In October, loanDepot dropped a whopper 🍔 of a lawsuit. Anthony Hsieh’s firm claimed that bitter Orange County rival West Capital Lending (WestCap) fueled its incredible growth through illegal & unfair business practices. 

At the center of the case: WestCap’s alleged comp structure. loanDepot alleges the firm pays LOs a “lucrative split” of loan revenue—typically 10% to 15%—which violates federal LO comp rules & creates “a perverse incentive” for originators to steer borrowers toward higher-priced loans to boost their own paychecks.

But the fight has escalated. WestCap just fired back with a lawsuit of its own, arguing that loanDepot’s Consumer Direct division is the real violator of LO comp rules & the one hurting borrowers.

In today’s edition of The Scoop, we’ll give you the inside scoop on the claims & what this is really about. Plus, what “judgment proof” ex-Sprout boss Michael Strauss is up to, why Blend’s Nima Ghamsari has “never been more excited” & more.

(🙏 If you like what you’re reading, tell a fellow mortgage junkie to sign up here.)

If anyone knows about loanDepot’s consumer direct structure, it would be WestCap. That’s because hundreds of people who work at WestCap used to be at loanDepot, which is kidna the genesis 🌎 of this legal brouhaha. 

The TL;DR of the latest case is this: WestCap claims that loanDepot operated an illegal comp scheme that tied managers’ pay to the profitability & pricing of loans. loanDepot allegedly violated federal laws by paying production managers bonuses based on team loan profitability & penalized them financially if they granted pricing concessions, which incentivized production managers to push borrowers toward higher-priced loans.

Ex-loanDepot production managers at WestCap said that they spent about 50% of their time directly selling loans to borrowers, negotiating rates/terms & PEs. They also acted as a "second voice" when LOs struggled to close deals. The production managers were expected to minimize PEs & persuade borrowers to accept higher fees/rates, the lawsuit claims.

loanDepot allegedly would quote prospective borrowers a higher initial price & try to hold the line w/ Leet Sales Skillz even if the client showed a competitor offer, only giving discounts when it was clear the deal could be lost.

Here’s where it gets interesting: By allegedly creating an “illegal profit pool” from higher-priced loans, loanDepot achieved the flexibility to cut pricing selectively against competitors. Can you see where this is going?

“loanDepot’s desire to use this competitive advantage to its full potential is revealed by the fact that multiple former employees, including but not limited to [Kevin] Wong and [David] Harned, have confirmed that when loanDepot wanted to use this flexibility to target a competitor, Production Managers would be advised to grant any exceptions – even if loanDepot was losing money on a loan – to undercut specific competitors, including specifically, West Capital Lending.” 

In response, loanDepot told The Scoop that the case was a “desperate reaction” to its own litigation & “recycles the same tired claims" that others have tried & failed to prove.

The broader context here matters. First, loanDepot was hit a w/ a lawsuit in Maryland alleging the lender uses so-called “internal loan consultants” to skirt LO comp rules. At the same time, loanDepot is targeting WestCap—Rocket’s largest broker shop—for allegedly poaching its employees & leaning on yield-spread-premium-style tactics to drive production. WestCap denies the allegations and is now firing back with its own suit.

None of this is happening in a vacuum. The two companies run very similar models (heavy lead flow, live lead transfers & call-center style origination) & they compete for the exact same sales talent. WestCap, which is run largely by former loanDepot employees, is seen by some in the industry as a more modern & more aggressive version of loanDepot itself. Sitting back while a rival like that grows quickly probably wasn’t an option for Hsieh.

As for the alleged consumer impact? IMO that’s a tougher sell. What mortgage company isn’t trying to minimize pricing exceptions & concessions when originating loans? The reality is that questionable LO comp practices have existed across the industry for years, largely because enforcement has been inconsistent at best.

Which is why the bigger conversation is still LO comp reform. While I hear the Trump administration is exploring potential changes, I wouldn’t count on it being a top policy priority anytime soon…

After a strange, unexplained delay, Blend finally held its earnings call on Tuesday. Blend posted $32M in Q4 revenue (up 7% y-o-y) w/ a net loss of $2.6M. The company touted $68.3M in cash/securities w/ no debt. Overall, mortgage suite revenue grew 3% y-o-y to $18.8M (it was up from Q3 too!).

Despite a brutal stock price, Nima Ghamsari said he's "never been more excited" about the opportunities ahead. He’s so excited that he announced a $50M stock buyback & now the stock is trading around $1.91 a share. YOLO, I guess.

Ghamsari said Blend inked 10 new deals & expansions in Q4, including 2 new mortgage customers, one of which has been a consumer banking customer since ‘23. Both deals include bundled mortgage & close. He attributed the deals to Blend’s “commitment” to invest throughout the cycle.

“It’s not easy to rely on partners in this industry because it is such a cyclical industry,” he said. “Our overall pipeline remains robust, up approximately 40% year over year. We are seeing a structural shift toward bundled deals.”

Ghamsari said Blend is using AI agents to take a first pass on every new piece of data that comes in. The “pre-underwriting” product is called AutoPilot & 7 customers have turned it on since it launched a week ago.

Former workers at Sprout Mortgage are getting bupkis b/c their old boss is broke as a joke. At least in a legal sense. NMN reported that the 150 or so former Sprout workers are voluntarily dismissing their lost wages suit b/c Strauss can’t be collected against. 

Strauss owes six- & seven-figure liens on Manhattan & Hamptons properties & $3M in state taxes. Roughly 300 creditors are also still seeking over $87M from Sprout, which abruptly closed its doors in July ‘22.

Still, as The Scoop previously reported, Strauss is involved in a relatively new non-QM venture called Investor Funding Corp.

We’ve got the details of his latest venture for paid subscribers👇