How the FTC's proposed ban on noncompetes could impact lenders

The Federal Trade Commission's proposed rule banning noncompetes is likely to have a substantial impact on the mortgage industry if it is enacted. 

The proposed legislation will not only ban noncompetes, but may create greater scrutiny over nonsolicit clauses and set a higher burden for poaching lawsuits, a handful of attorneys said.

The proposed rule would make it illegal for employers to attempt to enter into a noncompete with a worker, or to enforce a noncompete agreement. The commentary period for industry stakeholders ends March 10. A version of the legislation is expected to go into effect sometime this year, several attorneys say. 

Mortgage lenders who use noncompetes will have to rescind them, and will be barred from using them as a mechanism to keep loan originators, executives and marketing personnel from jumping ship to competitors. 

Some states, including California, North Dakota and Oklahoma, already prohibit the use of noncompetes. Other states, such as Maine, Maryland, New Hampshire, Rhode Island, and Washington, have banned noncompete agreements for low-wage workers.

In the mortgage industry, noncompetes have been used as a way to "protect an investment" especially if the originator received a sign-on bonus, said David Stein, partner at Ohio-based law firm Taft Stettinius & Hollister LLP. They have also been used as a "weapon" to keep employees from leaving.

"There are dozens and dozens of lawsuits that are filed every year in the mortgage industry, seeking to enforce noncompetes, and there are some known employers that use noncompetes as a weapon to retain their talent," Stein said.

Noncompetes are also used at banks and credit unions, said Alex Naumovych, loan officer at Draper and Kramer Mortgage Corporation.

"Noncompetes are more common in banks and credit unions because employees receive a salary and get leads handed to them," said Naumovych. "Nonsolicitation clauses apply more to nonbanks and impact people like branch managers, executives and loan officers that do a lot of business."

FTC's proposed rule will likely create an environment in which there will be greater scrutiny over both nonsoliciation clauses and poaching cases, attorneys say.

"Sometimes nonsolicits are used kind of as a de facto noncompete," said Stein. "I would expect to see scrutiny by some courts to say, well, when does the nonsolicit step over the line and violate the rule?"

The "extremely broad" nature of FTC's rule could eventually transfer over into the enforceability of nonsoliciation clauses and "set a higher bourden to get poaching cases to court," said Kim Coleman, former attorney at Primary Residential Mortgage.

Noncompetes and nonsolicits are often included in poaching lawsuits, which are quite common in the field. In 2022, lenders including Guild Mortgage, Cross Country Mortgage, Union Home Mortgage and Fairway Independent Mortgage Corp. have either filed or been hit by poaching lawsuits.

"Plaintiffs will often try to throw in every possible claim that they might have," said Coleman. "And it's up to the defendant to say that the claim is not substantiated, or you don't have standing"

FTC's proposed legislation follows the Biden's Administration's announcement in 2021 that encouraged a clamp-down on noncompetes. The FTC estimates stopping noncompetes could increase wages by $300 billion per year and expand career opportunities for 30 million Americans.

"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," said Lina M. Khan, chairwoman of the FTC, in a written statement. "Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand."

A ban on noncompetes "would support more competition," said Coleman. It could also lead to more innovation and a "focus more on the people themselves."

However, downsides could present themselves. Employers may not want to invest in training their employees. "And also, if you're having to pay more wages, how is that going to impact the bottom line, especially in a mortgage market where it is super difficult?" said Coleman.

Brian O'Shaughnessy, CEO of defunct Athas Capital Group, noted that all of his former employees were bound by nonsolicitation clauses, and that regulations banning noncompetes or nonsolicits will have a negative impact on "people willing to risk their capital."

"What kind of loyalty will employees expect, if an employer can't get any loyalty?" O'Shaughnessy said. "Watch how that will backfire on the woke. If the salespeople have no loyalty to the brand they're benefiting from and they're not risking their own personal capital… they become the enemy." 

So far feedback from the general population on FTC's rule has been mostly positive, but James Brody, chairman of the Mortgage Banking Practice Group, expects the final version of the rule to look slightly different from its current iteration.

"I expect there's going to be some litigation and that could very well impact whatever the final form is," Brody said.