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.<\/p>\n
The questioning follows a complaint to the SEC earlier this year by a\u00a0<\/strong>dismissed executive of Change Lending\u2019s parent, Change, who alleged that the firm misrepresents the races and ethnicities of borrowers whose loans are sold to investors as social-impact bonds.\u00a0<\/p>\n Change has accused the dismissed executive, former chief of staff Adam Levine, of attempting to smear the company for financial gain. <\/p>\n Change previously told Barron\u2019s<\/em> that it exceeded its required lending to disadvantaged borrowers under the U.S. Treasury\u2019s Community Development Financial Institution (CDFI) program, which gave Change Lending special mortgage-writing leeway aimed at boosting homeownership within underserved communities.\u00a0<\/p>\n Change Lending appears to have lost its CDFI certification last week, Barron\u2019s has reported. Its parent company remains on the CDFI Fund\u2019s list of certified businesses, where it is identified as a venture-capital fund, not a lender.<\/p>\n 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.\u00a0<\/p>\n A Barron\u2019s<\/em> analysis in July showed that the firm underperformed the industry last year\u00a0in increasing lending to Black borrowers and that only a small percentage of its loans in key markets were affordable to people with low incomes.\u00a0<\/p>\n Two former Change Lending employees with access to senior management told Barron\u2019s<\/em> Monday that they had been separately interviewed about the firm\u2019s lending by investigators with the Securities and Exchange Commission in August.\u00a0 <\/p>\n The investigators asked them about any remarks that Change co-founders Steven Sugarman and Jeff Seabold may have made about the company\u2019s practices regarding how borrowers\u2019 races and ethnicities were reported on government-mandated loan documents, the two said.\u00a0<\/p>\n 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\u2019t undergo an auditing process.<\/p>\n 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.<\/p>\n Asked by Barron\u2019s<\/em> about the apparent SEC action and the former employees\u2019 remarks, Change said in a statement that \u201cwe believe this is simply another false, dirty trick orchestrated by Adam Levine.\u201d\u00a0<\/p>\n 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. <\/p>\n \u201cAny assertion that Change encourages misrepresentations is false,\u201d it said. <\/p>\n An SEC spokesperson said in a statement to Barron\u2019s<\/em> that the agency doesn\u2019t comment on the existence or nonexistence of a possible investigation.<\/p>\n 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.\u00a0<\/p>\n His attorneys also wrote in the complaint that the alleged falsifications may also qualify as securities fraud, since \u201cinvestors are induced to purchase\u201d mortgage-backed securities from the firm \u201cbased on the company\u2019s false representations regarding the underlying loans.\u201d<\/p>\n Roger Barton, a New York-based attorney specializing in securities law who hasn\u2019t represented Levine or Change, says such an argument could be a convincing one if the allegations are born out.<\/p>\n \u201cWhether it\u2019s financial performance or their level of ESG engagement, making materially inaccurate statements is a securities violation,\u201d says Barton. \u201cIf they\u2019re in the business of selling securities, then whatever disclosures they\u2019re making to the investing public need to be true.\u201d<\/p>\n Levine said in his suit, filed in Orange County Superior Court, that he was fired for directly raising such issues with the Change\u2019s chairman, former Los Angeles Mayor Antonio Villaraigosa, and with outside regulators.\u00a0<\/p>\n Villaraigosa didn\u2019t respond to a message from Barron\u2019s<\/em> seeking comment on Monday.<\/p>\n Levine attorney David Lizerbram said in a statement to Barron\u2019s<\/em> on Monday that Levine began sharing his concerns about the Change\u2019s practices with the SEC in March.\u00a0He called Levine \u201can SEC whistleblower.\u201d<\/p>\n