Judge extends Change Lending's recertification 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 now through at least early December.

U.S. District Judge James V. Selna earlier this month 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.

The Treasury Department reached an agreement with Change to postpone its formal opposition to the TRO, and Selna on Tuesday reset a hearing on the matter to Dec. 11.

"There shall be no actions taken by the Parties to retroactively decertify Plaintiff for the period covered by the TRO or this Agreement," wrote Selna in a Sept. 11 order.

Change sued the CDFI Fund at the end of August 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 earlier this month 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. 

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. Sugarman resigned from that post in 2017 at the same time the SEC announced a probe of the bank.

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, although a spokesperson said the company is not aware of any SEC probe.

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.