UWM faces class-action racketeering suit
Mortgage lender accused of conspiring with brokers to push costly deals, resulting in billions of dollars in excessive fees
Pontiac-based United Wholesale Mortgage is facing a consumer class-action racketeering lawsuit in federal court that accuses the wholesale-exclusive lender of conspiring with brokers to steer homebuyers into costly mortgages. As a result, the lawsuit alleges, borrowers paid billions of dollars in excessive fees.
The plaintiffs in the case claiming violations under the Racketeer Influenced and Corrupt Organizations Act are four residents from Florida, North Carolina and Tennessee who filed the lawsuit this week against United Wholesale Mortgage LLC, affiliated entities and CEO Mat Ishbia in the U.S. District Court for the Eastern District of Michigan. The same day, a lengthy investigation published by Hunterbrook Media, an affiliate of a hedge fund that disclosed it shorted UWM’s stock and went long on rival Rocket Cos. Inc., explored similar allegations.
“The illicit scheme and enterprise go to the heart of the wholesale mortgage industry in America,” Brandon Hubbard, one of the plaintiff’s attorneys, wrote in the lawsuit. “UWM and the brokers hired by class members hold out the wholesale channel as the best way for borrowers to obtain the most affordable mortgages because, unlike in the retail channel, borrowers in the wholesale channel are represented and guided by ‘independent’ mortgage brokers who survey options on their behalf and shop for the most competitive prices and rates. But UWM and its captive bro
“The illicit scheme and enterprise go to the heart of the wholesale mortgage industry in America.” — Brandon Hubbard, one of the plaintiff’s attorneys, wrote in the lawsuit
ker partners have systematically undermined the basic structure and purpose of the wholesale channel.”
The lawsuit claims that as early as 2020, a large number of mortgage brokers in UWM’s network directed most of their loans to UWM. According to publicly available data, the suit says that of the 28,422 brokers who sent at least one loan to UWM in 2020, nearly 25% of them sent more than 75% of their loans to UWM. The lawsuit claims that among those brokers, more than 99% of the loans — valued at about a total of $11.7 billion — were sent to UWM, “meaning those brokers essentially never sent a loan to any of the dozens of other lenders who offer wholesale mortgages.”
The lawsuit coincides with the launch of Hunterbrook Media, whose first investigation was the UWM article. On its website, it says it will publish business news and investigations and discloses it’s affiliated with investment firm Hunterbrook Capital that “may take financial positions based on our research” to which it has “early access.” The outlet reported that it found that $39 billion in mortgages came through brokers who directed more than 99% of their business to UWM.
UWM defended itself in a statement sent by spokesperson Nicole Roberts, calling the lawsuit “a sham.”
“Although the real party behind it is a hedge fund named Hunterbrook, the lawyers concealed the hedge fund’s involvement,” the statement read. “Hunterbrook’s business model is to sensationalize public information to manipulate the stock market, thereby enriching their wealthy funders at the expense of regular investors, many of whom are hard-working UWM employees. UWM will defend these allegations to the fullest extent permitted by law and stands with the thousands of independent mortgage brokers who serve the unique needs of borrowers across the country.”
The mortgage broker also took further issue with Hunterbrook Media, saying it’s not a news organization: “It is a hedge fund sensationalizing public information to manipulate the stock market to enrich themselves and their investors. Buried deep in their ‘report’, and prior to its publication, Hunterbrook ‘went short $UWMC, long $RKT (referring to Detroit rival Rocket Companies Inc.) and purchased derivatives.’
“As you would expect a hedge fund masquerading as journalism would knowingly mislead the public, the report itself is riddled with inaccuracies and incorrect information. A hedge fund scheme using journalists to short a stock is not only unethical, it may be fraudulent.”
UWM declined to detail the article’s inaccuracies. ’The company’s stock closed up 5.7% on Thursday at $6.45 per share. That price, though, is down 11% from a week ago.
A media inquiry sent to Hunterbrook Media on Thursday afternoon didn’t receive immediate response. And an attorney representing the plaintiffs, John Zach, with Boies Schiller Flexner LLP, declined to comment on UWM’s allegations regarding Hunterbrook.
Zach pointed to Hunterbrook’s explanation on its website that refers to an agreement between Hunterbrook and BSF “in exploration of a class action lawsuit against UWM seeking restitution for homebuyers.”
Other disclosures note that Hunterbrook Media shared key findings with federal regulatory agencies overseeing the mortgage sector and to attorneys general in states where brokers have a legal duty to brokers or with mortgage regulatory agencies. Two of the authors filed a whistleblower report to the U.S. Securities and Exchange Commission.
The lawsuit comes after years of scrutiny of UWM and some of its business practices. That includes a fervent and public rivalry with Detroit-based Rocket Cos., parent of Rocket Mortgage. In March 2021, UWM intensified its mortgage war with Rocket, saying it wouldn’t do business with brokers who worked with that lender and one other lender that since has exited the wholesale mortgage channel.
Rocket declined to comment Thursday.
Ishbia on Thursday was pressed by media on the Hunterbrook reporting and fired shots at Rocket Mortgage and its founder, Dan Gilbert.
“That’s Rocket Mortgage and Dan Gilbert doing Rocket Mortgage and Dan Gilbert things, and that’s what it’s been funded by,” said Ishbia at an event in Phoenix to showcase the opening of the business headquarters for the Suns and Mercury franchises of which Ishbia is a team owner.
The comments drew a response from Hunterbrook publisher Sam Koppelman on X, formerly Twitter.
“Ishbia’s first comment on @hntrbrkmedia’s story is a baseless conspiracy theory. Neither Rocket nor Gilbert even agreed to provide us with comment,” Koppelman tweeted. “Ishbia, meanwhile, has yet to point to a single fact we got wrong in our reporting.”
The lawsuit says UWM closely monitors public and private databases, tracking the mortgage loans of brokers in its network. It highlights that the company has brought at least four lawsuits against brokerage firms seeking damages for alleged breaches of its Wholesale Broker Agreement. Antitrust allegations from brokers in response to the ultimatum have been dismissed by at least two judges recently.
The lawsuit alleges UWM rarely offered the best pricing for the homeowners whose mortgages it received during the past four years and regularly charged fees that “substantially exceeded” competitors.
“While UWM’s borrowers believed that their ‘independent’ brokers were working for them, in reality, UWMinduced thousands of these brokers to participate in their funneling scheme and enterprise bysuccessfully infiltrating and corrupting their duties to the plaintiffs and the class,” Hubbard wrote in the lawsuit.
The plaintiffs are seeking a judgment in their favor, including compensatory damages and costs for economic loss; restitution and disgorgement of all profits, direct or indirect, illegally obtained; equitable and injunctive relief, as permitted by law or equity; and an award of plaintiffs’ attorneys’ fees, costs, and expenses.
RICO claims used to be comparable to a legal nuclear option. Nowadays, particularly in the financial and mortgage sector, consumer allegations of fraud aren’t uncommon, but they tend to be complicated and difficult to prove, said Jeff Grell, who’s represented plaintiffs and defendants in RICO cases for more than 30 years and previously taught on RICO law at the University of Minnesota for 20 years.
“The devil is in the details,” Grell said. “Normally in a fraud situation, you have to prove that there was some kind of reasonable reliance. Fraud is very specific to what was actually said and not disclosed.”
Reasonable reliance refers to whether it was logical for consumers in this case to believe these independent mortgage brokers truly were independent. In most cases, brokers receive a 1-2% commission on a mortgage that’s typically paid by the lender.
“They’re still salespeople still selling products,” Grell said. “It’s just they have more than one company they’re working for. Where the plaintiffs are coming from, it’s going to boil down to fact issues: Was this puffery in the independent agent’s message or advertising, or was it something that the plaintiff could reasonably rely on?”
Typically, the more specific a marketing statement, the more likely it is to be considered reliable, Grell said. So, something saying a business has the best prices might be mere puffery, while a promotion committing to a specific interest rate would be more reliable.
Racketeering goes beyond fraud in that plaintiffs also would have to show UWM was operating and managing these brokers, Grell said. UWM’s requirement that its brokers not do business with Rocket Mortgage and evidence that some brokers are using UWM’s marketing materials to promote their businesses, as highlighted in the investigation, might be examples a litigator uses as evidence of control. But a defendant likely would say that UWM still isn’t requiring these brokers to send it loans.
The mortgage industry is highly regulated, Grell added, though companies often are “constantly trying to come up with something that gives them an advantage but doesn’t violate those regulations.”
Mortgage brokers may also send a loan to a lender other than the one offering the least expensive option for other reasons, said Kevin Heal, analyst at investment services firm Argus Research. UWM in the past has highlighted they close transactions faster than the industry on average.
“That might be peace of mind for some,” Heal said.
UWM surpassed Rocket as the top originator of U.S. mortgages in the third quarter of 2022. But it lost $69.8 million in 2023 as interest rates remain higher than in recent years, affordable housing inventory is limited and mortgage purchasers like the Federal Reserve and other banks buy fewer mortgage-backed securities.
“Even with these ‘tactics,’ they’re still losing money or making very, very little money on doing mortgages,” Heal said. “They’re trying to grab a bigger piece of a smaller pie.”
As for Hunterbrook, there have been similar efforts by such hedge funds as Hindenburg Research to short stocks and publish reports that draw attention to issues at the company. Typically, though, they don’t position themselves as media outlets.
The key factor in determining securities fraud is disclosure, said Adam Pritchard, a law professor at the University of Michigan. On the webpage of Hunterbrook Media’s UWM investigation, it discloses that Hunterbrook Capital was shorting the stock and investing in Rocket.
“By disclosing, they are avoiding the securities fraud problem,” he said. “By making clear their business model, sources may or may not want to cooperate with them (in future articles). Readers will make their own assessment of the credibility of their reporting, knowing there is this financial interest in the price going down.”