Ed. # 75: UWM, RESPA & Unclean Hands

They had it coming

Admittedly, I’ve been hard on United Wholesale Mortgage (UWM) and its brash outspoken billionaire CEO/owner Mat Ishbia in these Musings. For example, I’ve criticized UWM’s and Ishbia’s feud with Rocket Mortgage and its CEO that highlighted wholesale lending’s RESPA challenges; I’ve chastised Ishbia for supporting unprofessional comments by UWM supportersin the name of competition; I’ve been snarky and self-righteous noting RESPA-cringey junkets to Detroit UWM gave to business sources; and I’ve questioned their compliance interpretations in certain loan originator compensation policies of UWM personally promoted by Ishbia. Still, Ishbia seems to relish UWM’s role as the number one mortgage lender in the country, regardless of the target that places on his back or who he steps on to get there. In any event, I can’t be accused of just being a UWM or Ishbia supporter, and given his sharp elbows, I don’t have much sympathy for his most recent dustup discussed herein.[1]

The UWM lawsuit

Nevertheless, while Ishbia and UWM don’t need me to defend them,[2] I do have thoughts about the recently filed class action Complaint against UWM (and Ishbia personally) in the US Circuit Court Eastern District of Michigan (the “Complaint”) by the reknown Boies Schiller Flexner, LLP law firm.[3] The case generally alleges that UWM conspired with mortgage brokers to steer borrowers to obtain excessive fees. The lawsuit was apparently inspired by and coordinated with an article written and supported by a hedge fund named Hunterbrook Capital that also owns a media company called Hunterbrook Media. That hedge fund’s unusual involvement with this case will get more attention later, but my initial high-level, non-litigator reaction[4] was that the case is long on bad (alleged) facts, but the legal issues aren't as clear.

In fact, other than Ishbia’s apparent potty mouth, hyper-competitive (sharp-elbowed) business practices, edgy regulatory compliance, and exclusionary contracts prohibiting UWM’s brokers from also working with Rocket Mortgage and Fairway, the facts noted in the Complaint don’t seem materially different from what other wholesale lenders and mortgage brokers do, and, perhaps more importantly, how most businesses that obtain their business from referral sources operate in those kinds of relationships. So, if alot of those things are illegal, more than the wholesale lending industry might want to take note of this case.

Nefarious A to Z

In terms of the factual allegations, in addition to a particularly foul-mouthed[5]voicemail left by Ishbia about Rocket Mortgage and its CEO Dan Gilbert[6], the Complaint alleges, (i) exclusive dealing contract concerns, (ii) research and data Hunterbrook developed claiming UWM and its brokers price gouge and do not provide the “best deal”[7]for their customers, and (iii) general shade[8]cast over everything UWM does to obtain the loyalty of its brokers. Among the many allegations found in the Complaint you’ll see, (a) abuse of power, (b) bribery, (c) conspiracy, (d) deception, (e) exclusive dealings, (f) fraud, and so on. It’s an A to Z list of nefarious and evil sounding words, but even if all the factual allegations are true, most of the connection to actual violations of consumer law were lost on me (with one notable exception).

Drilling into it, the specific class action legal claims boil down to: (i) violations of the Racketeering Influenced Corrupt Organizations Act[9](a/k/a RICO), (ii) aiding and abetting breach of fiduciary duties, (iii) common law claims of “unjust enrichment”, and “conspiracy”[10], (iv) specific state law UDAAP type claims in the 3 states where the named plaintiffs reside, and, (v) finally, the one that made the most sense to me, RESPA. Now, I have no RICO experience[11]and only very limited exposure to class action law, but I might know a thing or two about RESPA and consumer finance law.[12] In that regard, reading the Complaint reminded me that in over 30 years of attendance, I have never run into a Boies Schiller attorney at the MBA Legal Issues and Regulatory Conference;[13] a conference I never miss and often speak at about RESPA and other mortgage banking matters.[14]So, along with many of my readers, I look forward to seeing them and whoever represents UWM at MBA LIRC in May in San Diego!

Chopped liver

The Complaint reads as if the mortgage lending business is a totally unregulated market in need of consumer protection oversight. To that point, after searching the whole 107-page Complaint, I found that the Consumer Financial Protection Bureau (CFPB) was mentioned precisely..., once. And that was in a footnote citing the LO Comp Rule. LO Comp isn’t even one of the claims! Accordingly, the folks at CFPB must feel very disrespected in their role as the top cop for mortgage borrower protection born out of Elizabeth Warren's consumerism views and the Dodd Frank Act's reaction to the mortgage meltdown. I imagine this is particularly true on the RESPA claims since CFPB has been signaling more ramped up RESPA enforcement (and regulation by enforcement). So, I can totally understand why when a spokesperson for the CFPB was asked about the allegations against UWM (per Inside Mortgage Finance) the response was, “We are going to decline to comment.” Hmmm. My response on behalf of CFPB[15]would have been, “What are we, chopped liver? We’ll be the ones to say if these UWM guys are violating RICO, RESPA and other federal consumer laws.” CFPB, of course, regularly reviews compliance at UWM.

RICO and state common law claims

Anyway, despite my professed ignorance (and perhaps explaining it), I have never seen a RICO claim applied to garden variety[16]wholesale mortgage brokering by federal enforcement agencies. It's hard to know when sharp elbowed competition becomes racketering, but the key to those RICO claims might be the issue of whether all the loyalty inducing UWM was engaging in with thier brokers was concealed from consumers. Consumers might not have known anything about UWM's relationships with thier brokers, but none of the Complaint's factual allegations should be news to CFPB. So, even taking all of the factual allegations as true,[17] I just can’t imagine there was such brazen and nefarious racketeering going on with the largest mortgage lender in the country without CFPB’s enforcement staff somehow missing it entirely.[18] That said, I've never been to a conference that discusses RICO issues either, so my thoughts on it should be considered in that diminshed light.

Meanwhile, the claims of aiding and abetting breach of fiduciary duties and UDAAP are going to be premised on the specific states having laws that impose such duties on mortgage brokers.[19]State common law is also the basis for any unjust enrichment or conspiracy claims. So, it is unclear to me whether those claims are proper as a national class action as presently framed (due to differences in state law and individual borrower experiences) or need to be disentangled and heard in local jurisdictions. As for federal law duties and UDAAP, (i) there is no private right of action under the CFPA for UDAAP claims, and (ii) to my knowledge, federal regulators don’t believe that lenders have fiduciary duties to borrowers under federal law[20]. That is why CFPB has so many regulations proscribing lender behavior by imposing specific disclosure requirements like TRID and substantive requirements like ATR/QM and LO Comp.[21]

The RESPA claim

Unlike RICO, as any reader of this blog knows, RESPA is a law I can drill deep into.[22] In fact, the plaintiff’s RESPA claim raises similar complications with wholesale lending and RESPA that were the subject of much litigation in the late 1990s. Still, the court might need a better understanding of the facts as applied to the law than provided in the Complaint to make the RESPA claim stick today. Just like the CFPB failed to do in the Freedom Consent Order, the plaintiffs will need to do a better job of connecting the dots to prove out thier RESPA claim, but the Complaint may not be the place to do that.

The Complaint’s basic RESPA allegation is that all of the payments and other loyalty incentives provided by UWM to its mortgage brokers are things of value in return for referral of settlement services (borrowers). If true, that properly states a RESPA violation unless an exception applies. Evidencing understanding of RESPA’s exceptions, the plaintiffs also claim that UWM’s payments and other incentives given to brokers were either (i) not in connection with goods or services actually provided or, in the alternative, (ii) that the amount paid by UWM for such services was not “reasonably related” to the value of the services and thus is not “bona-fide” under RESPA’s 8 (c)(2) services rendered test.[23]While the Complaint misstates how the term “bona fide” works in the context of 8(c)(2)[24](as interpreted by the DC Circuit’s controlling precedent in the 2017 PHH decision)[25], at least they mentioned 8 (c)(2) and seem to know that is the key RESPA issue.

HUD's Mortgage Broker Policy Statements

That said, if you’re going to assert there’s something illegal under RESPA about the relationship between a wholesaler and a broker, you might want to consider how RESPA is interpreted by the federal regulator(s) with RESPA interpretative powers. Alas, CFPB has been curiously silent about how mortgage brokering fits with RESPA.[26] In 1999, however, when RESPA was under HUD’s purview, HUD issued its RESPA Statement of Policy 1999-1 Regarding Lender Payments to Mortgage Brokers, (as clarified and reiterated in 2001-1LTR.DOC (live.com)). That particular HUD Policy Statement resolved the class action “yield spread” litigation occurring in the late 1990s by clarifying the requirements for mortgage brokering to not be a RESPA violation.[27]But when I searched the Complaint for “HUD” the only reference I got was Boies Schiller’s address in New York City at 55 Hudson Yards. So, the bottom line for the plaintiff’s RESPA arguments, is that they’re going to need some work to reel in UWM, but CFPB’s silence may have left an opening to do just that on RESPA.[28]

Hunterbrook’s ethical business model

As noted previously, the lawsuit was filed on the same day as the Hunterbrook Media article was published.[29] Hunterbrook admits that it used the information it obtained in sourcing the article to short the stock of UWM (and, apparently, go long on Rocket Mortgage’s stock), prior to publication. In fact, this appears to be the first deployment of Hunterbrook’s novel business model: i.e., to obtain publicly available information about companies in the name of investigative journalism and trade on that information before publishing the findings for a wider audience.

Bloomberg News’ Matt Levine[30], reported about Hunterbrook on April 2 when Hunterbrook’s UWM story broke and the case was filed. Levine noted that “Hunterbrook, the hedge fund that is also a newspaper, is a sort of salary arbitrage…, It is expensive to hire hedge fund analysts to investigate companies all over the world. It is cheaper to hire journalists.” On April 3, Levine highlighted how the same holds true for Hunterbrook’s efforts to obtain legal analysis for its due diligence. As noted by Levine, “If you want to figure out if a company’s conduct runs afoul of laws, one thing you might do is call up a lawyer and say “hey is this conduct legal?” If you are a hedge fund and you do that, the lawyer will send you a bill. If you are a media organization, maybe she won’t.”

According to Levine though, his fictional conversation actually happened. Said Levine, “I heard yesterday from a lawyer who got that call (actually email) from Hunterbrook, and who replied to the effect of “sure here are my rates,” and they replied to the effect of “no our ethics policy does not allow us to pay sources….,The lawyer replied to the effect of “man you are not fooling me, when investment firms call me for analysis I charge them.”[31]

I don’t know, but telling a lawyer they can’t get paid because of journalistic ethics when the “journalists” are going to make stock trades off the lawyer’s advice before the market gets the news sounds like a lot of ethical jujitsu[32]to me.

Unclean Hands.

So, what’s that lawyer exchange and Hunterbrook’s business model (journalism for trading profit rather than ad or subscription revenue) got to do with my case analysis? Probably little, but it could arise under the affirmative equitable defense offered by the “unclean hands” doctrine. There are many different formulations of this concept, but according to Law.com’s dictionary[33]unclean hands is “a legal doctrine which is a defense to a complaint, which states that a party who is asking for a judgment cannot have the help of the court if he/she has done anything unethical in relation to the subject of the lawsuit.”

Importantly, unclean hands does not require that a party have done anything illegal. Outside of specific professional ethical codes[34], whether a behavior or course of action is going to be found ethical or unethical will always be a question of one’s own sense of what is right and what’s wrong: just like justice, fairness, and equity.

Dirty Business

I think my thoughts on these ethical issues were illustrated by Kevin Williamson in a recent article in the Dispatch. Williamson paraphrased The Godfather’s Don Corleone’s announcement of his decision not to get into the narcotics business with another gangster: “I don’t judge a man for how he makes his money, but I know a dirty business when I see one.” Or as Williamson says in his own voice, “there’s a difference between profit-seeking and bad faith, but the balance can be delicate.”

Like Don Corleone’s distaste for the illegal narcotic business (while being a murderous gangster in other illegal businesses), for me, Hunterbrook's particular kind of journalism for profit (instead of advertising or subscription revenues) just feels icky. I am not so idealistic to think that journalism can ever be truly objective[35], but I do think that should be a goal of journalists.[36]This particular profit seeking role seems to guaranty a result that cannot be trusted. So, it doesn’t match up to my sense of ethics for that profession.[37] In my view, the ethical high road claimed by Hunterbrook isn’t as high as they think. Others, however, may disagree.

All that said, I am very interested to see if the trial judge and jury think anyone’s hands in this case are totaly clean. I don't think it raises any ethical issues, but with a mortgage lending regulatory regime premised on detailed disclosures like TRID, even consumers are expected to do some shopping for themselves. I suspect, however, we may never find out the answers to these questions because most lawsuits settle.

[1]UWM is loved by many mortgage brokers and despised by others. Some folks have no issue with sharp-elbowed competition, others however, believe that in the long run, that kind of interaction with the marketplace and individuals can yield its own form of retribution (Karma?). Being from Chicago you’d think I would be in the sharp-elbowed group, but I see it more like the musical, Chicago.

[2]To be clear, I have not been engaged on behalf of anyone in this dispute and, after reading this, both sides won’t care much for me anyway.

[3]Boies Schiller is an outstanding law firm known for taking on high-profile cases. Boies Schiller’s founder, David Boies, is a legendary trial lawyer who represented Al Gore in Bush v. Gore and was instrumental in the gay marriage case among other causes. Boies also has a list of former clients including Harvey Weinstein and Elizabeth Holmes (Boies also served on the Board of Directors for Theranos). Boies has no regrets about his clientele, and his firm seems to thrive on controversial cases.

[4]A complaint does not need to do much more than allege facts that violate a law. The factual details and legal analysis can come later and I assume that Boies Schiller plans on doing exactly that

[5]See for yourself at paragraph 79 of the Complaint.

[6]According to Housing Wire, Ishbia told reporters that Rocket Mortgage and Dan Gilbert were behind the Hunterbrook report. “That’s Rocket Mortgage and Dan Gilbert doing Rocket Mortgage and Dan Gilbert things, and that’s what it’s been funded by,” Ishbia reportedly said. Rocket Mortgage issued a categorical denial of Ishbia’s claim, but they no doubt enjoyed reading Huntington’s UWM story as “a dish served cold”.

[7]I am certain this data is going to get a thorough analysis by UWM and others. I also expect the concept of “best deal” meaning something other than “lowest price” and how lowest price is even measured will all be scrutinized.

[8]Speaking of shade, I hope everyone enjoyed the eclipse on April 8. Eclipses are truly an incredible experience that brings people together in a shared moment of wonder and amazement. I mean, who doesn’t like eclipses?

[9]RICO is a Nixon era law historically used to bring down organized crime families, but which has also been applied to corporations acting illegally (including the Trump Organization in a case settled shortly after the 2016 election).

[10]I’m not sure how this is a separate cause of action for anything. It seems to wholly rely on the aiding and abetting claim about fiduciary duties.

[11]But I did spend a long weekend in San Juan with my wife a couple months ago. Dad joke, sorry.

[12]See http://www.accfsl.org/member-directory/

[13]On May 6 in San Diego, I will again be speaking at the MBA Legal Issues Conference about RESPA along with several other attorneys who I know have attended MBA events previously. I also can confirm that everyone on that panel knows their way around mortgage regulatory and legal issues quite well, especially RESPA.

[14]I recently was reminded that Boies Schiller also represents the plaintiffs in the FHFA net worth sweep case dating back to the wipe out of preferred stockholders’ equity when the GSEs were placed into conservatorship 15 years ago (Fairholme v. Federal Housing Finance Agency).

[15]In the most hubris-filled voice I could muster.

[16]It can be said that UWM uses some powerful Miracle Grow-type steroids in its “garden”.

[17]Taking the factual allegations as true is precisely what the court will do upon a Rule 12 (b)(6) Motion to Dismiss for Failure to State a Claim, which is likely going to be UWM’s initial response to the litigation (not counting the barrage of expletives no doubt heard privately by UWM’s lawyers from Mr. Ishbia).

[18]Then again, CFPB was very late to the game on Wells Fargo’s account opening scandal.

[19]I’m sure there are a few, but other than California, I am not aware of any specific state’s laws imposing fiduciary duties on mortgage brokers.

[20]I have been saying since the early 2000s that I would trade a “suitability” standard for all of the class action liability under the various laws and regulations imposed on mortgage lenders. Suitability is a weakened form of fiduciary liability which the securities industry has adopted for consumer protection. Fiduciary duty is, to me, an imposition of a legal duty of professionalism. The suitability idea was unfortunately shot down well before the Dodd Frank Act became law, but as far as I am concerned, essentially became enshrined in ATR/QM.

[21]Some might say CFPB has occupied the field of mortgage consumer protection.

[22]See e.g., Musings Edition #43

[23]Specifically, paragraph 259 of the Complaint says, “Payment from UWM to the brokers were not associated with any goods or services actually provided by the brokers, or in the alternative, the value of any goods or services provided claimed to be provided by the brokers to UWM is not reasonably related to the payment from UWM such that the payment is not “bona fide” or within the protection of 12 U.S.C. § 2607(c)(2).”

[24]CFPB still has not acknowledged the PHH case’s controlling interpretation about what “bona fide” means and how RESPA 8 (c) (2) is to be interpreted generally, despite the DC Circuit expressly rejecting former CFPB Director Cordray’s interpretations in that case. Moreover, CFPB inexplicably seems to forbid analysis (or even mention) of 8 (c) (2) in its RESPA Consent Orders.

[25]The list of attorneys on the PHH case (including the amici curiae attorneys) is a bit of a who’s who of knowledgeable DC-based RESPA attorneys.

[26] CFPB reiterated a bunch of old HUD RESPA polices in 2023, including the mortgage broker policy statements, but I wonder if they now wish they had specifically addressed mortgage brokering in the context of CFPB’s 2020 RESPA FAQs or CFPB’s 2023 Advisory Opinion.

[27]As long as the broker provides at least 5 out 12 services including taking the application.

[28]CFPB being MIA on such an important RESPA issue seems to have conceded interpretative authority to the courts on something they could have addressed head on. If UWM is found to have violated RESPA in this case, it will inspire class action claims against all wholesalers wreaking havoc on the market CFPB oversees. If only some mortgage blogger had seen this risk coming years ago and offered CFPB a simple solution to facilitate efficient market operation,…

[29]Hunterbrook claims it has an affiliated non-profit that worked with the Boies Schiller firm to bring the lawsuit on behalf of the class representatives.

[30]Levine is an actual outstanding business journalist and former New York lawyer with the famed M&A Wachtel Lipton firm and investment banker with Goldman Sachs. His writing style and analysis are unique and fun to read.

[31]As noted later by Levine, “Presumably Boies Schiller plans to get paid.”

[32]Hunterbrook’s website notes their first principal as, “What we do must always be ethical.” [emphasis in the original]. Protest too much me thinks.

[33]This is not a definitive resource for all jurisdictions or situations, but rather just one interpretation. Consult an attorney in your jurisdiction for a proper answer to any legal question.

[34]Such as legal or medical ethics (although these are often state specific). Journalists do not have an agreed set of professional ethics that all journalists must abide by. Maybe they should, but Hunterbrook made up its own.

[35]I am frustrated by most news outlets today because of a lack of objectivity and outrage peddling for dollars.

[36]Disclosure of bias sometimes isn’t enough. Sometimes it is. And, something that is legal can be unethical and something that is ethical can be illegal. When those Venn diagrams don’t overlap perfectly, people often have differences of opinion.

[37]On the other hand, my friend, Jeremy Potter posited a difficult question to consider in this light. Specifically, “Does it matter if the target of the investigation plays a rough game?” That is, is it ok to fight sharp elbows in one line of business (wholesale lending) with sharp elbowed behavior in another (journalism)? Can two ethical “wrongs” make a “right”?