Johnston & Associates Special October Newsletter

In this newsletter we cover the following:
  • Welcome to the October Installment of Johnston & Associates’s Newsletter
  • Lehman Bros. Holding, Inc. (“LBHI”) and The Alternative Dispute Resolution (“ADR”) Process
  • HUD Officially Abandons DPA Mortgage Letter
  • CFPB Director Agrees Structure Is Unconstitutional
  • Maintaining Compliance and Competitiveness Webinar Series – “What Lenders Need to Know About SAFE Act Transitional Temporary Authority and Loan Officer Compensation”
  • 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 October Installment of Johnston & Associates’s Newsletter

To all our preexisting clients, industry friends and strategic partners whom are in receipt of this October 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 have a lot of great information and updates to provide, which include: (1) some helpful information for those brokers 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 between $100K to more than $15MM); (2) two regulatory compliance articles, titled: “HUD Officially Abandons DPA Mortgage Letter” and “CFPB Director Agrees Structure Unconstitutional”; and (3) another installment in Johnston & Associates’s Maintaining Compliance and Competitiveness Webinar Series, titled: “What Lenders Need to Know About SAFE Act Transitional Temporary Authority and Loan Officer Compensation”.

Finally, 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.

Lehman Bros. Holding, Inc. (“LBHI”) And The Alternative Disput 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 a “brief 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.

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.

HUD Officially Abandons DPA Mortgage Letter

HUD officially abandoned new rules for down payment assistance on FHA mortgages. The Department of Housing and Urban Development (“HUD”) issued a new Mortgagee Letter, 2019-12, which retracts the agency’s original changes to the down payment assistance rules and all subsequent actions in the matter.

Earlier, Johnston & Associates sent out information regarding the lawsuit against HUD filed by Cedar Bank Corp. after the release of Mortgagee Letter 2019-06.  According to HUD and the Federal Housing Administration (FHA), the “informal guidance” of Mortgagee Letter 19-06 was meant to provide clarity around what documentation would be required for borrowers who are using funds from another person or entity to cover part of the FHA’s minimum down payment requirement of 3.5%.  But, according to the Cedar Band of Paiutes, a federally recognized American Indian band that operates the Cedar Band Corp. and the CBC Mortgage Agency, the rules had far-reaching and damaging consequences. HUD originally reacted to the lawsuit by delaying the implementation of the rule changes to allow for a 90-day stay to review the Cedar Band’s claims.  When a federal judge granted the group’s motion and formally halted the implementation of the new rule until the case can be decided, HUD formally suspended the guidance “until further notice”.

HUD also advised that mortgagees may continue to follow the guidance in HUD Handbook 4000.1 II.A.4.d.ii, which sets forth existing requirements regarding government-provided down payment assistance. Through FHA Info #19-09, the FHA stated the agency is recommitting to the industry that it will continue to maintain and enhance the SF Handbook so that it becomes a single, comprehensive source of policy guidance for lenders and other stakeholders doing single family business with FHA. And that HUD intends to resume regular quarterly SF Handbook updates.  Time will tell if HUD will make another attempt to impose the same type of requirements or seek to impose other requirements that it believes to be suitable alternatives.

You can read the Mortgagee Letters and FHA Info announcements at:  The filed lawsuit information can be found at:  If interested in learning more, please feel free to contact Johnston & Associates’s Mortgage Banking Chairman, James Brody.

CFPB Director Agrees Structure is Unconstitutional

As everyone now know or should know, CFPB Director Kathy Kraninger had advised lawmakers, in response to Seila Law’s petition for a writ of certiorari seeking U.S. Supreme Court review of the Ninth Circuit Court of Appeals’ ruling that the Consumer Financial Protection Bureau’s (“CFPB’s”) structure is constitutional, the Department of Justice (“DOJ”), on the Bureau’s behalf, has taken the position that the Bureau’s structure violates the U.S. Constitution’s Separation of Powers.  Director Kraninger acknowledged in a pair of letters sent to Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi that the Bureau can no longer argue in the lower courts that its structure is constitutional.

Most recently, the CFPB joined the Justice Department in a brief asking the U.S. Supreme Court to consider whether the CFPB’s structure is unconstitutional.  Both the DOJ and the CFPB told the Supreme Court that they believe the appointment provision of the Consumer Financial Protection Act is unconstitutional because it says the Bureau’s lone director cannot be removed from office without good cause. The law, according to both the DOJ and the CFPB, violates the Separation of Powers Doctrine by interfering with the President’s executive authority.

Needless to say, given the fact that the CFPB has never before argued that the statute creating the Bureau is constitutionally flawed, as well as the fact that CFPB lawyers have argued the exact opposite in trial and appellate courts across the Country…as recently as last month, this represents a dramatic shift in positions.  Notwithstanding the foregoing, the Justice Department and the CFPB have both told the Supreme Court that the CFPB’s constitutional problem is easily solved (i.e., the Justices, the letters stated, need only sever and strike the provision under which the Director is insulated from accountability to the President).

The CFPB Director similarly assured Senator McConnell and Speaker Pelosi that the Bureau’s new determination that its structure is unconstitutional will not affect its ability to function – now or in the future. “I will continue to carry out the Bureau’s duties under the CFPA and to defend the Bureau’s actions,” she wrote, adding that even if the Supreme Court agrees with her and the Justice Department that her appointment was unconstitutional, “the CFPA should remain ‘fully operative.'”  It does, however, seem unlikely the issues are going to be quite as simple to put to rest as the CFPB director’s letter suggests. Proponents on all sides of the issue show the broad range of arguments involved.  Arguments ranging from the constitutionality of an agency’s decisions based on an unconstitutional structure to possible remedies between branches of the government instead of single parties.

Although the Supreme Court may eventually be forced to make a decision, the path to clarity will again be murky and filled with obstacles.  Further, given what we know about Senator Warren’s views on the constitutionality of the CFPB, the path to clarity being murky may be a bit of an understatement.  As a result, although Lenders may be tempted to take this an opportunity to lessen the reigns of their operations, the uncertainty of an unforeseeable decision promotes the need for due diligence from Lenders.  In other words, in viewing this from our perspective, we believe that Lenders should be sure they have a Compliance Management System in place and that it is being implemented consistently throughout the organization unless and until they are ever expressly advised otherwise.

Maintaining Compliance and Competitiveness Webinar Series: What Lenders Need to Know About SAFE Act Transitional Temporary Authority and Loan Officer Compensation

Date:               Thursday October 24, 2019
Time:              10:30 a.m. PST / 1:30 p.m. EST
Duration:        One Hour

Loan Originators are marking down their calendars. Recruiting and retaining consumer-oriented, high-performing mortgage loan originators has always been difficult.  However, it is about to get much easier for mortgage loan originators to switch jobs and continue originating mortgages without delays. This complimentary webinar, which will be hosted by Johnston & Associates, discusses topics that can be crucial to companies in gaining, retaining, and compensating sought after, high performing mortgage loan originators. James Brody, Chairman of the Mortgage Banking Practice Group for Johnston & Associates, as well as special guest speaker Ed Wallace (Executive Director for The Community Mortgage Lenders of America) will provide invaluable information regarding rule changes that have been years in the making. Some of the many issues that will be discussed during this comprehensive webinar include, but are in no way limited to, the following:

  • SAFE Transitional License Act Defined
  • Current Safe Act Requirements
  • Mortgage Loan Originator Requirements.
  • Depository Loan Originator Requirements.
  • Unintentional consequences of Current Safe Act Requirements
  • State Licensing is slow and burdensome.
  • Individual Sacrifice
  • Other negative effects
  • Significance of Transitional License implementation
  • Intent of Temporary Authority
  • Temporary authority permitted actions
  • Other positive effects
  • CFPB Bulletin 2012-5
  • State mitigation efforts
  • Conditions of Temporary Authority
  • Loan originator requirements
  • Effective dates or actions
  • Disqualification
  • Temporary Authority Regulation
  • Nuances of the LO Compensation Rule
  • Utilizing all Tools Available
  • Transitional Authority & Compensation
  • Appling the Tools to Transitional Licenses
  • Can I pay my LO as an Independent Contractor?
  • Loan Originator Paying for Unanticipated Cost Increases
  • Quality Loan Factor in LO Comp Plans
  • Effectives on Compensation Agreement Reasonable Time Periods
  • What about UDAAP?
  • Current LO Comp Regulation and Enforcement
  • Lender Risk, Control, and Preparedness

Moderator & Speakers: 
James Brody, Esq., Chairman of Mortgage Banking Practice Group
Johnston & Associates, Attorneys at Law, P.C.

Special Guest Speaker(s):
Ed Wallace, Executive Director
The Community Mortgage Lenders of America

Additional Speakers: 
To be announced

In order to register for this complimentary webinar, which will be limited to the first 1,000 registrants, please click on the following link

Otherwise, should you have any follow-up questions or have any difficulty registering for the upcoming webinar, please contact Mr. James Brody.  After registering, you will receive a confirmation email containing information about joining the webinar.

Complimentary Webinar Recordings and Presentation Materials
We are pleased to offer complimentary recordings and other presentation materials from our recent webinars:
  • April 18, 2019 – “Annual Regulatory Round-up: Invaluable Tips for Maintaining Compliance in 2019 and Beyond” webinar. To access the recording of this webinar, click as follows:
  • January 17, 2019 – “Lehman Bros. GSE and RMBS Litigation: A Comprehensive Review and Analysis” lender only webinar (only available by individual request)
  • July 26, 2018 – “Loan Officer Compensation Tips and Trends: How to Gain a Competitive Edge While Remaining Compliant” webinar
  • June 28, 2018 – “Repurchase and Indemnification Claims in 2018 and Beyond: A Comprehensive Update” webinar
  • May 10, 2018 – “Mergers and Acquisitions in the Mortgage Banking Industry: Expert Insights and Forecasts for 2018 and Beyond” webinar
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 Attendence by Johnston & Associates

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

  • October 27-30, 2019: A number of attorneys from Johnston & Associates’s Mortgage Banking Practice Group will be in attendance at The Mortgage Bankers Association’s Annual Convention & Expo in Austin, TX.
  • 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 counselin 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!

Conference Attendance by Johnston & Associates

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

  • October 27-30, 2019: A number of attorneys from Johnston & Associates’s Mortgage Banking Practice Group will be in attendance at The Mortgage Bankers Association’s Annual Convention & Expo in Austin, TX.
  • 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 counselin 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!

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