The Securities and Exchange Commission has been questioning former employees of California-based Change Lending over whether its mortgages to Black and Hispanic borrowers have been accurately recorded on its government disclosures, according to the former employees.
The questioning follows a complaint to the SEC earlier this year by a dismissed executive of Change Lending’s parent, Change, who alleged that the firm misrepresents the races and ethnicities of borrowers whose loans are sold to investors as social-impact bonds.
Change has accused the dismissed executive, former chief of staff Adam Levine, of attempting to smear the company for financial gain.
Change previously told Barron’s that it exceeded its required lending to disadvantaged borrowers under the U.S. Treasury’s Community Development Financial Institution (CDFI) program, which gave Change Lending special mortgage-writing leeway aimed at boosting homeownership within underserved communities.
Change Lending appears to have lost its CDFI certification last week, Barron’s has reported. Its parent company remains on the CDFI Fund’s list of certified businesses, where it is identified as a venture-capital fund, not a lender.
The CDFI designation had allowed Change Lending to make mortgages without requiring borrowers to produce employment-verification records, banking activity details, or other documentation that lenders typically require. In exchange, Change Lending had been required to do 60% of its lending among groups that include Hispanic, Black and low-income borrowers.
A Barron’s analysis in July showed that the firm underperformed the industry last year in increasing lending to Black borrowers and that only a small percentage of its loans in key markets were affordable to people with low incomes.
Two former Change Lending employees with access to senior management told Barron’s Monday that they had been separately interviewed about the firm’s lending by investigators with the Securities and Exchange Commission in August.
The investigators asked them about any remarks that Change co-founders Steven Sugarman and Jeff Seabold may have made about the company’s practices regarding how borrowers’ races and ethnicities were reported on government-mandated loan documents, the two said.
The employees said they told investigators that managers had expressed a nonchalance about whether those details were accurately recorded and that the managers volunteered that the forms didn’t undergo an auditing process.
The employees told investigators that they felt these remarks were meant to encourage them to permit racial and ethnic identifications to be misrepresented on the forms, they said.
Asked by Barron’s about the apparent SEC action and the former employees’ remarks, Change said in a statement that “we believe this is simply another false, dirty trick orchestrated by Adam Levine.”
The company said that borrowers self-report their racial and ethnic details and that this information is in most cases collected by third-party brokers, not the company itself.
“Any assertion that Change encourages misrepresentations is false,” it said.
An SEC spokesperson said in a statement to Barron’s that the agency doesn’t comment on the existence or nonexistence of a possible investigation.
A lawsuit filed in June by former chief of staff Levine alleged that the business had been misidentifying the races, ethnicities, and income levels of its borrowers in its annual reports to maintain CDFI certification.
His attorneys also wrote in the complaint that the alleged falsifications may also qualify as securities fraud, since “investors are induced to purchase” mortgage-backed securities from the firm “based on the company’s false representations regarding the underlying loans.”
Roger Barton, a New York-based attorney specializing in securities law who hasn’t represented Levine or Change, says such an argument could be a convincing one if the allegations are born out.
“Whether it’s financial performance or their level of ESG engagement, making materially inaccurate statements is a securities violation,” says Barton. “If they’re in the business of selling securities, then whatever disclosures they’re making to the investing public need to be true.”
Levine said in his suit, filed in Orange County Superior Court, that he was fired for directly raising such issues with the Change’s chairman, former Los Angeles Mayor Antonio Villaraigosa, and with outside regulators.
Villaraigosa didn’t respond to a message from Barron’s seeking comment on Monday.
Levine attorney David Lizerbram said in a statement to Barron’s on Monday that Levine began sharing his concerns about the Change’s practices with the SEC in March. He called Levine “an SEC whistleblower.”
In a court filing in response to the claims in Levine’s lawsuit, Change alleged that the former executive filed his complaint against the firm in an attempt to tarnish its reputation by inviting media coverage, including by Barron’s, as part of a scheme to extract a payment from the firm.
Change said Levine had been dismissed after exhibiting “erratic behavior becoming progressively threatening and hostile” toward others at the company, then “conducting unauthorized investigations…and fabricating stories” about co-workers to deflect from complaints about him.
Levine was arrested Thursday by Los Angeles police serving a search warrant at his home on suspicion that he had impersonated a law officer, a police official told Barron’s Friday. He was released early Friday on $100,000 bail, according to an online arrest record.
In a statement, Lizerbram called the arrest “a shameless and blatant retaliation.”
Bloomberg reported earlier Monday that the SEC was investigating Change over its mortgage-backed securities.
Write to Jacob Adelman at [email protected]
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