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].
