California-based Loan America, Inc. is the latest former business partner to sue Sprout Mortgage in a suit filed six months after the mortgage lender abruptly closed its doors.
The lawsuit, filed on December 20 in the Superior Court of the State of California for the County of Los Angeles, accuses Sprout and its top managers – including its owner Michael Strauss, president Shea Pallante and chief financial officer Christopher Wright – of fraud and deceit, promissory estoppel, negligence, unfair business practices, aiding and abetting, and civil conspiracy.
HousingWire sent requests for comment to the companies’ representatives but they have not responded.
Loan America, a full-service mortgage company, relies on warehouse loans or lines of credit for loan funding, similar to many other non-QM lenders. Typically, the company does not hold such loans for more than two weeks, instead selling them to a group of investors – including Sprout Mortgage.
According to the lawsuit, Loan America and Sprout would agree on prices and rates for any loan that Sprout was interested in purchasing. Loan America agreed it would not fund or close such a loan until receiving a “cleared to close” confirmation from Sprout.
After its due diligence, Sprout would send a “cleared to purchase” confirmation, which is what happened with a $7,581,712 package of loans originated from January to March 2022, according to Loan America. However, Sprout failed to complete the purchase, the lender claims.
“Despite repeated written demands, all of which have been ignored, Sprout has failed and refused to abide by its agreement to complete the purchase of any of the loans,” Loan America’s attorneys wrote in the lawsuit.
Consequently, the mortgage lender claims that by March 23, it had only $700,000 left in its warehouse credit line. About 75% of the $10 million available were loans locked with Sprout that remained in limbo, which reduced its capacity to fund new loans, causing losses in revenues.
Loan America also claims it faced losses when forced to sell the loans to a third party to mitigate its damages.
“On information and belief, Sprout had become insolvent on or before January 2022 and was unable to meet its obligations toward Plaintiff. Rather than disclose this material fact to Plaintiff, Sprout, pursuant to an agreement amongst all Defendants herein, conspired to conceal this information from Plaintiff,” the lawsuit states.
Tech mortgage platform Modex shows Loan America originated $95 million in mortgage loans in the last 12 months, going from about $14 million in February to $4 million in November. The company has one branch and 11 active loan officers.
The facts outlined in the lawsuit show that problems at Sprout started months before the company shut down its operations in early July when it laid off its entire staff without severance or their last paychecks.
Former employees accuse the company of retroactively cutting off their health insurance on May 1, 2022 without prior communication. Meanwhile, the company allegedly collected insurance premiums from the employee paychecks.
The facts are under investigation by New York authorities. A New York State Department of Labor spokesperson told HousingWire it “does not comment on open and ongoing investigations.”
Sprout has recently been sued by former employees, vendors and business partners, such as Banc of California, New Wave Lending Group, Merchants Bank of Indiana and FirstFunding. The mortgage lender has started to respond to some of these claims, denying its allegations.
