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Hours before its IPO fizzled, Guild Mortgage agreed to pay $25M to settle federal lawsuit

Lender hoped to raise up to $162M in the IPO on Thursday; instead it raised $98M

Just before its stock debuted at a disappointing $15 a share, Guild Mortgage settled a federal lawsuit that claimed the lender knowingly breached legal requirements when it originated and underwrote FHA loans.

Guild agreed to settle the federal lawsuit, brought by the Department of Justice, for just under $25 million, the government said Thursday. It did not admit to any wrongdoing.

The lawsuit, brought initially in 2016, alleged that Guild knowingly originated and underwrote mortgages that didn’t meet the program requirements of the FHA. Those loans, originated between 2007 and 2011, defaulted and led to claims to the FHA for mortgage insurance. Guild failed “to comply with material program rules that require lenders to maintain quality control programs to prevent and correct underwriting deficiencies, and failed to self-report materially deficient loans that it identified,” the government said.

“As this settlement demonstrates, we are committed to holding mortgage lenders accountable when they choose to abuse the integrity of vital government programs that are designed to assist homeownership,” U.S. Attorney Robert Brewer for the Southern District of California said in a statement. “We also commend the whistleblower for coming forward, exposing these wrongs, and working with the government investigative team.”


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The whistleblower, former head of quality control at Guild, Kevin Dougherty, will receive $4.98 million of the $24.9 million settlement.

In a statement, Guild said it “entered into this settlement agreement to avoid the delay, uncertainty, and expense associated with continued litigation.”

“Guild remains confident in the compliance processes it has in place for FHA- related mortgage lending and other mortgage lending activities and maintains its position that the claims asserted were without merit,” said Mary Ann McGarry, Guild’s CEO.

The settlement occurred just before Guild and its private equity owners McCarthy Capital Partners made a debut on the public markets.

Through Guild Holdings, the lender’s management and the private equity investors planned to issue 8.5 million shares of Class A stock, priced between $17 and $19. It would have raised approximately $153 million. Instead, Guild sold just 6.5 million shares at $15 apiece, raising $98 million. The money raised will not be going to Guild Mortgage; management and McCarthy are the beneficiaries of the IPO.

In an interview on Thursday, McGarry, the longtime CEO said that company management and McCarthy were in it for the long haul, even if the IPO didn’t meet expectations.

“We don’t look at just today, it’s a snapshot in time,” she said in an interview. “We’re focused on the future, and I can only control what I do best, and that’s being CEO and running the company and producing consistent, profitable growth as I have the last 12 years.”

Through the six months ending June 30, Guild, which does nearly all of its business through the retail channel, posted a profit of $110.8 million, up from a $47 million loss in the first six months of 2019. It originated $14.6 billion in loans during the first half of the year. Company president Terry Schmidt said the recapture rate this year was 67%.

Per the prospectus, 55% of mortgages originated in the first half of the year were refinancings. Guild retained servicing on 85% of its loans. Gain-on-sale margin was a very healthy 504 bps, up from 383 bps year-over-year.

For the third quarter, origination volume is expected to come in at $10 billion, which should yield a net income between $178 million and $187 million.

Guild has retail locations across 31 states and, according to McGarry, the company is interested in expanding into new territories, potentially through additional acquisitions.

This story was updated to include comment on the settlement from Guild.

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