United Wholesale Mortgage is facing a potentially ugly court battle from a few of its own constituents. Three mortgage brokers in California claim that UWM pulled the rug out from beneath them in March when it changed the commission structure on mortgages that were quickly paid off by borrowers. The lawsuit is seeking class-action status.
On March 12, 2020, UWM executive Allen Beydoun appeared in a video sent to the roughly 100 mortgage brokers he claimed were responsible for higher-than-industry-average prepayment speeds.
In the video, which was reviewed by HousingWire, Beydoun said that the 100 or so brokers were “making a negative impact” on prepayment speeds in the wholesale channel by refinancing “three-to-five times faster than the entire market.” He characterized it as “churning,” and said that UWM determined it was a combination of higher individual compensation plans, doing no-cost loans, or potentially charging the borrower a higher rate initially to set up a refinance later on.
UWM changed its policy that month so that brokers couldn’t refi out of UWM loans that were less than 365 days old without paying back the commission or 1% of the mortgage (whichever was greater).
The three brokers – Rishi Bhasin, Anne James and Nelson Otero – are asking for between $10,000 and $77,000 in commissions from loans that were paid off early, saying UWM improperly applied it to loans retroactively. In other words, they say UWM punished them for loans that were still in the pipeline and had conformed to the prior 180-day standard.
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“They’ve got contractual obligations just like everyone else has,” said Scott Glovsky, the plaintiffs’ attorney. “Just because they’re a large corporation doesn’t mean they get to cheat on the deal. The contract that they drafted has terms on them. They’re required to comply.”
UWM hasn’t yet responded to the suit in court, but the lender issued a statement this week that called the lawsuit’s claims “meritless, if not frivolous,” and a source close to the lender argued that the lawsuit distracts from the larger issue of churning, a practice the lender says it is trying to eradicate.
The company’s position is that fast prepayment speeds hurt its standing with Fannie Mae and Freddie Mac, investors on the secondary market, and that churning harms borrowers because they should have just been given the better rate initially, not months later. Rates hadn’t changed enough in the intervening period to justify another loan, the source close to the company said.
It’s worth remembering the time in which this all transpired. No one on March 12 could foresee a year in which record origination volume would lead to record profits. In mid-March, lenders were spooked and hoarding cash. And the GSEs were having conversations with wholesale lenders over concerns about rising prepayment speeds, sources said. According to data from the Federal Housing Finance Agency, the prepayment rate on all agency MBS hit 2.1% in October 2019 and rose to about 2.5% in March 2020. (Per Black Knight data, the prepayment rate in October 2020 was 3.17%, the highest rate in more than 16 years.)
Before the Beydoun video made the rounds – and spurred some testy exchanges on private mortgage broker Facebook groups – UWM wasn’t known for aggressively enforcing EPOs, several brokers unconnected to the case told HousingWire.
But cash was precious, and investors don’t like buying mortgages from lenders whose loans get paid off too quickly. If UWM, the biggest purchase lender in America, sends a strong message about what they deemed to be overly aggressive prepayment speeds, the expectation is that others in the industry will follow. And by all accounts, they have. Multiple sources said that the vast majority of brokers who received the video featuring Beydoun complied with UWM’s new policy.
The brokers who filed the lawsuit say UWM’s churning allegations are untrue, and that the lender’s claim that their prepayment rate was three-to-five times the industry average was false.
“Of the 30 clients that we funded with UWM in 2019, four of them refinanced with us again past the 180 day EPO period, and none within that period. That’s 13%,” Otero told HousingWire in an email on Wednesday. “I sincerely doubt that’s three-to-five times faster than the industry norm in a falling rate environment such as we have had over the last two years. Mr. Beydoun also speculates our company purposely has a higher comp plan to somehow manipulate clients into higher interest rate loans so they could be refinanced into a lower rate later. This is just preposterous. Their data is flawed.”
James Kleimann is the Mortgage Editor at HousingWire. You can reach him at jkleimann@housingwire.com.
Preposterous that someone would consider the possibility, and then have the audacity to actually look? UWM is trying to “eradicate churning”? And I have a bridge to sell you.