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The Consumer Financial Protection Bureau (CFPB) has taken its first action against a mortgage originator. David Eghbali, a mortgage loan originator (MLO) who worked out of Wells Fargo’s Beverly Hills, Calif. office, was accused of an illegal mortgage fee-shifting scheme. The CFPB found that Eghbali worked a deal with an escrow company to shift its fees from some customers to others to facilitate no-cost refinances. Eghbali entered into an administrative consent order with the CFPB requiring him to pay an $85,000 penalty and banning him from working in the mortgage industry for one year to settle the case.
The CFPB based its claims on the Real Estate Settlement Procedures Act (RESPA) and the Consumer Financial Protection Act (CFPA). The CFPA allows the CFPB to bring actions on anything the CFPB considers “Unfair, Deceptive or Abusive Acts or Practices:” The acronym “UDAAP” was coined from this. An act or practice is deemed unfair under the CFPA if:
1. It causes or is likely to cause substantial injury to consumers;
2. Such injury is not reasonably avoidable by consumers; and
3. Such injury is not outweighed by countervailing benefits to consumers or to competition.
You will find the CFPB generally always throws this charge into its actions because the only way to refute it is to go to court.
The second basis for the claim is that RESPA Section 8 prohibits referrals where a “thing of value” is exchanged. "No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” The CFPB claims that Eghbali received a discount from the escrow company that was “of value” to him since it would “ultimately increase the number of loans he closed, increasing his commissions.”
Here is why this is so troubling. No, it is not because I am taking up for an MLO. I am disappointed that the CFPB and the U.S. Department of Justice (DOJ) have generally always gone after the company rather than employees when an employee committed wrongdoing. Wrongdoers do need to be brought to justice.
My first concern is that this action more or less prohibits title companies or anyone else from offering discounts. We live in a society where the right to contract has been somewhat sacred. That is being chipped away little by little. Loan officer compensation is another example of the erosion of the right to contract. How many LOs have been able to negotiate a discount for a borrower with a title company? How many title companies or other service providers have offered a discount on services to a good LO? I’m certain that has some effect on the ability to close the transaction and filtered into income made by the LO and the company they worked for. Is this no longer allowed? Undoubtedly, some borrowers paid more than those that received the discount. Will the CFPB now be reviewing all settlement statements to see who paid what? I don’t recall anyone considering service provider discounts to be illegal prior to this. I would have to label the RESPA portion of this a stretch. One could rationalize this as abusive under CFPA to those who paid the full or a greater price for escrow services. Of course, every action and every price could be labeled unfair or abusive if carried to an extreme. The CFPB has been given unparalleled discretion with the very subjective language of the CFPA. Could the borrower who paid more have avoided the “abuse?” They certainly could have by shopping for an escrow company. It may very well be that those who paid more still got a better deal than if they had simply gone to the phone book to select an escrow agent. We don’t even know if quite a few actually did shop. The CFPB is presuming they were totally ignorant.
My second concern is that Wells Fargo was given a pass as was the escrow company. This is selective enforcement that I believe goes against the very core principles of the constitution. If there was a RESPA violation, it is just as illegal to offer as it is to accept the “thing of value.” USC 42, 1981 states, “All persons within the jurisdiction of the United States shall have the same right in every State and Territory to make and enforce contracts, to sue, be parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens, and shall be subject to like punishment, pains, penalties, taxes, licenses, and exactions of every kind, and to no other.” While this was part of the Civil Right Act, it certainly seems to convey the idea that no one person should be prosecuted when another is equally culpable. No doubt the escrow agent profited just as the LO profited. The consent order says they participated in the “scheme.” Are we also to believe that Wells Fargo was totally oblivious to these arrangements and they had no profit incentive? In today’s environment, more than one person at Wells reviewed every fee that was charged for compliance with state and federal laws. At best, they appear to be negligent and at worst, knowing participants.
My greatest concern is that individuals and small companies have no power to defend themselves against an all-powerful agency like the CFPB. RESPA carries huge monetary penalties as well as jail time. Unfortunately, the cost to adequately defend a suit against the CFPB would be millions of dollars. Few, if any, mortgage originators could fund such a defense. In essence, this violates another constitutional protection that everyone should have. Can a person be deemed to have due process or have adequate counsel when it is so expensive that even large corporations choose consent orders rather than trials? These are rights conferred by the Fifth and Sixth Amendments that are effectively negated when the government chooses to make a criminal prosecution where the individual cannot afford to mount an effective defense. We are sorely in need of legislation that makes the government liable for reasonable legal costs of individuals who are exonerated. This should apply to all agencies, not just the CFPB.
It is curious that Wells Fargo was not named in this action. Normally, an employer has a duty to defend its employee unless the employee is acting outside the scope of their duties. Negotiating the terms of loans and negotiating with service providers would hardly be outside the scope of Eghbali’s duties. California, requires employers to defend and indemnify employees, unless the employee was acting outside the scope of their employment. If the CFPB named Wells Fargo, the merits of this case may have found their way to court. If Wells Fargo was not involved, it is obvious no individual would have the resources to mount a proper defense. Thus, the CFPB can virtually come after individuals and small entities at will, irrespective of the merits of their case.
Eghbali has boldly come forth and stated that he could not defend himself against the CFPB and was forced to sign the consent order.
“I am deeply shocked that the CFPB chose to pursue a regulatory action against me on a novel and frankly bizarre theory—that obtaining low or zero fee escrow services for certain of my clients somehow delivered an improper 'benefit' to me at the expense of my clients,” said Eghbali. “I was bullied into entering the consent order because the CFPB left me no other reasonable choice … The extraordinary cost of fighting these allegations in prolonged litigation against such a powerful federal agency was not possible for an individual in my circumstance.”
I’m not saying Eghbali is innocent. We really don’t know for certain. It would have been nice for a court to decide that or at least for Eghbali to make his decision for reasons other than impossibility to defend. It also would have given us some more guidance into the “regulation by enforcement” paradigm the CFPB is pursuing.
John Councilman, CMC, CRMS of AMC Mortgage Corporation in Ft. Myers, Fla. is immediate past president of NAMB—The Association of Mortgage Professionals. He may be reached by phone at (239) 267-2400 or e-mail JLC@AMCMortgage.com.
This article originally appeared in the June 2016 print edition of National Mortgage Professional Magazine.