Employee Poaching in the Mortgage Industry: A Most Dangerous Game

By Martin S. Frenkel and Brian A. Nettleingham

For lenders, servicers, and other companies in the mortgage industry, top talent can be elusive prey. Stellar performers, especially loan officers and others on the sales front, can be targeted by multiple potential employers, all of whom want to coax them out of their current positions and bag those trophy employees for themselves. Unlike their metaphorical counterparts in the animal world, many in-demand mortgage industry workers are more than receptive to being poached by the highest bidder, with the promise of higher commissions and a more robust compensation package in a time of high inflation and industry contraction. 

But employee poaching in the mortgage industry often involves the employee taking much more than their talent with them. Whether on their own or with the encouragement and cooperation of their new employer, many departing workers abscond with trade secrets and proprietary customer information and encourage their colleagues to join them at their new company. Some may try to transfer loans in the pipeline to their new employer or induce customers to take their business with them. 

Such conduct poses significant risks for all parties involved, with an existing employer frantically trying to contain the fallout from losing valuable information and human capital and the poacher and poached employee facing costly and disruptive litigation for their actions. 

Recent trends have seen a wave of lawsuits involving poached employees, misappropriation of trade secrets, and solicitation of fellow employees:

• Nonbank lender LoanDepot sued rival lender CrossCountry for allegedly poaching dozens of high-performing loan officers and using proprietary information and trade secrets the departing officers took with them.
• CrossCountry sued Guild Mortgage, alleging that it persuaded an employee to divert loans and information to Guild before she departed from the firm. 
• Pacific Valley Bank filed suit against a former senior vice president and senior business banker for allegedly improperly acquiring, using, and disclosing trade secrets to his new employer, Pinnacle Bank. 
• Mutual of Omaha Mortgage claimed Waterstone Mortgage poached over 60 of its employees, causing the lender to shutter three of its East Coach branches. The lawsuit accuses Waterstone of misappropriating trade secrets and unjust enrichment, among other counts. 

These are just a few examples of poaching litigation that will likely continue over the coming months and years. What usually distinguishes potentially improper and actionable poaching from mere “aggressive recruiting” or an employee simply moving on to greener pastures are two fundamental legal transgressions: breach of contract and theft.

Non-Competition/Non-Solicitation/Non-Disclosure Agreements 

If rules are made to be broken, then contracts are made to be breached. No document can prevent an employee from jumping ship or downloading customer files onto a thumb drive they will dutifully deliver to their new employer. However, agreements that limit what employees can and cannot do upon their departure can provide jilted employers with significant rights and remedies that can contain the damage and hold departing employees and their new employers accountable for violations of such agreements. 

There are three primary contractual provisions that prudent employers can use to protect themselves when an employee leaves for a competitor:

Non-Competition Agreements

As with all contracts, these three prophylactic agreements are governed by state law, which can vary wildly from state to state. This is particularly true regarding non-competition agreements in which the employee agrees to refrain from working for competitors or going into the same business for a set period or in a defined geographic area. Such agreements can support injunctive relief to prevent the employee from working at a competitor, among other remedies. 

But because non-competition agreements run counter to principles of fairness and freedom of commerce, most states look skeptically at such provisions, and several prohibit them entirely in some circumstances. Many employers overreach in their non-compete clauses, making them so broad or oppressive that a judge would likely find them invalid. If an employer wants to rely on a non-compete provision, it should consult with an attorney who can carefully tailor it to fit the applicable state’s law.

In addition, the FTC has recently signaled that it may promulgate rules that ban most non-compete agreements at some point in the future. Although the FTC’s potential ban is not yet law, it has the potential to make protecting employer interests that much more difficult.

Non-Solicitation Agreements 

While not as disfavored as non-competes, non-solicitation agreements that preclude an employee from trying to take coworkers and customers with them also must be carefully crafted and reasonable to enforce. 

Non-Disclosure Agreements

The law and courts recognize the value of trade secrets and proprietary information and will not hesitate to enforce confidentiality and non-disclosure agreements involving such information. Violating these agreements by disclosing confidential company information can lead not only to court intervention to get the trade secrets back into company hands but also to the recovery of significant damages and the clawback of any pay or benefits included in a severance package. 

But it isn’t just the employee who is at risk for violating these provisions. As the preceding examples illustrate, their new employer can face tortious interference, unfair competition claims, and statutory liability for trade secret misappropriation. A prudent new employer should understand what their new hire has previously committed to before moving forward with their relationship as well as the nature of any information or data the employee provides.

Proactive Security Steps

As noted, a document alone cannot stop an employee from absconding with trade secrets. That is why mortgage lenders and services need to establish policies and protocols to secure data and computer systems and limit access and portability of such information. Just as they should retain an experienced attorney to craft the agreements that can serve as a shield against employee poaching, mortgage industry employers would be well served to consult with IT and information security professionals to develop systems designed to minimize the possibility of trade secret misappropriation.

If you have questions or concerns about your rights or exposure related to employee poaching, please contact Martin Frenkel or  Brian Nettleingham at Maddin Hauser.