A former employee of nonbank mortgage lender The Change Company, has filed a lawsuit alleging the company founded by former banker Steve Sugarman has mischaracterized home loans in certifications to the Treasury Department.
The lawsuit, filed Tuesday in Superior Court in Orange County, California, was brought by Adam Levine, CEO Sugarman's former chief of staff. Levine is a former vice president at Goldman Sachs and former assistant White House press secretary in the George W. Bush administration. Before his stint in the White House, 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 also alleges that Change Co., a community development financial institution based in Anaheim, California that originates loans to minority and low-income communities, has made false representations to investors about the underlying characteristics 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 asked for an independent investigation into certain practices and issues at the company. When Levine "reported his concerns to government regulatory authorities," he was terminated, the lawsuit states.
Alan Wayne Lindeke, Change Co.'s chief legal officer and general counsel, called the lawsuit "without merit."
"Multiple third-party diligence firms have verified the accuracy of Change Lending's Target Market data and the corresponding assessment methodology has been verified by outside counsel," Lindeke said in an emailed statement.
David Lizerbram, a lawyer in San Diego who represents Levine, declined to comment.
Sugarman served as Chairman and CEO of Banc of California before
In 2018, Change Co. was certified by the Treasury Department as a community financial development institution. CDFIs are government-certified lenders with a mission to provide financing to disadvantaged communities. Because they provide credit and financial services to underserved Black, Hispanic and low-income communities, they are exempt from certain mortgage regulations.
Specifically, CDFIs do not have to abide by the Consumer Financial Protection Bureau's ability-to-repay rule, which requires that mortgage lenders document a borrower's income, assets, employment and credit history. Those so-called qualified mortgage rules were put in place after the subprime mortgage crisis in an effort to prevent a reprise of the low-documentation and no-documentation loans that were rampant before 2008.
Change Co. states on its website: "Our regulatory certification enables us to serve prime, creditworthy borrowers who struggle with burdensome documentation requirements."
In just five years, Change Co. has catapulted ahead of competitors largely because, as a CDFI, it is not bound by traditional underwriting requirements. This year, Scotsman Guide, which ranks mortgage lenders by size,
The company lends to people "with unpredictable or hard-to-document income," but looks for compensating factors such as loan-to-value ratios below 80%, Change Co says on its website. Its borrowers have FICO scores above 640 and typically have more than a year's worth of cash reserves to bridge gaps between paychecks, the website states.
All CDFIs have to demonstrate that they are serving at least one eligible target market — either a specific area or targeted population. They are required to provide annual certification and data collection reporting to the Treasury Department, attesting that 60% of their loans, both in number and dollar volume, are made to target markets.
In the lawsuit, Levine claims that he has documentation showing that the company is "mischaracterizing the race, ethnicity, and income level of borrowers," and that it "falsifies information on its annual certification by mischaracterizing its loans."
CDFIs represent a regulatory tradeoff. They are exempt from some government requirements to collect borrowers' income documentation, which can be difficult for both the lender and the customer and can eliminate the ability to serve borrowers who don't have a stable job or whose income comes from a business they own.
A company that wasn't bound by these underwriting restrictions could shoot ahead of peers that were subject to the rules, so to compensate, CDFIs are required to restrict the majority of their lending to demographic groups considered underserved. If a CDFI was not following the rules and sticking to its target population, it would essentially operate as an untrammeled lender while its competitors were tied to stricter underwriting regulations.
Mortgage lenders typically bundle their loans and resell them to investors as
"These misrepresentations are material, as many investors choose CDFI securitized products as part of a broader policy that promotes socially responsible investing," the lawsuit states. "For example, investors who believe they were supporting loans to low-income members of the community would not choose to purchase a [Change Co.] security if they knew that the company falsely characterized its loans to wealthy individuals and even celebrities as low-income loans."
Change Co. and its subsidiary Change Lending closed a $307 million
