A group of mortgage borrowers has filed a federal class-action lawsuit against one of the nation’s largest mortgage lenders, alleging it systematically violated federal loan officer (LO) compensation rules to boost profits ahead of going public, according to a federal complaint filed July 15 in the U.S. District Court for the District of Maryland.
The federal complaint, Nathan Johnson, et al. v. loanDepot.com, LLC, alleges that loanDepot operated a “sophisticated, years-long scheme to systemically circumvent and conceal its willful violations of the loan officer compensation laws set forth in the Truth in Lending Act,” according to court records.
Five named plaintiffs from Maryland, Virginia and Florida claim that loanDepot also violated Dodd-Frank regulations by tying LO compensation directly to loan terms—a practice outlawed after the 2008 financial crisis. The complaint also mentions potential federal criminal violations, including wire fraud, securities fraud and false statements.
According to the lawsuit, loanDepot “linked the commission paid to loan officers to the rates and fees consumers paid” and concealed these violations from borrowers and regulators through an elaborate system.
The company’s LOs typically earned 1% of the loan amount as compensation for each loan they originated, which is consistent with industry standards.
However, when loan officers couldn’t secure higher rates from borrowers, the company allegedly slashed their compensation or eliminated it entirely, directly violating federal compensation laws.
An elaborate internal transfer scheme
The plaintiffs allege that loanDepot used so-called “internal loan consultants,” or ILCs, to mask the compensation cuts tied to its loan pricing.
The lawsuit explains how LOs were forced to transfer borrower files to ILCs when customers refused higher interest rates. These transfers were “sham” transactions where “there was no actual transfer of the loans to ILCs—the ILC assumed no additional duties—and the original loan officer continued to perform the same duties, but at a reduced commission rate.”
The complaint alleges that loanDepot required its LOs to falsify internal forms explaining these transfers, often forcing them to claim the moves were requested by customers rather than driven by pricing. LOs who refused to do this received no compensation for their work on those loans, the complaint alleges.
“If the loan officer could only get the borrower to move forward at a lower rate, loanDepot would pay the loan officer substantially less (e.g., 30 basis points) or would pay the loan officer nothing on that loan,” according to court documents.
The lawsuit also claims that loanDepot used an “automated electronic system” to place ILC signatures on federal loan disclosure forms “under penalty of perjury,” even though the ILCs had no actual involvement in originating the loans.
This practice allegedly created false federal loan documentation suggesting ILCs were responsible for loans they never handled.
Regulatory backdrop
The allegations point to violations of Regulation Z, which implements the Truth in Lending Act. These rules were strengthened following the mortgage crisis to prevent the kind of steering that contributed to the infamous 2008 housing finance collapse.
The final rule is meant to protect consumers by reducing incentives for loan originators to steer consumers into loans with particular terms, according to Consumer Financial Protection Bureau (CFPB) guidance.
Federal regulations explicitly prohibit changing loan officer compensation based on loan terms. “When the creditor offers to extend credit with specified terms and conditions (such as the rate and points), the amount of the originator’s compensation for that transaction is not subject to change (increase or decrease) based on whether different credit terms are negotiated,” according to the CFPB’s comment on Regulation Z.
The plaintiffs are represented by Mitchell Sandler PLLC, a financial services law firm based in Washington, D.C. The alleged scheme involved $300 billion in mortgage loans originated by loanDepot, court records show. The plaintiffs are seeking a jury trial and unspecified actual damages, class awards and “the sum of all finance charges and fees paid.”
The proposed lawsuit class includes all borrowers who obtained a retail mortgage from loanDepot between Jan. 1, 2019, and today (excluding those whose loans were transferred to ILCs), according to court records.
loanDepot did not immediately respond to RISMedia’s requests for comment.
The lawsuit is the latest in a string of legal challenges loanDepot has faced in recent years. Former COO Tammy Richards lost her case against the lender earlier this year after she alleged gender discrimination and wrongful termination based on retaliation for refusing to participate in alleged illegal lending practices.
The company also settled an $86 million data breach settlement stemming from a January 2024 cyberattack that compromised 16.9 million customers’ personal information, and a $1.025 million settlement over alleged Electronic Funds Transfer Act violations.
