Johnston & Associates Special December Newsletter

In this newsletter we cover the following:
  • Welcome to the December Installment of Johnston & Associates’s Newsletter
  • JPMorgan Chase / EMC Seeks Indemnification from Loan Originators on $4 Billion Settlement Agreement
  • Loan Originator Compensation…Not Again, But More
  • Lehman Bros. Holding, Inc. (“LBHI”) And The Alternative Dispute Resolution (“ADR”) Process
  • Johnston & Associates’s Expanded Regulatory Compliance Audit Services
  • Complimentary Webinar Recordings and Presentation Materials Available from Johnston & Associates Mortgage Banking
  • The Legal Services we offer at Johnston & Associates
  • Conference Attendance by Johnston & Associates
Welcome to a Special December Installment of Johnston & Associates’s Newsletter

To all our preexisting clients, industry friends and strategic partners whom are in receipt of this December installment of Johnston & Associates’s Newsletter, as well as any and all new readers whom have decided to subscribe hereto, we welcome and thank you for taking the time to read about those topics that we believe to be of great importance to the mortgage banking industry.

In this Newsletter, we cover: (1) an important update on JPMorgan Chase/EMC’s ongoing efforts to seek indemnification from loan originators for losses that were allegedly suffered in connection with RMBS loans (i.e., Johnston & Associates has been and continues to defend a large number of lenders who received indemnification demands from Chase and/or were sued by EMC); (2) a brief discussion of Loan Officer Compensation, the Department of Labor (“DOL”) and the Fair Labor Standards Act (“FLSA”); (3) some helpful information for those brokers, credit unions and lenders who Lehman Bros. Holding, Inc. (“LBHI”) have served with Alternative Dispute Resolution (“ADR”) Notices (i.e., Johnston & Associates has been and continues to be representing one of the largest blocs of defendants in and out of the Lehman litigation, including more than 30 banks, credit unions, lenders and brokers, with alleged exposure from as little as $100K to more than $15MM); and (4) information concerning Johnston & Associates’s expanded regulatory compliance audit services.

As many of you already know, the professionals who comprise Johnston & Associates’s Mortgage Banking Practice Group represent our clients in matters that include, but are not limited to, repurchase and make-whole lawsuits, Servicer litigation, third-party mortgage fraud litigation, appeals to HUD’s Mortgagee Review Board, preparation of policies and procedures, creation of Loan Officer Compensation plans, formation of Marketing Service Agreements, assisting with the negotiation and review of Broker and Correspondent LPAs, and much, much more.

Finally, on behalf of the entire Johnston & Associates team, we want to wish all of you and your families a very Happy Holidays and a safe, healthy and prosperous New Year!!!

JPMorgan Chase/EMC Seeks Indemnification from Loan Originators on $4 Billion Settlement Agreement

JPMorgan Chase & Co. (“Chase”) paid $4 Billion as part of an RMBS Trust Settlement Agreement (“RMBS Settlement”) in December 2017.  Subsequently, Chase began seeking indemnification from third party loan originators for their allocable share of losses that were allegedly caused by each originator’s relevant loan portfolios.

For the most part, Chase’s efforts have been limited to its sending demand letters to loan originators, as well as related confidentiality agreements that Chase requires as a condition to its providing the information and documentation that Chase relies on in support of its claims.  However, in a momentous departure from its informal mitigation efforts outside of court, it now appears that Chase is testing the waters of pursuing its RMBS related losses in court, thru litigation initiated by Chase’s wholly owned subsidiary, EMC Mortgage LLC (“EMC”), in reliance on the indemnity clauses contained within the relevant mortgage loan purchase agreements.

Specifically, setting aside the fact that Johnston & Associates has been and continues to be defending a number of loan originators against indemnity claims that EMC is pursuing around the Country in connection with agency loans that were sold to Fannie Mae and Freddie Mac, EMC has now filed a fairly large lawsuit against Pulte Mortgage LLC (“Pulte”).  Although the RMBS lawsuit against Pulte is relatively new, with Pulte waiting for a decision from the Court on its motion to dismiss (i.e., the initial motion filed in response to the underlying Complaint), it remains to be seen whether this is a one-off case, whether it is a prelude to a larger number of similar lawsuits being filed, and/or whether it is merely a test case whose outcome will influence whether and how Chase/EMC decides to proceed against all those loan originators who received demand letters since December 2017.

As Johnston & Associates continues to defend a large number of loan originators against RMBS claims made by Chase out of court, as well as against claims made by EMC in court (e.g., we are presently defending against EMC lawsuits in Kentucky, Texas, etc.), we will continue to provide timely, relevant and insightful information.  In the interim, should any of our clients and/or our newsletter subscribers have any questions regarding the claims being made by Chase and/or EMC, please feel free to contact the Chairman of Johnston & Associates’s Mortgage Banking Group, James Brody, and/or its Co-Chair Ingrid Peterson.

Loan Originator Compensation…Not Again, But More

Loan Originator Compensation….it can be and many times is a confusing and complicated subject for many industry professionals. The wide array of possible compensation methods, the standards, what’s applicable as a term and what isn’t, can get almost anyone’s head spinning. So far, there has not been many drastic changes from the Consumer Financial Protection Bureau (“CFPB”) under its new director, Kathy Kraninger.

Although many people in the mortgage industry hope that the area of loan originator compensation will be clarified for additional exemptions, as it currently stands, a Mortgage Loan Originator (“LO”) can’t be compensated based on the term of a loan or a loan product. Although the CFPB is usually the first regulator that comes to mind when thinking about LO compensation, the Department of Labor (“DOL”) requirements should never be forgotten.

Beginning on January 1, 2020, the DOL is fulfilling its promise to rethink the salary thresholds applicable to an employer’s obligation to pay overtime.  In the final updated rule, the DOL is:
raising the “standard salary level” from the currently enforced level of $455 per week to $684 per week (equivalent to $35,568 per year for a full-year worker);
raising the total annual compensation requirement for “highly compensated employees” from the currently enforced level of $100,000 per year to $107,432 per year;
allowing employers to use non-discretionary bonuses and incentive payments (including commissions) paid at least annually to satisfy up to 10% of the standard salary level, in recognition of evolving pay practices; and revising the special salary levels for workers in U.S. territories and the motion picture industry.

The duties tests, which require that employees meet certain duties requirements in order to be exempt from overtime, have not changed. The duties tests will remain the primary method for determining whether an employee is exempt, subject to the higher salary thresholds.

In addition to the expressly enumerated job types, the Fair Labor Standards Act (“FLSA”) states that employees employed as “bona fide executive, administrative, professional and outside sales employees” and “certain computer employees” may be considered exempt from both minimum wage and overtime pay. These are sometimes called “white collar” exemptions.

The FLSA exempts from its minimum wage and overtime standards employees who qualify as outside sales employees. There are nevertheless important criteria outlined in both Federal and State regulations that must be met before an employee can be classified as an outside salesperson. When those criteria are not satisfied, the exemption does not apply and normal wage and hour laws must be followed, including minimum wage and overtime.

In addition, most employers are subject to both the federal and state minimum wage laws.  Also, local entities (e.g., cities and counties) are allowed to enact minimum wage rates and several cities have recently adopted ordinances that establish a higher minimum wage rate for employees working within their local jurisdiction.  The effect of this multiple coverage by different government sources is that when there are conflicting requirements in the laws, the employer must follow the stricter standard.

Paying overtime compensation to mortgage loan originators can be a complex, difficult, and cumbersome task. LO’s often work nonstandard, flexible, or changing schedules, seeking to be available to potential borrowers, realtors, and others at almost any time of day.  Keeping track of constantly changing work hours can be tricky at best.  This is added to a compensation structure that may involve multiple compensation methods and compensation standards.  A mix of compensation types is a competitive way to retail top-talent, but it makes the calculation of their weekly overtime rate of pay a real challenge.

At the end of the day, job titles do not determine exempt status.  Rather, in order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the DOL regulations. The DOL has recognizes that employers of all types may decide to raise salary levels, reorganize workloads, adjust work schedules, or spread work hours in order to avoid payment of overtime.

To prepare for these changes, employers will need to examine their exempt employees and verify that the employees will remain exempt under the new 2020 rules.  You can read all the details of the changes and the comments here:  Further, employers should proactively review their policies, procedures, and tracking systems to ensure they are and will continue to be in compliance.

Lehman Bros. Holding, Inc. (“LBHI”) And The Alternative Dispute Resolution (“ADR”) Process

With our office representing one of the largest blocks of broker and lenders, both in and out of the litigation that Lehman Bros. Holding, Inc. (“LBHI”) had filed in the U.S. Bankruptcy Court, Southern District of New York, we are happy to be in a position to provide helpful input and tips for those companies who may have received correspondence from LBHI and are concerned about what should be done in response thereto.

Invariably, assuming that you are not part of the ongoing Lehman Litigation, the type of correspondence that you would have received or may yet still receive includes an Alternative Dispute Resolution (“ADR”) Demand Letter.  These ADR Demands, which frequently emanate from Mr. Scot Osborne or Mr. John Baker, outline an indemnification claim stemming from the role of lenders or brokers, and assert that originators breached certain representations and warranties (“Rs&Ws”) made to Aurora Loan Services (“ALS”) and/or Lehman Brothers Bank (“LBB”), who assigned rights to LBHI, including LBHI’s rights to indemnification for the claims made against LBHI by RMBS Trustees and GSEs.

Typically, these ADR Demands will be sent by overnight mail, but may also arrive in the regular USPS mail.  If you received such an ADR Demand, as opposed to merely a demand letter without an ADR Demand, you have certain court-ordered obligations.  An ADR Demand will typically consist of  a cover letter with a subject line of “Lehman Brothers Holdings Inc. Indemnification Alternative Dispute Resolution Notice to [client name]”, enclosing an “Indemnification ADR Package”, which will likely include the following documents: (1) Indemnification ADR Notice; (2) Attachment A-Loan Information; (3) Attachment B-the November 14, 2018 Order; and (4) Attachment C-Evidence Preservation Notice.

Under normal circumstances, as a non-litigant, you would not be required to attend a mediation.  Unfortunately, because of the extraordinary nature of the LBHI Bankruptcy, which is the largest bankruptcy in U.S. history, the Judge on the case has taken measures to enable LBHI to attempt to settle thousands of loan claims against over two hundred lenders and brokers.  Federal Rule of Bankruptcy Procedure 7016 authorizes the court to “take appropriate action” at a pretrial conference with respect to “settlement and the use of special procedures to assist in resolving the dispute,” which is generally interpreted as authorizing courts to enter ADR orders. There is also a standing order in the SDNY Bankruptcy Court that permits courts to order mediation for purposes of resolving cases.

The Judge in this case has entered an Alternate Dispute Resolution (“ADR”) Order that requires even non-parties to attend mandatory but non-binding mediation in New York City, in person, if served with an ADR Demand.  This means that if so served, while you must attend, the mediator is not authorized to issue a final ruling on the claims.

Once this ADR Notice package is served, you generally have 15 calendar days to respond the Indemnification ADR Notice.  Although LBHI will usually give you three weeks, which is very little time to review what may be dozens of individual loan claims, you have a choice of responding by either agreeing to settle for the total amount demanded or by denying the demand and providing a Statement of Position.  The Statement of Position must be served on LBHI within the time stated on the demand, which again will be a minimum of 15 days but is usually three weeks.

There is no specific format for the Statement of Position mandated by the November 14, 2018 ADR Order, which only requires an explanation and also permits a counteroffer, along with reasons for the counteroffer.  Because LBHI is primarily focusing on misrepresentation claims and appear to in general base their settlement offers on the number of  misrepresentation claims that they believe to be valid (i.e. those where LBHI does not believe the originator can rebut the alleged misrepresentation), it is important to do a forensic defense analysis of the loans at issue, so as to factually rebut the misrepresentation claims as much as possible.  However, in deciding whether and whom should conduct these forensic defense analyses, loan originators should consult their counsel to understand how best to insulate themselves from having to share these analyses in response to discovery demands that may be made by LBHI.

Along these lines, a failure to respond can possibly result in a sanction award against the party named in the ADR Demand. To hold a party in civil contempt, a court must find that (1) the order the party failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the party has not diligently attempted to comply in a reasonable manner. King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995). Parties to a mediation are required to act in good faith, which has been narrowly interpreted to require compliance with orders to attend mediation, provide pre-mediation memoranda, and, in some cases, produce organizational representatives with sufficient settlement authority.  In re A.T. Reynolds & Sons, Inc., 452 B.R. 374, 384 (S.D.N.Y. 2011).  Still, parties are free to reject settlements proposed in court-based ADR.  See, e.g., Kothe v. Smith, 771 F.2d 667 (2d Cir. 1985) (declaring that “pressure tactics [involving a pretrial judicial settlement conference] to coerce settlement simply are not permissible”); Dawson v. United States, 68 F.3d 886, 897 (5th Cir. 1995) (holding that the district court abused its discretion by requiring settlement offers from parties); Fed. R. Civ. P. 16(c) advisory committee’s note (1983 amendment).

The ADR process also necessitates a cost/benefit analysis for settlement, and can lead to a mediation session that takes place in New York City.  LBHI may be planning a set of new adversary proceedings in bankruptcy court, and receipt of a demand outlined above unfortunately may be a signal that LBHI intends to involve you in those proceedings.

All in all, as these ADR Demands must be taken seriously and time is not always on your side, please contact Chairman James Brody to schedule a complimentary consultation to address any follow-up questions and/or concerns that you may have in connection herewith.

Johnston & Associates’ Expanded Regulatory Compliance Audit Services

Mortgage regulators typically give short notice and provide a list of items needed to provide at an audit.  As examinations and audits can be burdensome and stressful to mortgage lenders because of the sheer volume of resources needed to facilitate the process, there are ways to make the experience more palatable for all involved. Our audit prep services can provide mock-audits, pre-audit preparation, post-audit responses, as well as availability for audit process support. Our audit prep services cover all the policy and procedure related audit prep, as well as providing any necessary training and coaching.

In addition to examinations, the Consumer Financial Protection Bureau (“CFPB”) expects and requires all mortgage loan lenders and servicers have a complete Compliance Management System (“CMS”) in place. Despite the recurrence of dynamic market changes, experienced compliance officers should be equipped to quickly and skillfully adapt to the new conditions and adjust the current Compliance Management system if necessary. We can review your existing CMS to determine if any gaps exist, or can help develop a CMS process and procedures for your company if one does not currently exist through our process reviews.

Our process reviews include a thorough review of the organizational structure, procedures, actual processes practiced, and loan files compliance with investor and regulatory requirements.  Such a review identifies department, process, or company potential shortfalls and gaps in the operation that are opportunities for improved quality and efficiency, helping to ensure credibility. A process review may stem from the need to ensure that your policies and procedures are comprehensive or ensure that they are being followed.

In the event you would like to learn more about Johnston & Associates’s expanded regulatory compliance audit services, please contact Chairman James Brody to schedule a complimentary consultation.

Complimentary Webinar Recordings and Presentation Materials
We are pleased to offer complimentary recordings and other presentation materials from our recent webinars:
These materials may be downloaded from our Johnston & Associates website or, for more information concerning any of the foregoing webinars and/or the subject matter of these webinars, please contact its Chairman James Brody.
Legal Services Offered by Johnston & Associates in the Mortgage Banking Industry

Johnston & Associates is a full suite boutique law firm, which amongst other practices such as real estate and commercial litigation, has a nationally recognized Mortgage Banking Practice Group.  With an experienced team of mortgage banking lawyers (including senior litigation attorneys, former in-house General Counsel and in-house Compliance Counsel from a well-known bank and mortgage company, etc.), certified fraud examiner and forensic underwriters, and an extremely competent support staff, all of whom are dedicated to aggressively and competently serving the needs of our valued clientele, Johnston & Associates’ Mortgage Banking Practice Group is known all across the country for the experience and results that it brings to the areas of regulatory compliance, mortgage banking litigation, and a broad range of mitigation services.

Amongst the many legal services Johnston & Associates offers the mortgage banking industry (e.g., brokers, lenders, servicers, vendors and more), such include, but are in no way limited to, as follows:

  • Mortgage Repurchase and Make-Whole Indemnification Litigation and Mitigation (e.g., Secondary Market Investors, Agencies, etc.)
  • Mortgage Industry Litigation (e.g., Servicer and Sub-Servicer Disputes, 3rd Party Fraud Recovery, CPL and Title Policy Actions, Appraiser E&O Claims, Loan Officer Actions, etc.
  • Mortgage Repurchase and Make-Whole Alternative Dispute Resolution (e.g., Arbitration, Mediation, etc.)
  • Regulatory Compliance, Administrative and Business Services (e.g., Mock Audits, LO Compensation, MSAs, Licensing, CA Dep’t of Business Oversight, HUD Review Board, etc.)
  • Transactional Matters (e.g., Drafting and Negotiating Broker and Correspondent Loan Purchase Agreements, Mergers & Acquisitions, etc.)
Should you have any questions regarding how Johnston & Associates’ Mortgage Banking Practice Group can be of assistance to you and/or your company, please contact its Chairman James Brody and/or its Co-Chair Ingrid Peterson.
Conference Attendance by Johnston & Associates

Johnston & Associates will have a number of its attorneys in attendance and/or speaking at the following upcoming conferences:

  • February 3-6, 2020: A number of attorneys from Johnston & Associates’s Mortgage Banking Practice Group will be in attendance at The Mortgage Bankers Association’s Independent Mortgage Bankers Conference in New Orleans, LA.
  • February 16-18, 2020: A number of attorneys from Johnston & Associates’s Mortgage Banking Practice Group will be in attendance and giving presentations at The Mortgage Collaborative Winter Member Conference, as TMC’s preferred legal counsel, in New Orleans, LA.

If you or someone from your company will also be in attendance at the foregoing conferences and would like to set up a complimentary appointment to meet with Johnston & Associates’ Mortgage Banking Practice Group, please contact its Chairman, James Brody, to schedule a date and time. We hope to see you there!

Copyright © 2019 Johnston & Associates, Attorneys at Law, PC, All rights reserved.