loanDepot lawsuit directs a spotlight on LO comp practices

The suit accuses loanDepot of pressuring LOs to offer borrowers higher-rate loans in exchange for higher compensation, forming the basis of the steering claims. If LOs were unable to close these deals, they allegedly transferred the borrower to internal loan consultants (ILCs), enabling lower compensation to be paid instead.

But in practice, the transfers were largely fictitious, with the original LO continuing to work on the file, the lawsuit claims. If the reason for the transfer — such as securing a lower rate — was truthfully documented, the LO received no commission. But if the reason was falsified using one of several preapproved justifications beyond their control, they were paid at a reduced rate.

“From the LO comp rule, nothing prohibits a creditor from negotiating different rates for different people,” said Troy Garris, co-managing partner at Garris Horn LLP. “There could be other issues like fair lending. One of the prohibitions would be if you tell the loan officer: ‘Sell it at 8% if you can, and we’ll pay you 200 basis points. If you can’t, we’ll pay you a different amount.’ That’s changing the compensation based on the terms of the transaction.”

Attorneys also said that it’s common for loans to change hands during some mortgage transactions for various reasons—for example, if an LO isn’t licensed in a borrower’s state, is on vacation or has a heavier workload. Transfers can also occur when LO assistants or teammates collaborate on a file. 

“It’s perfectly legitimate to have handoffs like that if done properly,” Garris said. “It’s pretty common. In fact, I would go so far as to say that most of the time it’s legitimate.” 

Attorneys told HousingWire that in the loanDepot case, the presence and role of ILCs in this case remains unclear, and will be crucial in determining whether a violation occurred.

Kris Kully, a partner at the law firm Mayer Brown, said that many lenders employ groups of originators who specialize in different areas or products. However, “the CFPB regulation doesn’t really address under what circumstances loan originators can refer an applicant from one to another.”

“There is some commentary, as the complaint points out, that says a loan originator can’t reduce their compensation in selective cases. That’s something the industry has struggled with, because the thinking is that lower compensation might lead to lower consumer costs,” Kully said. “There are certainly valid reasons for such handoffs—like an LO being on vacation and someone stepping in. But the regulation hasn’t explicitly addressed these scenarios.”

Under the spotlight

James Brody, of national law firm Brody Gapp LLP, said his office has received numerous calls over the past several days from “some pretty upset lenders.”

“They’re effectively saying: ‘Things are already tough with the LO comp rules—especially now that they are under review,” Brody said. “Why do we need a lawsuit shining a light on practices that aren’t barred, but could have a negative impact on our ability to deal with compensation issues now?’”

Brody is referring to the CFPB submitting a list of rules under review to the Office of Management and Budget (OMB) in early June. Among the rules are potential changes to loan originator compensation requirements and discretionary mortgage servicing regulations under the Truth in Lending Act (Regulation Z; TILA).

According to Brody, practices such as compensation tied to lead source and internal LO transfers are not per se prohibited under the current LO Comp rules, but they are not fully settled through formal guidance. “That ambiguity is why lenders are nervous.”

The CFPB has allowed compensation to vary based on lead source. But HousingWire reported in December 2023 that violations of LO comp rules can arise when lenders or LOs alter the documented lead source after initial borrower contact—potentially to lower rates and secure deals. 

Ashley Jumpp, a partner at Brody Gapp LL, said lenders have been calling to ask whether their compensation based on lead source structures would be a violation. The issue, according to Jumpp, is that there’s no formal guidance: no commentary, consent order, on this exact situation. Even compliant frameworks can still be misapplied in execution. 

The loanDepot claims differ. Attorneys have described the practice as “sham transfers” to individuals who didn’t actually perform the work needed to justify lower pay.

“Internal referrals from one person to another could be an action that we need to be analyzed and looked at to make sure that it’s not being utilized incorrectly. There’s a big difference between policy on paper and policy in practice,” Jumpp said. 

Brody added: “We’ve built plans that rely on varied lead channels and referral systems in ways we believe are fully defensible, but the fear is this spotlight invites scrutiny at a time when clarity is still lacking.”

Ari Karen, the attorney at Mitchell Sandler who filed the lawsuit, said that, “The pattern of activity alleged in the lawsuit is something that if proven would be incredibly unique. Based on what is alleged, it would be far outside the norm of what I’ve seen before. This is a principal reason we believe its impacts on other lenders and consumers would be so consequential, thus warranting this action.”

loanDepot said it will not comment on the ongoing litigation.