Judge reverses Change Lending’s decertification for non-QM loans

A federal judge has reversed the U.S. Treasury Department’s decertification of Change Lending, allowing the non-bank originator to resume its non-qualified mortgages to underserved borrowers. 

U.S. District Judge James V. Selna on Friday issued a temporary restraining order against the Community Development Financial Institutions Fund, which revoked Change’s status earlier this month. The certification grants lenders more flexible underwriting if they meet specific underserved lending thresholds. 

Change sued the CDFI Fund earlier this week in a California federal court, arguing the government office’s decertification was based on erroneous calculations. Change met a benchmark for a number of qualified transactions but missed a dollar amount qualification by less than 3 percentage points, the Fund allegedly said. 

“They did an analysis and never picked up the phone to say, ‘Hey, is our analysis correct?'” said Sanford Michelman, an attorney with Los Angeles-based Michelman & Robinson LLP on behalf of Change. 

Despite Change’s suggestion to review the data, the Fund never responded, Michelman said. The CDFI Fund revoked Change’s certification Aug. 17. 

Change in a statement Friday afternoon said it was relieved by the court’s quick action and it’s on track to permanently address the CDFI Fund’s “flawed analysis and mathematical errors.” It also noted both the Fund and Change agree on the lender’s 66% of lending to underserved borrower number. 

A spokesperson for the Fund declined to comment Friday afternoon. 

Change is one of the nation’s largest non-QM originators with $4.2 billion in volume last year, and has been certified with the Fund since 2018. It was founded by Steve Sugarman, the former chairman and CEO of Banc of California, after he resigned there amid an SEC probe in 2017.

The company came under scrutiny in June when a former Change employee accused it in a lawsuit of mischaracterizing its borrowers. The Securities and Exchange Commission is also allegedly investigating Change over its mortgage-backed securities it sold on Wall Street, a probe neither side has confirmed. 

Barron’s first reported Change’s decertification, and in June uncovered the lender’s business with wealthy clients such as Johnny Depp. Change has asserted its underserved lending bona fides, writing in its lawsuit it lent $6.8 billion to low-to-moderate income borrowers and $1.3 billion in persistent poverty areas. 

The Anaheim-based lender described in its complaint the bad math behind the decertification, suggesting only 188 loans in question led to the Fund’s “arbitrary and capricious” action. In one example, the Fund allegedly docked Change for not meeting an 80% of area median income threshold, when Change’s submitted data already included that 80% calculation. 

“This duplicative application of the 80% factor was therefore using 64% as the standard, rather than the proper 80% standard,” the lawsuit read. 

The Fund has a Sept. 11 deadline to submit an opposition to the court, Selna ordered. The sides are also set to appear before the judge Sept. 15 in Santa Ana, California to debate a more long standing preliminary injunction.