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Federal antitrust regulators are seeking a preliminary injunction to stop Intercontinental Exchange’s planned $11.7 billion acquisition of mortgage tech provider Black Knight from closing on April 28 — before an administrative hearing to determine its legality has even begun.
The Federal Trade Commission, which last month launched an administrative proceeding to block the merger, has also subpoenaed two mortgage software providers that might be affected if the deal closes — Polly and Calyx Technology.
In a complaint filed Monday in U.S. District Court in San Francisco, the FTC said Intercontinental Exchange (ICE) and Black Knight plan to close the merger deal after a vote of Black Knight shareholders that’s scheduled for April 28.
Lawyers with the FTC asked the court to block the merger, saying the regulator’s administrative proceeding to determine the legality of the acquisition isn’t set to begin until July 12.
If the FTC ends up ruling that the deal violates antitrust law “reestablishing the status quo would be difficult, if not impossible, if the acquisition has already occurred in the absence of preliminary relief,” FTC lawyers said in their request for a temporary restraining order and preliminary injunction to delay closing of the deal.
ICE and Black Knight had hoped to address the FTC’s concerns about the deal’s potential to stifle competition by selling Black Knight’s Empower loan origination system (LOS) to a subsidiary of Constellation Software Inc., a publicly traded company based in Canada with a market capitalization of $41.4 billion ($55.7 billion Canadian).
In seeking an injunction, the FTC said allowing the acquisition to close before the completion of the administrative proceeding “would cause irreparable harm by, among other things, enabling the combined firm to begin altering Black Knight’s operations and business plans, accessing Black Knight’s sensitive business information, eliminating key Black Knight personnel, changing Black Knight’s product development efforts, and divesting certain Black Knight assets to Constellation.
“In the absence of relief from this Court, substantial harm to competition would occur in the interim, even if suitable divestiture remedies were obtained later.”
ICE and Black Knight did not immediately respond to a request for comment on the FTC’s move to seek a preliminary injunction in federal court.
FTC accused of ignoring mortgage tech competition
But in responding to the FTC’s administrative complaint, lawyers for ICE and Black Knight maintain that regulators seem oblivious to the “intense competition” between mortgage technology providers, and the benefits that the merger would provide to consumers.
“The proposed Transaction between ICE and Black Knight will result in substantial procompetitive benefits, including merger-specific quality improvements, pricing efficiencies, increased access by U.S. consumers to residential mortgages, and other procompetitive effects— all of which will directly benefit mortgage borrowers, existing and potential homeowners, and mortgage lenders in the United States,” ICE argued in a March 20 filing.
“These benefits are tangible, and the efficiencies that will be realized by the proposed transaction will particularly benefit first-time homebuyers, who are often cash-constrained and account for a quarter to a third of U.S. home sales.”
In challenging the merger, the FTC has “arbitrarily ignored” competition between providers of loan origination systems, including Blue Sage, Byte, Calyx, Finastra, Fiserv, Integra, Mortgage Cadence and Wipro — many of whom serve more lenders than Black Knight, attorneys for ICE argued.
Attorneys for ICE complained that “perhaps the most troublesome aspect” of the FTC’s intervention was its alleged failure to consider whether the planned sale of Empower “and a broad package of other assets” to Constellation Web Solutions Inc. might address the commission’s antitrust concerns.
“Constellation is a highly qualified buyer, with substantial experience in software generally and mortgage technology specifically,” attorneys for ICE said. “Constellation has strong financials and is even better capitalized than Black Knight to invest in Empower and ensure that Empower not only continues to be an active competitor in the LOS [loan origination system] space, but will grow and innovate to be a stronger competitor than it is today.
“Rather than account for these realities, the FTC would rather pretend the divestiture does not exist and is intent on challenging a pre-divestiture version of the transaction that will never materialize.”
In its March 9 administrative complaint, the FTC claimed that in addition to loan origination systems, mortgage lenders rely on many providers of “ancillary services,” such as document vendors, borrower point-of-sale and product and pricing engines (PPEs) that generate loan pricing based on borrower criteria.
The FTC said its review of internal ICE documents had revealed the use of several “levers” to grow revenue, including price increases to Encompass customers, and dismissed the divestiture of Empower as a remedy, noting that Constellation would serve as a reseller of ancillary services to be provided by ICE, including Black Knight’s Optimal Blue mortgage product and pricing engine (PPE).
In their March 20 answer to the FTC’s complaint, attorneys for Black Knight dismissed the FTC’s allegations regarding product pricing and eligibility engines, saying they were “based on a fundamental misunderstanding of the competitive dynamics for product and pricing tools.”
“ICE’s native Encompass Product and Pricing Service product (EPPS) and Black Knight’s Optimal Blue pricing product are not close substitutes and do not competitively constrain one another,” attorneys for Black Knight said. “Nearly all LOS providers, including ICE, provide some basic, native product and pricing capabilities within their LOSs. ICE’s EPPS product exists in this category— it is native to ICE’s Encompass LOS, cannot be used with any other LOS, and is offered free or as an inexpensive add-on to Encompass.”
Third-party PPE providers, including Black Knight’s Optimal Blue, “offer enhanced automation and PPE capabilities through LOS-agnostic PPE solutions that a lender may choose to purchase in addition to and to integrate with its LOS,” Black Knight’s attorneys maintained.
“These third-party PPE solutions offer robust and wide-ranging functionality and services that cannot be achieved through the basic native pricing tools. The products cater to different customer segments who pay vastly different prices. Nothing about the transaction will reduce competition for PPE solutions.”
Polly, Calyx Technology hit with subpoenas
In another development in the administrative proceeding, the FTC has subpoenaed mortgage technology vendors Polly and Calyx Technology to testify.
Polly offers a product and pricing engine that distributes mortgage pricing across channels, a loan trading exchange that automates many of the steps required to sell and distribute loans, an analytics platform that provides insights powered by market and internal data and a partner platform that facilitates integrations with preferred partners.
Calyx offers a suite of loan origination system (LOS) solutions, including Path, a configurable LOS for financial institutions and mortgage bankers; Point, an LOS tailored for mortgage brokers; Zenly, a lead management and point of sale platform; and Zip, a mobile-friendly lead capture solution.
Both Polly and Calyx have sought to quash or limit the subpoenas.
Attorneys for Calyx said the company is a competitor of ICE, Black Knight and Constellation Web Services, that is “quietly seeking to continue its business independent of the proposed merger and related transactions.”
While Calyx has “fully cooperated” with regulators by providing information previously requested in a civil investigative demand, the FTC’s March 27 subpoena “is a dramatic departure,” seeking information going back six years, attorneys for Calyx said.
Complying with the subpoena, they said, “threatens to impose monumental and virtually insurmountable expense and burden, as well as threatening exposure of valuable proprietary business information, upon an innocent bystander to the transactions being challenged.”
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