HousingWireHousingWire
Introduction
The mortgage industry is in constant flux, and talented loan originators and their teams are in high demand. Gone are the days when refinance applications provided a steady pipeline of loans for anyone holding a license. Today’s market rewards those originators who can secure steady pipelines of purchase mortgages and refinances from outside their employer’s existing portfolio. As mortgage lenders compete for this more rarified talent, originators are constantly enticed by new opportunities and potential bonuses. This movement, however, is not without legal risks for employee and employer.
The employee’s perspective
Generally speaking, individuals or groups are allowed to prepare to move to a new employer, even while working for their current employer. But when discussing your potential departure with other employees or customers, exercise caution. Do not do anything that can be construed as unlawful disruption of your current employer’s contractual or business relationships, whether with existing employees or customers. Likewise, do not violate any provisions of your employment contract regarding solicitation of employees or customers. Lawsuits for interference and breach of non-solicitation provisions are among the most common claims asserted in litigation against departing employees.
If a group of employees is moving, it is prudent to make all arrangements prior to any one employee departing for the new company. If one employee has moved while others remain behind, the former employer will likely claim that the employee (now acting as an agent for the new company) solicited the remaining employees on behalf of the employer, ultimately alleging that the new employer tortuously interfered with the contractual relationships of the remaining employees to the former employer.
Similarly, departing employees should take care regarding what information, if any, is moved from one employer to another. Your employment agreement may prevent you from taking or using your prior employer’s confidential or proprietary information, and misappropriation of such information is often asserted in post-separation lawsuits. Even customer and referral information that you brought with you to the company risks being problematic, particularly if your employment agreement does not specifically address the rights to such information. Many employment agreements, by their terms, will attempt to claim ownership over such information to the extent that it was integrated into company systems or utilized during the term of your employment. The best time to address this issue is prior to signing your employment agreement, clarifying that you own customer and referral source information that you compiled before joining the company.
Active loan files generally should remain with your former employer unless there is an agreement (with the borrower’s consent) to move the file. You can request documentation of the status of each file and you have the right to expect payment to the extent that your employment agreement provides you with the right to receive commissions from pipeline loans. The best time to negotiate terms for payment of pipeline loans is at the start of the employment relationship, not in the midst of its termination.
Be prepared
Be prepared for your new employer to require that you sign an agreement affirming that you are not violating your prior employment agreement. It is important, therefore, that you take care to insulate yourself from any claims relating to improper solicitation or misappropriation of business opportunities or confidential information.
As an employer seeking to hire proven talent, you will face some of the same concerns as those you are hiring. At a minimum, you should confirm that the employee is not violating an existing employment agreement in joining your company. Include in your written employment agreement guarantees by the employee that he or she is not bringing over confidential customer data, proprietary business information, diverting loan files, or improperly soliciting other employees or clients. Consider including representations and warranties in the employment agreement that the new employee is not violating any prior employment agreement in the course of joining your company.
In today’s climate, it is common to pay an advance or bonus to attract talent. You want to make certain, however, that new employees don’t collect the bonus simply to bounce to another opportunity and bonus. At a minimum, the bonus should be contingent on a minimum period of employment and performance metrics. Delaying payment of the bonus may not be a viable option when recruiting new talent. Loan originators may be relying on the bonus to weather the transition period between winding down their pipelines at their former company and the start of commissions at the new company. In these cases, consider drafting an agreement that allows any bonus to be clawed back if the employee fails to stay with the company or meet certain key performance indicators. One strategy is to secure the bonus with a promissory note signed by the employee, making the bonus payment repayable until the note has been satisfied.
When new employees join your company, particularly where you’ve hired a team or a branch office, you should clarify up front how any existing branding may be leveraged. At a minimum, you must confirm that any logos, tradenames, trademarks, domain names, etc. actually belong to the new employees and not their former employer. Your employees may have used “Ace Mortgage Broker” as a unique brand, coupled with “powered by [former employer’s name].” Before allowing your new employees to use that brand in commerce, check to see if the name has been registered to do business in any states and whether it has been added to the NMLS registration for any other company. It is not uncommon for loan officers to think they own their unique “sub-brand”, only to find out that it is actually owned by their prior employer. Continued use at your company could lead to an infringement claim.
In sum, loan originators and those who seek to recruit them benefit greatly from anticipating the potential legal hurdles that can accompany a move. Careful planning and transparency can avoid some of the risk and help manage the long term costs of such moves.
Brian A. Nettleingham is a shareholder at Maddin Hauser.
Martin S. Frenkel is a shareholder and co-chair of the Financial Services and Real Property Litigation group at Maddin Hauser.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: zeb@hwmedia.com.
