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National Mortgage Professional
May 24, 2007

Broker vs. loan officer: Whose client is it?Ron E. Frankwarning signs, departure, legal help, what the data showed, trade secrets, computer fraud and abuse act No question polarizes brokers and loan officers more than the following: To whom does the client belong? Ask any broker, and he'll tell you the clients belong to him. I've yet to find a loan officer that agrees. The scenario is predictable and common. A broker hires a loan officer to solicit prospective mortgage applicants. Over time, the loan officer builds up a book of business and has numerous applicants in the pipeline. Then, the loan officer discovers that he can make a higher percentage of the broker's fee elsewhere. So the loan officer switches brokers and tries to take the pipeline with him. Loan officers fleeing with client files is not a rare occasion. Most brokers would agree that it is nothing less than an epidemic. Due to the fact that the residential mortgage broker industry is relatively new and only recently regulated, there really is no clear mandate as to whom the clients belong. So, Christian Brothers Finance, a brokerage in Houston, recently spent the time and effort to have this hotly contested questioned answered. Warning signs Sean Easley, owner of Christian Brothers, should have seen the warning signs. His top loan officer, who had been closing an average of 15 loans a month, went three weeks without submitting any new loans to her processors. Yet, the loan officer continued to run numerous credit applications and continued ordering appraisals. The loan officer then bought a laptop to work and began using it, instead of her desktop computer. She skipped important company meetings and began having unexcused absences. When she did work, she left each day with a large briefcase, stuffed full. These should have been huge red flags. Departure One day, the owner arrived to find an empty office. The loan officer's filing cabinet, once full of prospective borrower files, was now empty. Databases that had previously contained Point files had been shredded, e-mails were erased, and contact files were destroyed. When the loan officer attempted to leave with the laptop, the police were called. However, the police refused to get involved. The owner and the company had been violated. Left with no other alternative, Easley called an attorney. Legal help There are extraordinary legal remedies available to assist in situations like this. Immediately, Christian Brothers obtained a temporary restraining order, preventing the loan officer from accepting payments for any broker fees until the situation could be resolved. Additionally, the court ordered that the loan officer turn over her laptop for inspection and copying. The data recovered was nothing short of damning. What the data showed The hard drive data painted a clear picture of what had transpired. Three weeks before the loan officer suddenly quit, she met with another broker to work out a deal for a better revenue split. Then, she leased an office, ordered all of her equipment and set up shop elsewhere. During this time, the loan officer began downloading all the client information from Christian Brothers' computers, ran a digital shredder program on the computers and began submitting prospective applicants to lenders through the new broker. There was even an e-mail showing that her brother had attempted to break in at 2:00 a.m. to accomplish the theft. The real sizzler was that the laptop also contained a spreadsheet showing that this loan officer had been paying illegal kickbacks (RESPA violations) to employees of a national lender in exchange for leads. Trade secrets The lawsuit was filed in Houston. Five separate judges had an opportunity to review the issues and rule on the question of to whom the clients belonged. The judges all consistently held that the clients belonged to the broker and not the loan officer. The courts found that client information collected about these prospective mortgage applicants were trade secrets of the broker and entitled to protection, even though there was no covenant not to compete or employment agreement to the contrary. Computer fraud and abuse act The court also found that the loan officer's use of a digital shredder program on the company's computer systems violated the Computer Fraud and Abuse Act (18 USC § 1030). This act provides favorable civil remedies for employers under these circumstances and also makes the employee's conduct a felony. Victory for brokers Easley should be applauded for standing up for ethical residential mortgage broker practices. The civil case was eventually settled after the court entered an injunction preventing the loan officer from collecting any proceeds from the clients she took from Christian Brothers. The loan officer in question is currently under investigation by the Texas Department of Savings and Mortgage Lending and the local district attorney's office. Recommendations If you are a broker faced with a similar situation, your best course of action is to act quickly. Time is not on your side. The courts are set up to assist people who are diligent in pursuing their rights. Obtaining extraordinary relief, such as a temporary injunction preventing a loan officer from being paid or forcing a former employee to turn over her hard drive, is a difficult task. It can only be accomplished efficiently by an attorney who is skilled and experienced in these intellectual property areas. Ron E. Frank is an attorney at the Houston- and Dallas-based law firm of Beirne, Maynard & Parsons LLP. He may be reached at (713) 871-6795 or e-mail [email protected]
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