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Johnston Thomas February 2019 Newsletter


In this newsletter we cover the following:
  • LBHI Litigation Update
  • Fair Lending Law Update
  • Vendor Management Update
  • Regulatory Compliance and Litigation Webinars: Complimentary Recordings and PPTs for JT’s Marketing Service Agreement, Loan Officer Compensation, and other Complimentary Webinars
  • The Legal Services we offer at Johnston Thomas
Welcome to the February Installment of Johnston Thomas’s Newsletter

To all our preexisting clients, industry friends and strategic partners whom are in receipt of the Johnston Thomas Newsletter, as well as any and all the 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 which we all are fortunate enough to be a part of and to those mortgage banking professionals whom we count ourselves lucky to work alongside.

As part of our ongoing effort to provide our readers with content rich Newsletters, including timely discussions on those topics that are of great concern and interest to many within our industry, we always welcome any and all follow-up questions and/or feedback that you and/or your companies may have.

Finally, as many of you already know, the professionals who comprise Johnston Thomas’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.

LBHI Litigation Update

LBHI Litigation Webinar

The Johnston Thomas – LBHI Defense Group (“Defense Group”) represents one of the largest groups of lender defendants in the LBHI litigation that is presently pending in the Bankruptcy Court for the Southern District of New York, as well as those lenders that received indemnification demand letters outside of the LBHI litigation.

In light of Johnston Thomas deep involvement in and out of the existing LBHI litigation, as well as its attorneys decades of collective experience in defending correspondent lenders from indemnification lawsuits all across the Country, we offered a lender only webinar to address many of the common questions and concerns that people have with regard to the LBHI litigation,

If you are a lender that is interested in receiving a copy of our PowerPoint Presentation, please feel free to contact Mr. James Brody to request a copy, at jbrody@johnstonthomas.com.

New Wave of Indemnification Demand Letters

Loan originators around the country have been receiving new demand letters from Lehman Brothers Holdings Inc. (“LBHI”) demanding indemnification for allegedly defective loans sold to Lehman Bros. Bank (“LBB”) and assigned to LBHI.  The letters demand attorneys’ fees, costs, expenses and damages, generally in an amount around $1M.  In addition, these demands generally provide loan numbers that do not belong the originators, claim conclusory damage amounts and provide abbreviated claim reasons.

With regard to some general tips for those lenders that may have received such demands, besides recommending that you always consult with counsel before making any decisions, such include but are not limited to the following:

1.     Request information sufficient to identify the alleged loans at issue (e.g., property addresses, borrower names, etc.);
2.    Request a breakdown of damage amounts;
3.    Request specifics of claim reasons;
4.    Fully review and redline any proposed NDA that may be offered in order to obtain additional information and documentation;
5.    Pull any applicable insurance policies to determine whether and when a notice of claim needs to be made;
6.    Conduct a full evaluation of the claims (e.g., forensic audits in anticipation of litigation, etc.).

Second Wave of RMBS Lawsuits

On or about Monday February 4, 2019, LBHI supplemented its LBHI Litigation by filing a second wave of RMBS Complaints.  For a list of any all additional lenders who were named in the second wave of RMBS Complaints, please feel free to contact Mr. James Brody to request a copy, at jbrody@johnstonthomas.com.

Favorable Case Law out of MN

Possibly the most exciting legal news at present, involves relatively new case law based out of Minnesota, which may be used in support of arguments over the legitimacy of damage figures allegedly suffered and/or owed to LBHI. If interested in learning more about this exciting development, such that you can use such to determine whether or not it may be helpful to your particular case, please contact Mr. James Brody to request a copy, at jbrody@johnstonthomas.com.

Fair Lending Law Update

The application of the federal fair lending laws—the Equal Credit Opportunity Act (ECOA) and Fair Housing Act (FHA)—to mortgage loan origination and servicing has always been an area of uncertainty, perhaps now more than ever. Whether you realize it or not, the game has changed. The slow accumulation of new requirements and mandates created by the GSEs, TRID, HMDA, investors — as well as the onset of other risks such as False Claims Act charges and class action lawsuits — have pushed the stakes so high that conventional approaches to gaining borrowers and product offerings do not apply.

Fair lending and redlining continues to be top priorities for regulators and law enforcement, with several high-profile regulatory actions. A key to fair lending concerns is the influence of loan officer discretion in underwriting. Although CFPB leadership recently changed, many of the career professionals remain, and the Bureau’s guidance documents provide important insights into its priorities and concerns.

A Lender needs to ask, how much discretion is an individual loan officer given in terms of increasing or decreasing a rate? What kind of impact does that have on your markets? Are the rates to borrowers effected by Loan Officer compensation? What about a lenders marketing strategy and oversight? Is the entity marketing in a reasonably expected market area and where they are making loans outside of them.

The first step in managing fair lending compliance is to identify areas of risk. As is the case with other types of activities, fair lending risk in mortgage origination and servicing is most heavily concentrated where there is human discretion. In institutions where processes allow for numerous areas of discretion, institutions should prioritize them based on the potential harm to consumers.  A Baseline Risk Review can be essential in helping institutions identify large areas of risk and discover areas of risk that may not have been previously identified. After these risks are identified, institutions will have the knowledge and tools to prioritize and manage the risks, helping to prevent the threat of Fair Lending and other regulatory violations.

Vendor Management Update

Vendor management is a topic of increasing regulatory focus. Federal regulations require mortgage lenders to have a service provider risk management program in place. A financial institution’s service provider risk management program should be risk-focused and provide oversight and controls commensurate with the level of risk presented by the outsourcing arrangements in which the financial institution is engaged. It should focus on outsourced activities that have a substantial impact on a financial institution’s financial condition, are critical to the institution’s ongoing operations, involve sensitive customer information or new bank products or services, or pose material compliance risk.

While the components of an effective Vendor Risk Management (VRM) program may vary based on the scope and nature of an institution’s contracted activities, effective programs typically include, at least, (i.) risk assessments, due diligence, and selection; (ii.) contract provisions and considerations; (iii.) incentive compensation review and service-level agreements (SLAs); (iv.) oversight and monitoring; (v.) business continuity and contingency plans, as well as, redundant system placement review.

The current regulatory guidance applies to outsourced activities beyond core mortgage processing or information technology-related services. Even vendors that an institution has categorized as minor, lower-tier, lower-risk service providers several years ago may today pose greater risks similar to a major core vendor.

When engaging with a vendor, there are many steps to take: conducting a risk assessment, scoping, setting expectations, establishing communication methods, and verifying compliance requirements. Third parties present a broad range of risks, including:

  • Compliance risks such as violations of laws, rules, or regulations or noncompliance with policies or procedures;
  • Reputation risks such as dissatisfied customers or violations of laws or regulations that lead to public enforcement actions;
  • Operational risks such as losses from failed processes or systems or losses of data that result in privacy issues;
  • Transaction risks such as problems with service or delivery; and
  • Credit risks such as the inability of a third party to meet its contractual obligations.

Organizations that rely heavily on vendors, but don’t have sufficient visibility into their vendor networks are exposing themselves to high risks. A strong VRM helps companies anticipate inherent risks rather than simply reacting to adverse situations and incidents after they occur.

Understanding vendor risks and managing them effectively are essential to maintain sustainable businesses, and ensure regulatory compliance. Having a strong Vendor Risk Management (VRM) program helps companies anticipate inherent risks rather than simply reacting to adverse situations and incidents after they occur.

Complimentary Webinar Recordings and Presentation Materials Available from Johnston | Thomas Mortgage Banking

We are pleased to offer complimentary recordings and other presentation materials from our recent webinars:

  • October 18, 2018 – “Compliance Tips and Trends: The Resurgence of Marketing Service Agreements, Affinity Relationships, Joint Ventures and Affiliated Arrangements” webinar
  • 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 Thomas 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 Thomas in the Mortgage Banking Industry

Johnston Thomas 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 Thomas’ 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 Thomas 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 Thomas’ 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.

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

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