loan originators.
The case was referred to the federal agency last year by investigators with the Utah Division of Real Estate, said spokesperson Moira Vahey. The Utah suit was the first time the agency has sued over the loan originator compensation rule, Vahey said.
Castle & Cooke funded $1.3 billion in mortgage loans in 2012, according to the lawsuit. It has 330 employees in 45 branches with its headquarters in Salt Lake City.
The lawsuit asks that the court prohibit the company from further violations of consumer protection laws and pay restitution to consumers and a fine, as well as other undetermined costs.