Ex-underwriter alleges former company played hard and fast with rules to win business
A whistleblower who previously worked as an underwriter for a non-QM firm has denounced the lending practices at his former company, claiming they bent the rules on a regular basis to approve suspect loans.
The source claims the lender regularly failed to verify income, accepted credit scores as low as 500, and allowed borrowers to take out cash refinances intended for business use to purchase stocks in personal investment accounts.
The individual, called X in this report and who no longer works at the firm, agreed to speak to Mortgage Professional America (MPA) on condition neither his identity nor that of the company was revealed.
“They were not verifying assets, employment or income, and there was really no credit requirement,” he claimed. “I saw people get approved for a loan that had a FICO score of just 500.”
Non-QM, or non-qualified, is a type of mortgage with a higher interest rate that’s designed specifically for self-employed people who fall outside GSE guidelines.
Many borrowers are entrepreneurs with complex, multiple-source incomes who, despite having good credit profiles, are unable to obtain a loan approval from a bank as they are unable to provide two years’ worth of W-2 forms.
X joined the company late in 2020 before leaving in January this year. During his time at the firm, he was tasked with underwriting one- to two-year bridge loans on rental products.
He blamed the lax approach to lending rules on the sales team, which he claimed was given a lot of freedom in order to win more business for the company.
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He said: “There’s a set of guidelines that protects a company from an underwriting perspective on what’s allowed what’s not allowed, and without sales, the company wouldn’t be in business and I wouldn’t have had a job - but if sales did not get their way, executive leadership got involved.
“The leadership thought that the guidelines were gray instead of black and white, where things could be adjusted to meet requirements. Consequently, dozens of exceptions were being made.
“At a time when interest rates were much lower, the volume was up and we were pumping and dumping loans. During the summer the guidelines were constantly changing, but that’s when the company came out, stating that borrowers only needed one month bank statement for cash-out refinances. There was no reserve requirement, which is when a borrower must maintain a certain level of liquidity.”
He added: “Borrowers coming in to do cash-out refinances that were strictly for business use, not owner occupied, were purchasing tens of thousands of dollars in stocks for their personal investment accounts.”
X reviewed between 70 and 95 loans at most every month, but when he raised concerns with his bosses, he claimed he was pressured into approving the loans, admitting that his underwriting practices came under heavy criticism from the sales teams.
“On more than one occasion, I was pulled aside by the executive leadership, stating that these loans needed to be approved because they were repeat borrowers and the threat of these borrowers or brokers leaving the company to seek business elsewhere put a bad taste in some of these executive leaders’ mouths,” he said.
He was then placed on a performance review and effectively demoted when he was instructed to approve only smaller loans.
“The max I could do was under $500,000. Anything above that would have to go to management, but they would not allow me to suspend or decline loan applications that had to be submitted up to management to review,” he said.
In one instance, the lender declined a borrower for making a fraudulent application - a correct move on the surface but which also raised another issue at the company.
“Loan officers were creating letters of explanations which should be written by the borrower,” he explained. “If loan officers were trading this to get loans approved so they could get their commission checks, my concern was that they were going out of their way to coach their borrowers to be able to explain what needed to be written in order to get loans approved.”
He claimed he was not the only underwriter to complain about lending standards at the company, but dissent was always met with the same response.
“One individual was part of a certain underwriting team of correspondents,” he noted. “There was a disagreement between him and the director, and the decision was made to pull him from that department and have him underwrite only regular loans.”
He added: “Other people would say a loan made no sense but put it in second sign for management to review, and it would just get approved. I ended up doing one because we were spending money to basically bail out somebody on paying their past two taxes on a hotel because it was considered business purpose as a way for them to avoid foreclosure.”
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After his position became untenable, he left the firm in January. Two months later he contacted the chief risk officer at the firm’s parent company, sending two emails MPA has had access to, stating that he believed the lender was violating the rules.
Despite an initial response, X claimed the risk officer did not take any further action.
Speaking to MPA this month, he vowed he would not go back to working for a non-QM lender ever again.
“The lending practices and the culture is extremely toxic,” he claimed. “Sales will throw you under the bus for not approving their loan. Sales is treated like kings and queens while anyone below is treated like trash.”
MPA reached out to two experts in the non-QM space for a response to the claims.
Tom Hutchens, executive vice president of production for Angel Oak Mortgage Solutions, said he did not believe X’s story.
“I think you’re talking to a disgruntled person who’s trying to smear an industry. I’m not going to say that there aren’t some exceptions, but every single investor, securitizer and lender has pre-approved guidelines,” he said.
“If they decided to go off guidelines and make an exception, it has to be fully documented. But I can tell you with 100% certainty, there’s no-one in our industry that has a guideline that says we’ll do loans for borrowers with a 500 credit score, or that we won’t verify assets. That’s not a sustainable model because of all the checks and balances that are in place and have been in place since 2013 in this space. If there was a lender doing that, it’s not going to be sustainable.
“If they are originating loans and not verifying assets and doing them down to 500 credit scores, they have to document why on each loan, and investors get to see all this documentation, unless they’re committing fraud.”
Jon Maddux, chief executive officer and co-founder of non-QM specialist Fundloans, said: “I obviously believe in sound lending practices and this doesn’t seem like a good way of determining a good lending credit risk. That type of underwriting is bound to come back with some undesirable results. It’s necessary to determine the ability to repay and most non-QM companies, including us, verify the borrower’s ability to repay.”
Non-QM’s recent history
Last year, the demand for non-qualified mortgages increased substantially after a dip in 2020, partly due to the rise in the number of self-employed people, which is set to reach 10.6 million in 2026, according to the US Bureau of Labor Statistics.
Nonetheless, two non-QM lenders - First Guaranty and Sprout Mortgage – recently went bankrupt, while others such as Angel Oak, Impac Mortgage Holdings and AG Mortgage Investment Trust have reported substantial losses.
Detractors have also compared non-QM to the subprime loans that sparked the financial crash of 2007, a claim rebutted by its proponents, who point out that non-QM has a lower LTV and a much higher FICO credit score (760 on average), while adding that borrowers are required to prove Ability to Repay (ATR) through their bank statements and tax returns.