Colgate Selden, counsel in Alston & Bird’s Financial Services & Products Group, was quoted on the recent Consumer Financial Protection Bureau (CFPB) consent order against Franklin Loan Corporation.
“The CFPB is looking closely at business practices of all companies, despite their size, and it should not be a surprise that they focused on Franklin Loan,” said Selden. “Apparently, the CFPB did not impose a civil penalty to avoid the company filing for bankruptcy, which could result in consumers not receiving anything in the near term. There could, however, still be private civil actions, which may take a significant toll on the company in addition to the compensation recovered for consumers.”
Selden added: “The new Loan Originator Compensation Rule eliminated the legitimate business expense safe harbor due to potential abuses such as ‘expense accounts’ in this case funded through loan terms that paid loan originators excess funds after expenses were paid. The industry should expect that the CFPB will pursue further actions similar to this even for compensation methods only used under the old Loan Originator Compensation Rule. The CFPB is also looking at how compensation plans were changed just after the old rule came out. In this case, the violation was a result of the company wanting to pay people effectively the same as before the old rule but through a different mechanism. The CFPB will likely use the timing of such changes (that effectively maintained old or similar transaction term-based compensation practices through different mechanisms) as evidence of intentional violations of TILA. The new CFPB rule does have a limited profit sharing safe harbor that could provide relief for certain types of bonuses, which otherwise would violate the rule.”