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Return of the upsellers?

By Kenneth HarneyBy Kenneth Harney
Kenneth Harney
Kenneth Harney, who lives in Washington, D.C., writes an award-winning column on housing and real estate.

It’s called “upselling” – steering home mortgage applicants into higher-cost terms that increase the lender’s profits – and it was rampant during the housing boom years.

It worked like this: Rather than putting borrowers into loans at the lowest rates and fees for which they were qualified, loan officers convinced them to sign up for more expensive ones. Loan officers who squeezed more profit out of their applicants got extra pay.

The Federal Reserve Board banned abusive practices like this in 2011. But a lawsuit filed last week by the Consumer Financial Protection Bureau suggests that hidden, backroom upselling ploys might still be alive and well.

The CFPB alleged that a large mortgage company with 45 branches spread among 22 states paid loan officers more than $4 million in bonuses “based on the interest rates of the loans they originated – the higher the interest rates of the loans closed by a loan officer … the higher the loan officer’s quarterly bonus.”

The suit, filed in U.S. District Court in Salt Lake City, charged Castle & Cooke Mortgage LLC and two top executives with violations of the Fed’s rule barring compensation to loan officers that is tied to interest rate or other loan terms. Despite the federal ban, the suit alleges, Castle & Cooke “developed and implemented a scheme” to pay bonuses based on the higher interest rates obtained by loan officers in company branches.

Asked for comment, Jeff Bell, a company spokesman, said Castle & Cooke “has been cooperating with the CFPB in its investigation for more than a year, and anticipates an amicable resolution in this complex regulatory matter.” He denied that the firm’s bonus system rewards loan officers based on the mortgage terms they obtain from applicants.

Last year, according to the CFPB, Castle & Cooke funded approximately $1.3 billion in new mortgage loans.

The agency is seeking restitution of the money allegedly overcharged to consumers by virtue of the undisclosed bonus system.

What does this case mean to mortgage shoppers? Most mortgage industry experts agree that as a result of intensive federal regulatory scrutiny, upselling schemes are less common today than during the early years of the last decade.

Bill Kidwell, head of a mortgage advisory firm in Denver, says most companies “know you can’t base compensation on interest rates” anymore as the result of rule changes and the arrival on the scene of pro-consumer regulator CFPB.

But Kidwell argues that mortgage companies, like other businesses, need to be able to compensate employees based on their financial performance for the firm, and that current federal rules “lack clarity” on how to accomplish that.

Bottom line for consumers: Shop intensively for rates and loan fees, keyed to your credit scores, down payment, capacity to repay, bank reserves and other factors that determine your perceived risk. If you understand what you qualify for and deserve, it will be tougher for anybody to upsell you.
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