loanDepot sued over steering scheme, LO comp rule violations

A class-action lawsuit filed in Maryland accuses mortgage lender loanDepot of violating federal loan officer (LO) compensation rules and steering borrowers into higher-rate loans to boost its financial performance ahead of its 2021 initial public offering (IPO). 

The lawsuit describes a “sophisticated, years-long scheme” around the falsification of internal documents and federal disclosures to maximize profits at the expense of borrowers and LOs. A spokesperson for the company declined to comment to HousingWire. 

loanDepot has been challenged in court since its IPO. The lender prevailed in a case brought by former chief operating officer Tammy Richards, who claimed discrimination after blowing the whistle on what she called illegal practices. It also settled a lawsuit from shareholders, who claimed that executives made false or misleading disclosures before and after the IPO. 

In the new case, the plaintiffs are borrowers from Maryland, Virginia and Florida who obtained mortgages from loanDepot between September 2019 and June 2021. The lawsuit, filed on Monday, is in a district court in Maryland. 

The plaintiffs detail how loanDepot allegedly required LOs who couldn’t push higher-cost loans to “transfer” the borrower to an internal loan consultant. None of the plaintiffs’ loans were transferred to these ILCs, so they paid higher rates and fees.  

But, according to them, the internal transfer was a fiction as the ILC assumed no
additional duties, the original LO continued to perform the same duties and loanDepot “electronically robosigned the ILC’s signature.” These transfers were justified with false reasons like “customer request” on internal forms, the lawsuit claims.

The lawsuit further alleges that if an LO truthfully documented the reason for the transfer — such as securing a lower rate for the borrower — they received no commission. But if they falsified the reason using one of several preapproved justifications outside of their control, they were still paid, albeit at a reduced rate.

According to the complaint, loanDepot consequently punished LOs with reduced commissions if they failed to close loans at inflated rates, and the company eliminated compensation entirely if LOs didn’t falsify documentation to conceal the activity.

“Beginning in and around 2019, loanDepot began instituting compensation plans that required LOs to charge an inflated interest rate/fees to borrowers,” the lawsuit claims. “If LOs could not obtain the borrowers’ consent to move forward with those terms, loanDepot would reduce the borrowers’ rate and/or fees but punish the LO by reducing their compensation or eliminating it altogether.” 

The alleged practices would constitute violations of the Dodd-Frank Act and its implementing rules, including the Consumer Financial Protection Bureau (CFPB)’s Regulation Z. These rules prohibit the compensation of LOs based on loan terms other than the amount of credit extended — a reform designed to curb predatory practices that contributed to the 2008 financial crisis.

Borrowers, according to the lawsuit, were routinely steered into more expensive loans by LOs under pressure to offer the highest pricing, and who faced financial penalties for failing to do so or for not falsifying the required documentation.

As of Thursday, loanDepot had 1,642 sponsored loan officers, per the Nationwide Multistate Licensing System (NMLS). On average, LOs are compensated 100 basis points (1%) of the loan amount, according to the lawsuit.

The plaintiffs estimate loanDepot originated approximately $300 billion in mortgages during the time of the alleged scheme. They are suing under the Truth in Lending Act and allege additional violations including wire fraud, securities fraud and conspiracy.

The suit seeks repayment of interest and fees on affected loans.