Movement is constant in the mortgage industry. The pressure to increase loan volume and demand for quality origination talent, especially given fluctuating interest rates, rising business costs, and shrinking profitability, has increased the competition for hiring proven business generators, teams, and branches, and has driven a rise in mergers and acquisitions intended to gain market share while decreasing overhead and consolidating operating costs. This movement of individuals, teams, branches, divisions and even companies occurs against the backdrop of legal issues that—if ignored or mishandled—can quickly undermine any anticipated benefits, particularly given the increasingly narrow margins for error. These issues include limitations on competition and solicitation, confidentiality concerns, transmission of confidential consumer information, assignment of assets and mitigation of liabilities, transfer of intellectual property, licensure, retention or procurement of business relationships, clarity on key performance indicators, and much more.
These movements are marked by transactions, including execution of employment agreements, sale or merger agreements, and management of risk. In each instance, competent legal counsel attuned to a client’s business needs and objectives can make or break a deal.
This article introduces a three-part series that will highlight some of the risks associated these market movements and explore how legal counsel can add value by creating safeguards, mitigating risk, yet still move the deal forward creating a balance where counsel is a “deal maker”, not a “deal breaker” except when absolutely necessary. Each article will address a different category of “movement” and the unique risks associated with it.
The first article will address the movement of individuals or teams among mortgage companies. The employee and employer each have an interest in reducing risks and the potential costs associated with such moves. Employees must take care not to violate existing employment agreements, especially regarding solicitation of customers and co-workers. Understanding what rights the departing employee may have in a loan pipeline, customer lists, or referral arrangements can avoid costly legal battles that significantly impair the value of any new opportunities. Employers must also take steps to ensure they do not become the target of litigation by the former employer, and they will want to hedge the risks associated with payment of any signing or startup bonuses. In addition, the issue of intellectual property is frequently overlooked in this context, even though many loan originators have expended significant cost and effort to develop “sub-brands” that they hope to take with them to any new position. Without proper planning and investigation, continued use of such brands and marks can result in costly infringement claims.
The second article deals with movement marked by mergers and acquisitions within the industry. In this context, branding and intellectual property are often a key component of any deal, including trade names, ancillary DBAs, domain names and email addresses. The ownership and registration of this intellectual property must be properly understood, valued, and addressed in any structured transaction. In addition, mergers and acquisitions within the industry are subject to regulatory scrutiny by various governmental agencies, a reality that must be factored into any transaction. Likewise, retention of key talent and executives must be addressed.
The third article builds on some of the specific lessons learned regarding post-closing risks and how to anticipate and mitigate those risks. For example, earn outs paid to sellers should be structured in a manner that does not impair the continued operation of the company. Creating performance metrics for payments that are fair and clear to seller and buyer is essential. Likewise, carefully identifying potential post-sale liabilities and allocating those liabilities by, among other things, assigning commensurate indemnification obligations is essential to any deal. In addition, real estate—whether for a headquarters or branch locations —must be addressed, including assignment of leases or subleases. Finally, essential intellectual property, including tradenames and domain names, must be addressed, and state filings and NMLS listings much be updated as necessary.
The dynamic movements in today’s mortgage marketplace are driven by the need to secure talent and increase performance in the face of extraordinary competitive forces. Care must be taken to help ensure that the benefits of such moves are not undermined by failing to recognize and address the associated legal risks. We will endeavor to highlight some of those risks and the steps to mitigate them in the coming series of articles.
Martin S. Frenkel is a shareholder and co-chair of the Financial Services and Real Property Litigation group at Maddin Hauser.
Brian A. Nettleingham is a shareholder at Maddin Hauser.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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