2022 Outstanding Achievement in Public Law Award: DFPI REES Task Force

 The California Department of Financial Protection and Innovation’s Real Estate Educational Services Task Force Team led a 45 state agency task force in conjunction with the Conference of State Bank Supervisors (CSBS) to uncover fraud by mortgage loan originators.

The task force investigated a years long cheating system in which over 600 mortgage loan originators paid to circumvent mandatory testing and education required of mortgage loan originators under federal and state laws. The DFPI’s team devised, coordinated, and oversaw a global settlement process for the 45 state agencies that saw over 450 mortgage loan originators agree to disciplinary action.

Mortgage loan originators are responsible for shepherding consumers through the single largest financial decision in the lifetimes of most American households. It is critical to promote fair and honest business practices and ensure qualification standards to protect consumers from unethical and unqualified mortgage loan originators. In the wake of the 2007 mortgage crisis, Congress enacted the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) to mandate minimum standards for the licensing and registration of state-licensed mortgage loan originators. The law calls on the states to implement and enforce these standards, including requiring mortgage loan originators to have at least 20 hours of pre-licensing education and an annual eight hours of continuing education. Tied to the education are mandatory knowledge examinations.

In the task force’s investigation, it determined that Real Estate Educational Services (REES), a Carlsbad, California business, was aiding mortgage loan originators in bypassing the testing and education mandated by the SAFE Act through two fraud schemes. In one, REES would masquerade as the mortgage loan originators and complete online testing and education from unaffiliated education providers. In the other, REES provided years of credit for a purported in-person course, which in fact was never taught. Effectively, mortgage loan originators were able to skip pre-licensing requirements as well as annual continuing education.

The DFPI team doggedly sought out evidence in the face of invocations of the right against self-incrimination under the Fifth Amendment. Through ex parte proceedings, the DFPI team expeditiously obtained orders compelling production of REES business records under the required records doctrine, which invalidates an assertion of the Fifth Amendment.

Additionally, the DFPI team coordinated the filing of administrative actions against REES affiliated persons with Maryland’s Office of the Commissioner of Financial Regulation and the Oregon Division of Financial Regulation. These coordinated actions resulted in a settlement agreement in which the REES affiliated persons agreed to cooperate with the task force’s investigation, bars on their involvement in mortgage education, and payment of monetary penalties.

All of the task force’s above accomplishments were achieved within 12 months of the formation of the task force. The task force’s disciplining of over 450 individual mortgage loan originators in a single investigation is historic. Also, the DFPI is still pursuing administrative actions against the remaining non-settling mortgage loan originators who continue to shirk responsibility for their dishonest conduct.

The DFPI’s leadership has resulted in media coverage across the nation, including a Bloomberg law article remarking that “California’s leadership of a multi-state mortgage origination investigation marks the arrival of the state’s new financial regulator as a national leader on consumer protection efforts.” https://news.bloomberglaw.com/banking-law/californias-watchdog-takes-spotlight-in-mortgage-scam-settlement

The DFPI team’s attorneys consisted of Blaine Noblett, Allard Chu, Boryana Arsova, and Marlou DeLuna.