California-based CDFI accused of mischaracterizing its borrowers

Patrick T. Fallon/Bloomberg

A former worker of nonbank mortgage lender The Change Firm, has filed a lawsuit alleging the corporate based by former banker Steve Sugarman has mischaracterized residence loans in certifications to the Treasury Division.

The lawsuit, filed Tuesday in Superior Courtroom in Orange County, California, was introduced by Adam Levine, CEO Sugarman’s former chief of employees. Levine is a former vp at Goldman Sachs and former assistant White Home press secretary within the George W. Bush administration. Earlier than his stint within the White Home, he had been a senior aide to Sen. Daniel Patrick Moynihan.

The lawsuit seeks damages for alleged wrongful termination, whistleblower retaliation and breach of contract. It additionally alleges that Change Co., a group growth monetary establishment based mostly in Anaheim, California that originates loans to minority and low-income communities, has made false representations to traders concerning the underlying traits of the mortgages it securitizes.

The lawsuit states that Levine reached out in March to Change Co. Chairman Antonio Villaraigosa, a former mayor of Los Angeles, and requested for an unbiased investigation into sure practices and points on the firm. When Levine “reported his issues to authorities regulatory authorities,” he was terminated, the lawsuit states.

Alan Wayne Lindeke, Change Co.’s chief authorized officer and basic counsel, referred to as the lawsuit “with out benefit.”

“A number of third-party diligence corporations have verified the accuracy of Change Lending’s Goal Market knowledge and the corresponding evaluation methodology has been verified by outdoors counsel,” Lindeke mentioned in an emailed assertion.

David Lizerbram, a lawyer in San Diego who represents Levine, declined to remark.

Sugarman served as Chairman and CEO of Banc of California earlier than resigning in 2017. He shaped a brand new firm focused on originating loans to debtors with non-traditional credit score wants. 

In 2018, Change Co. was licensed by the Treasury Division as a group monetary growth establishment. CDFIs are government-certified lenders with a mission to supply financing to deprived communities. As a result of they supply credit score and monetary companies to underserved Black, Hispanic and low-income communities, they’re exempt from sure mortgage rules.

Particularly, CDFIs don’t have to abide by the Shopper Monetary Safety Bureau’s ability-to-repay rule, which requires that mortgage lenders doc a borrower’s earnings, property, employment and credit score historical past. These so-called certified mortgage guidelines have been put in place after the subprime mortgage disaster in an effort to forestall a reprise of the low-documentation and no-documentation loans that have been rampant earlier than 2008.

Change Co. states on its web site: “Our regulatory certification permits us to serve prime, creditworthy debtors who battle with burdensome documentation necessities.” 

In simply 5 years, Change Co. has catapulted forward of opponents largely as a result of, as a CDFI, it’s not sure by conventional underwriting necessities. This 12 months, Scotsman Information, which ranks mortgage lenders by measurement, ranked Change as the biggest non-qualified mortgage lender within the U.S. with $4.2 billion in lending quantity.

The corporate lends to individuals “with unpredictable or hard-to-document earnings,” however seems to be for compensating components akin to loan-to-value ratios beneath 80%, Change Co says on its web site. Its debtors have FICO scores above 640 and sometimes have greater than a 12 months’s price of money reserves to bridge gaps between paychecks, the web site states.

All CDFIs should display that they’re serving no less than one eligible goal market — both a selected space or focused inhabitants. They’re required to supply annual certification and knowledge assortment reporting to the Treasury Division, testifying that 60% of their loans, each in quantity and greenback quantity, are made to focus on markets.

Within the lawsuit, Levine claims that he has documentation exhibiting that the corporate is “mischaracterizing the race, ethnicity, and earnings degree of debtors,” and that it “falsifies info on its annual certification by mischaracterizing its loans.”

CDFIs characterize a regulatory tradeoff. They’re exempt from some authorities necessities to gather debtors’ earnings documentation, which could be tough for each the lender and the client and may remove the flexibility to serve debtors who do not have a secure job or whose earnings comes from a enterprise they personal.

An organization that wasn’t sure by these underwriting restrictions may shoot forward of friends that have been topic to the foundations, so to compensate, CDFIs are required to limit nearly all of their lending to demographic teams thought-about underserved. If a CDFI was not following the foundations and sticking to its goal inhabitants, it will basically function as an untrammeled lender whereas its opponents have been tied to stricter underwriting rules. 

Mortgage lenders sometimes bundle their loans and resell them to traders as residential mortgage-backed securities. The lawsuit alleges that Change Co. “makes false representations” to the consumers of its mortgage-backed securities “by mischaracterizing the underlying loans.”

“These misrepresentations are materials, as many traders select CDFI securitized merchandise as a part of a broader coverage that promotes socially accountable investing,” the lawsuit states. “For instance, traders who consider they have been supporting loans to low-income members of the group wouldn’t select to buy a [Change Co.] safety in the event that they knew that the corporate falsely characterised its loans to rich people and even celebrities as low-income loans.”

Change Co. and its subsidiary Change Lending closed a $307 million securitization of residence loans in June. The corporate mentioned on the time that since turning into a CDFI 5 years in the past, it has funded over $25 billion in loans to greater than 75,000 households.