Lender Sues Fast-Growing Broker – 1099 vs W2 in the Crosshairs?
A lawsuit in the Superior Court of California (Orange County) could send shockwaves throughout the mortgage industry. The complaint alleges, among other things, that a rapidly expanding mortgage brokerage gained a competitive edge through unlawful labor, compensation, and data-handling practices.
The case portends broad implications for lenders nationwide, raising fresh concerns about loan officer classification, compensation models, and consumer data use.
Core Allegations
According to the complaint, the mortgage broker allegedly:
Misclassified hundreds of loan originators as independent contractors to avoid payroll taxes, benefits, and compliance requirements.
Paid loan officers 10–15% of loan revenue, tying compensation to loan terms in violation of Regulation Z.
Misused borrower data, including FICO scores and loan details, from a competitor’s systems.
Permitted former employees to redirect active leads and clients to the new company before officially departing their prior employer.
If proven, these actions could constitute violations of federal labor, consumer protection, and privacy laws.
Why Should Mortgage Leaders Care?
This case is not just about one mortgage brokerage. It underscores risks that could affect any lender anywhere in the nation.
Key takeaways include:
Employee Misclassification Risks: Improperly classifying LOs as contractors can trigger numerous violations, including under tax, wage, and licensing laws.
Compensation Structure Exposure: Tying pay to loan terms, including revenue, can violate loan originator compensation rules emanating from the Dodd-Frank Act.
Data Privacy and Security: Unauthorized access to borrower information can violate federal and state law, including the Gramm-Leach-Bliley Act (GLBA) and state privacy laws like the California Consumer Privacy Act (CCPA).
Recruiting and Lead Transfers: Aggressive recruiting tactics or misuse of lead data may lead to various claims, including under trade secret and unfair competition laws.
What Should a Lender Do Now?
Executives should take immediate steps to mitigate exposure in these high-risk areas:
Audit LO Classification: Assess the comfort level with loan originator and other employee classifications.
Reassess Compensation Plans: Ensure structures do not involve paying loan originators based on terms of one or more transactions or proxies for such terms.
Tighten Data Governance: Restrict, monitor, and document access to borrower data, and promptly address irregularities.
Strengthen Transition Policies: Implement robust confidentiality, non-solicitation, and data retention protocols for loan originators and other employees whether onboarding and offboarding.
What’s the Bottom Line?
This case should be viewed as a warning shot: lapses in labor, compensation, or data compliance can quickly spiral into major legal issues. Lenders should view this as an opportunity to review internal policies, validate compensation practices, and shore up data controls before regulators, or competitors, force the issue.
Need Guidance?
If your company needs help assessing its loan officer classification, compensation structure, or data management practices, our team stands ready.
Contact: troy@garrishorn.com for more information.