Just two days after it abruptly shut down its operations, non-QM lender Sprout Mortgage became the target of a class-action-seeking lawsuit.
Two former employees are suing the Long Island-based Sprout, its affiliated company Recovco Mortgage Management LLC and chief executive officer Michael Strauss, alleging they laid off around 100 employees at the New York office on Wednesday without giving legally required written notice and failed to pay their paychecks due the following day.
Plaintiffs Nathaniel Agudelo and Helen Owens – both closing disclosure specialists who worked for Sprout from the fourth quarter of 2020 through July 6, 2022 – filed the lawsuit on their behalf and others in the same situation in the Eastern District of New York U.S. District Court on Friday.
A spokesperson for the company and Strauss did not immediately respond to a request for comment.
HousingWire reported on Wednesday that Shea Pallante, the president of Sprout, informed more than 300 workers across the company of the shutdown in a conference call at 4:30 pm on Wednesday. A deal for financing fell through and Strauss made the decision to pull the plug on Wednesday, sources said.
According to former employees, they were quickly locked out of their systems after news of the layoff. Pallante said employees would receive benefits through the end of the month, but the company did not offer severance payments, and, as of Friday around 1 p.m., Sprout failed to pay their last paychecks.
The class-action-seeking lawsuit seeks to recover alleged unpaid minimum wages and withheld regular salaries owed to employees.
Plaintiffs believe that Strauss instructed other individuals not to issue the paychecks due on Thursday, covering the period from June 16 to June 30. They say they don’t have information about the payment covering July 1 to July 6, due on July 22.
The plaintiffs also want compensation for damages caused by the company’s failure to provide 60 days’ notice under the WARN Act and 90 days’ notice under the NY WARN Act.
Sprout is the second major non-QM lender to shut down operations recently. First Guaranty Mortgage Corp. (FGMC) and its affiliate Maverick II Holdings filed for Chapter 11 bankruptcy protection in late June after suddenly cutting hundreds of jobs.
Three former employees are suing the lender and financial backer, Pacific Investment Management Company (PIMCO), alleging they were discriminated against on the basis of their gender and then retaliated against for complaining.
Former employees of Sprout said loans in the pipeline are still pending, and it’s highly doubtful they will be funded. At least one employee even has their own personal mortgage in the Sprout pipeline and has not received an update on the loan’s status, former workers told HousingWire.
One former capital markets staffer, who requested anonymity, said Sprout had been dealing with liquidity and funding problems for months. Unlike some of its peers, Sprout wasn’t backed by a major asset management firm, and it was particularly vulnerable to a lack of liquidity from investors. It couldn’t handle the widening spreads and began taking losses on loans originated in the beginning of the year, he said.
What happens to the loans on hand is unclear – various former employees said Sprout had been doing north of $350 million in loans a month.
“They’re not going to be able to make much money selling these loans,” said one industry capital markets veteran who did not work at Sprout. “They can hold it and wait for the market to recover. And warehouses are probably making a margin call based on the mark down of those loans.”
James Kleimann contributed reporting.