Black Knight and PennyMac sue each other over servicing technology
Black Knight and former customer PennyMac Financial Services are suing each other in separate courts in disputes sparked by the latter's creation of its own mortgage servicing platform.
"Yesterday, Black Knight served PennyMac with a lawsuit filed in Jacksonville, Fla., alleging theft of trade secrets and breach of contract," Michelle Kersch, Black Knight's senior vice president of marketing and corporate communications, said in an email. "In response, this morning PennyMac filed a lawsuit in California. We intend to vigorously prosecute our lawsuit and defend ourselves against PennyMac's baseless countersuit."
Black Knight’s lawsuit, which was filed in the Duval County (Fla.) Circuit Court, alleges trade-secret appropriation by PennyMac.
A system PennyMac created allegedly mirrors "the architecture, data structure and functioning” of Black Knight’s MSP System, according to the suit.
"In disregard of contractual restrictions and the trust that had been placed in PennyMac, PennyMac instituted a secret project to create a copy of the MSP System for its own benefit in lieu of the MSP System. In furtherance of this scheme, it not only used the information shared with it in confidence by Black Knight, it also improperly shared access credentials with individuals who were not authorized to use the MSP System under the terms of the Master Agreement," the filing alleged.
PennyMac's rapid ability to onboard the loan servicing files to its new system was allegedly a sign that trade secrets were stolen, according to Black Knight.
"As one measure of PennyMac's efforts to improperly duplicate the MSP System, it has advised Black Knight that the 'deconversion' process for transferring its operations will be virtually immediate. The normal transition of a loan servicer to a new platform takes many months or even years. PennyMac's confidence that it can migrate to the imitation system without such a transition demonstrates the extent to which it has tried to 'mirror' the MSP System and its confidential components," Black Knight alleged in its legal filing.
Black Knight is asking the court to find that it is "the owner of any and all software, code, systems and other materials developed by PennyMac and/or its third-party software developer."
The mortgage technology company claims PennyMac caused damages that exceed $340 million.
In the third quarter, concerns linked to PennyMac, the loss of another MSP client that was acquired by a non-MSP user, and the probable removal of loans from MSP due to New Residential’s acquisition of Ditech were all "headwinds [that] in total represent 5% of revenue," Black Knight CEO Anthony Jabbour said in an earnings call Tuesday.
The Black Knight filing states the company has a 62% market share for its MSP servicing platform, which handles more than 35 million active loans.
Its dominant market share is an issue in PennyMac's lawsuit which was filed in the U.S. District Court for the Central District of California. That suit alleges that Black Knight violated the federal Sherman Act, the California Cartwright Act and California's Unfair Competition Law.
"Black Knight's conduct is transparently monopolistic," PennyMac alleged in its legal filing. "As more fully alleged below, such conduct is designed to and does stifle competition, forcing purchasers like PennyMac to pay extraordinarily high prices and fees for an underperforming and antiquated product. Black Knight likewise refuses to license its products at commercially reasonable prices to perceived competitors, and seeks to exercise exclusive control over competitive products."
PennyMac further alleged that Black Knight's servicing revenue increased during the past three years, "even while it falsely or misleadingly marketed price reductions that neither PennyMac nor, on information and belief, other Black Knight customers ever realized."
The mortgage company's new system consists of 150 separate customized modules that were developed independently, according to PennyMac
"From inception, the PM modules and their corresponding source code were developed by PennyMac's IT team independent of any MSP system coding proprietary to Black Knight (or its predecessors), none of which was even accessible to PennyMac or its IT personnel," the mortgage company said in a legal filing.
"Black Knight's 50-year-old mainframe-based MSP technology — ancient by almost any standards — is so limited that PennyMac and other customers are forced to build or buy a clunky patchwork of applications and modules to enhance Black Knight's otherwise rudimentary functionality," PennyMac President and CEO David Spector said in a press release. "By contrast, our independently developed servicing modules fully leverage cloud-based infrastructure and real-time processing and enable us to reduce costs, increase scalability and decrease response times to changes in regulations and the market environment.
"In general, modern technology has allowed businesses to reduce costs and operate with greater agility. Now, faced with our likely antitrust suit and substantial lost revenue from losing PennyMac as a client, Black Knight with a straight face claims that the custom system of modules PennyMac developed somehow belongs to Black Knight," Spector added.
It was not a fight that PennyMac sought, a company executive with knowledge of the situation said. It provided notice in May that it was ending the MSP contract, the executive said.
PennyMac's new system is workflow-based, so it is mapped to processes in the servicing function, and that makes it different than the database system that Black Knight has, said the executive.
PennyMac serviced $348.5 billion as of Sept. 30, consisting of $227.9 billion of its own mortgage servicing rights and another $120.6 billion subserviced or special serviced for affiliated company PennyMac Mortgage Investment Trust. The company started using MSP in 2008 and stopped on Oct. 31.
On Nov. 6, Black Knight reported third-quarter net earnings of $37.3 million, compared with $43 million one year prior. Its investment in Dun and Bradstreet hurt the period's results, reducing net earnings by $11.8 million. Black Knight's second quarter income of $31.9 million was also hurt by the D&B investment.
Revenue for its software solutions business (which includes both the servicing and origination technology operations) were $257.3 million for the quarter, with operating income of $121.8 million. In the second quarter, software solutions had operating income of $123.8 million. For the third quarter of 2018, software solutions revenue was $243.9 million and operating income was $116.7 million.
The data and analytics segment earned $6.6 million (compared with $6.4 million one year prior), but corporate and other lost $53.2 million, an improvement from a year-ago loss of $56.1 million.