The use of funds held in LIP (loan in progress) accounts in this manner contravened the rules as they were intended for reimbursing expenses related to renovating the mortgaged properties, according to the Commission.
The result was that Angel Oak was able to reduce delinquency rates in the underlying loan pool artificially, it stated, thereby preventing the triggering of an early amortization. It also meant that the company avoided having to make an early repayment of the investment to senior tranche noteholders later that year, in November 2018.
Angel Oak not only failed to disclose to noteholders that it had used funds held in escrow in LIP accounts to mitigate loan delinquencies, which continued through to 2019, but it also issued “materially false and misleading information” in a report on the delinquency rates, the Commission outlined.
The Commission found that Ashish Negandhi, a 52-year-old senior portfolio manager at the company, was aware of the situation and that, concerned about the adverse financial and reputational harm it would have on Angel Oak, approved the use of LIP account funds to mitigate the impact of the loan delinquencies.
By his actions, Negandhi failed to disclose the real situation to noteholders, it was stated. Additionally, both he and Angel Oak failed to inform the board of directors of a private fund for which Angel Oak served as investment adviser of its improper use of LIP funds.