S-1/A

As filed with the Securities and Exchange Commission on January 6, 2020

Registration No. 333-234250

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2 TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

Velocity Financial, LLC

(to be converted as described herein into Velocity Financial, Inc.)

(Exact name of registrant as specified in its charter)

Delaware	6199	46-0659719
(State or other jurisdiction of Incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

30699 Russell Ranch Road, Suite 295

Westlake Village, California 91362

(818) 532-3700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Christopher D. Farrar

Chief Executive Officer

30699 Russell Ranch Road, Suite 295

Westlake Village, California 91362

(818) 532-3700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With copies to:

William B. Brentani	Andrew S. Epstein
Daniel N. Webb	Jason D. Myers
Simpson Thacher & Bartlett LLP	Clifford Chance US LLP
2475 Hanover Street	31 W. 52nd Street
Palo Alto, California 94304 (650) 251-5000	New York, New York 10019 (212) 878-8000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

CALCULATION OF REGISTRATION FEE

Title of each Class of Securities to be Registered	Amount to be Registered(1)	Proposed Maximum Offering Price Per Share(2)	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee(3)
Common stock, par value $0.01 per share	8,337,500	$16.00	$133,400,000	$17,315.32

(1) Includes an additional 1,087,500 shares that the underwriters have the option to purchase.

(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.

(3) The Registrant previously paid $12,980.00 of such fee in connection with the initial filing of the Registration Statement on October 18, 2019.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

EXPLANATORY NOTE

Velocity Financial, LLC, or the LLC entity, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the completion of this offering, the LLC entity will convert into a Delaware corporation and change its name from Velocity Financial, LLC to Velocity Financial, Inc. We refer to this conversion throughout the prospectus included in this registration statement as the “Conversion.” As a result of the Conversion, the members of the LLC entity will become holders of shares of common stock of Velocity Financial, Inc. Except as otherwise noted in the prospectus, the consolidated financial statements and related notes thereto and selected historical consolidated financial data and other financial information included in this registration statement are those of the LLC entity and its subsidiaries and do not give effect to the Conversion. Shares of the common stock of Velocity Financial, Inc. are being offered by the prospectus included in this registration statement.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 6, 2020

7,250,000 Shares

Velocity Financial, Inc.

Common Stock

This is our initial public offering of shares of common stock of Velocity Financial, Inc. We are offering 7,250,000 shares of our common stock to be sold in this offering.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of the common stock is expected to be between $14.00 and $16.00 per share. Our common stock has been approved for listing, subject to official notice of issuance on The New York Stock Exchange, or the NYSE, under the symbol “VEL.”

Investing in our common stock involves risks. See “Risk Factors” on page 19.

	Per Share	Total
Initial public offering price	$	$
Underwriting discounts and commissions(1)	$	$
Proceeds, before expenses, to us	$	$

(1) Please see the section entitled “Underwriting” for a complete description of the compensation payable to the underwriters.

The underwriters have the option to purchase up to 1,087,500 an additional shares of our common stock from us at the public offering price, less underwriting discounts and commissions, within 30 days after the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Delivery of the shares of common stock is expected to be made in New York, New York on or about                 , 2020.

Wells Fargo Securities           Citigroup JMP Securities

Raymond James

The date of this prospectus is                 , 2020

(1)   Reflects unpaid principal balance of all loans, including loans held for sale and loans held for investment, as of September 30, 2019.

(2)   Reflects total loan originations, as measured by original loan amount, for the nine months ended September 30, 2019. Excludes 35 acquired loans with an aggregate principal balance of $9.1 million.

(3)   Reflects increase in total originations, as measured by original loan amount, for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. For the nine months ended September 30, 2019, excludes 35 loans totaling $9.1 million.

(4)   For the nine months ended September 30, 2019. Portfolio yield reflects total interest income earned on our loan portfolio as a percentage of average loan amount over the specific time period, annualized.

(5)   Weighted average loan-to-value calculated for the population of total loans outstanding as of September 30, 2019 using the original loan amounts and appraised loan-to-value at the time of origination of each loan.

(6)   Includes eleven securitizations through September 30, 2019 and one securitization completed in October 2019.

(7)   Reflects income before income taxes as a percentage of the monthly average of members’ equity for the nine months ended September 30, 2019, annualized. Our return on equity, which reflects annualized net income as a percentage of the monthly average of members’ equity, was 11.1% for the nine months ended September 30, 2019. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Pre–Tax Return on Equity and Return on Equity.”

(8)   Based on total portfolio of loans outstanding at September 30, 2019.

TABLE OF CONTENTS

	Page
Summary		1
Risk Factors		19
Special Note Regarding Forward-Looking Statements		45
Use of Proceeds		47
Dividend Policy		47
Capitalization		48
Dilution		50
Selected Consolidated Financial Information		52
Management’s Discussion and  Analysis of Financial Condition and Results of Operations		54
Business		94
Industry Overview		112
Management		130
Executive Compensation		135
Principal Stockholders		150
Certain Relationships and Related Party Transactions		152
Description of Capital Stock		154
Shares Eligible For Future Sale		161
Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders		163
Underwriting		166
Legal Matters		170
Experts		170
Where You Can Find Additional Information		170
Index to Financial Statements		F-1

Through and including                 , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

Neither we nor the underwriters have authorized anyone to provide you with information other than the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We and the underwriters are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where offers and sales thereof are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock.

For investors outside the United States: We and the underwriters have not done anything that would permit a public offering of the shares of our common stock or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

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MARKET AND OTHER INDUSTRY DATA

We use statistical and economic market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Summary—Our Market Opportunity” and “Industry Overview.” We have obtained substantially all of this information in the sections entitled “Summary—Our Market Opportunity—1-4 Unit Residential Rental Properties” and “Industry Overview—National Housing Market Overview” from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (which we refer to as “JBREC”), an independent research provider and consulting firm, based on the most recent data available as of September 2019, and we have obtained substantially all of this information in the section entitled “Summary—Our Market Opportunity—Small Commercial Properties” and “Industry Overview—Trends in Small Balance Lending” from a market study prepared for us in connection with this offering by Boxwood Means, LLC (“Boxwood”), an independent research provider and consulting firm, based on the most recent data available as of September 2019. Such information obtained from the JBREC market study is included in this prospectus based on JBREC’s authority as an expert on such matters, and such information obtained from the Boxwood market study is included in this prospectus based on Boxwood’s authority as an expert on such matters. Any forecasts prepared by JBREC or Boxwood are based on data (including third party data), models and the experience of various professionals, and are based on various assumptions (including the completeness and accuracy of third-party data), all of which are subject to change without notice. See “Summary—Our Market Opportunity,” “Industry Overview” and “Experts.”

In addition, this prospectus includes market and other industry data and estimates that are based on our management’s knowledge and experience in the markets in which we operate. The sources of such data generally state that the information they provide has been obtained from sources they believe to be reliable, but we have not investigated or verified the accuracy and completeness of such information. Our own estimates are based on information obtained from our and our affiliates’ experience in the markets in which we operate and from other contacts in these markets. We are responsible for all of the disclosure in this prospectus, and we believe our estimates to be accurate as of the date of this prospectus or such other date stated in this prospectus. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for the estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, you should be aware that market and other industry data included in this prospectus, and estimates and beliefs based on that data, may not be reliable.

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SUMMARY

This summary highlights the key aspects of this offering. It is not complete and may not contain all of the information that you may want to consider before investing in our common stock. You should read carefully the more detailed information set forth elsewhere in this prospectus, including under “Risk Factors” and in our consolidated financial statements and related notes before making an investment decision.

As used in this prospectus, unless the context otherwise requires, references to the “Company,” “we,” “us” and “our” refer to (1) following the date of the Conversion discussed under the heading “—Corporate Conversion,” Velocity Financial, Inc. and its consolidated subsidiaries, or any one or more of them as the context may require, and (2) prior to the date of the Conversion, Velocity Financial, LLC and its consolidated subsidiaries, or any one or more of them as the context may require. Additionally, references to our “board of directors” refer to (1) following the date of the Conversion, the board of directors of Velocity Financial, Inc., and (2) prior to the date of the Conversion, the board of managers of Velocity Financial, LLC. Except as otherwise indicated or the context otherwise requires, all information is presented giving effect to the Conversion. Except where otherwise noted, the consolidated financial statements and selected historical consolidated financial data and other financial information included in this prospectus are those of Velocity Financial, LLC and its subsidiaries and do not give effect to the Conversion.

Our Company

We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and small commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 15 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.

We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model capable of generating attractive risk-adjusted returns for our stockholders throughout various business cycles. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.

Our growth strategy is predicated on continuing to serve and build loyalty within our network of mortgage brokers, while also expanding our network with new mortgage brokers through targeted marketing and improved brand awareness. We believe our reputation and 15-year history within our core market position us well to capture future growth opportunities.

Our Competitive Advantages

We believe that the following competitive advantages enhance our ability to execute our business strategy and position us well for continued growth:

Established Franchise with Strong Brand Recognition

We believe our reputation and deep history within the real estate lending community position us as a preferred lender for mortgage brokers. We have been originating and acquiring loans in our core market

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since our inception in 2004, making us a recognizable brand with a proven ability to execute. Additionally, we have successfully executed twelve securitizations of our investor real estate loans, raising over $2.5 billion in gross debt proceeds from May 2011 through October 2019. We have a keen understanding of this securitization market, including complicated structural issues, investor expectations and rating agency requirements. We believe we have a strong reputation with investors in the securitization market, which enables us to maintain efficient access to debt capital that ultimately improves our ability to offer competitive pricing to our borrowers.

Customized Technology and Proprietary Data Analytics

We have invested in and customized automated systems to support our use of data analytics which drives our lending process. We believe the investor real estate lending market requires a highly-specialized skill set and infrastructure. To effectively compete and execute on a sustainable long-term business strategy, lenders must control the cost to originate and manage loans without sacrificing credit quality. We believe our investment in technology and use of data analytics helps us achieve these critical objectives and positions our business for sustainable, long-term growth.

We apply the same asset-driven underwriting process to all of the loans in our portfolio, regardless of whether we originate or acquire these loans. Our credit and underwriting philosophy encompasses individual borrower and property due diligence, taking into consideration several factors. Our access to 15 years of proprietary data allows us to perform analytics that inform our lending decisions efficiently and effectively, which we believe is a strong competitive advantage.

Large In-Place Portfolio with Attractive, Long-Term Financing

We believe our in-place portfolio provides a significant and stable income stream for us to invest in future earnings growth. The majority of our loans are structured to provide for interest rate protection, by floating after an initial fixed-rate period, subject to a floor equal to the starting fixed rate. The loans are mainly financed with long-term fixed-rate debt, resulting in a spread that could increase over time, but not decrease. As a result, our in-place portfolio generally benefits from rising interest rates. Excluding the interest expense paid on our corporate debt, which we expect to partially repay with a portion of the net proceeds from this offering, we generated $52.2 million in portfolio related net interest income, representing a 4.06% portfolio related net interest margin, during the nine months ended September 30, 2019. Including the interest expense paid on our corporate debt, we generated $41.6 million in total net interest income, representing a 3.24% net interest margin, during the nine months ended September 30, 2019.

Our In-House Asset Management Results in Successful Loss Mitigation

Direct management of individual loans is critical to avoiding or minimizing credit losses and we work with our third-party primary servicers with whom we have developed strong relationships to emphasize disciplined loan monitoring and early contact with delinquent borrowers to resolve delinquencies. We have a dedicated asset management team that, augmented with primary servicing from our loan servicers, focuses exclusively on resolving delinquent loans. Our hands-on approach enables us to generally preserve the value of our assets and helps us to minimize losses. We believe this expertise, combined with our outsourced servicing relationships, gives us a distinct competitive advantage.

Our Experienced Management Team

Led by co-founder and Chief Executive Officer Christopher Farrar, our management team averages more than 25 years of experience in the financial services and real estate lending industries, including extensive experience in commercial and residential lending, structured finance and capital markets. We have successfully navigated both positive and negative economic cycles and retained our core team of

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experienced professionals in appraisal, underwriting, processing and production, while bolstering our finance and asset management team with professionals possessing extensive experience in financial reporting and real estate management. We believe our in-depth knowledge of our core market provides a distinct competitive advantage.

Our Growth Strategy

The market for investor real estate loans is large and highly fragmented. We have built a dedicated and scalable national lending platform focused specifically on serving this market and believe our capabilities position us well to maintain our reputation as a preferred lender in this market. Our growth strategy is predicated on further penetrating our existing network of mortgage brokers and expanding our network with new mortgage brokers. A key element of our implementation of this strategy is the growth and development of our team of account executives, as well as targeted marketing initiatives. We will continue to supplement the extension of our broker network with the development of new products to support the evolving needs of borrowers in our core market. In addition to our core origination business, we plan to continue to evaluate and opportunistically acquire portfolios of loans that meet our investment criteria.

Further Penetrate Our Existing Mortgage Broker Network

We strive to be the preferred lender within our network of approved mortgage brokers. We have developed a strong reputation in the market for high quality execution and timely closing, which we believe are the most important qualities our mortgage brokers value in selecting a lender. There is significant opportunity for us to further penetrate the more than 3,000 mortgage brokers with whom we have done business over the last five years. Approximately 93% of loan originators originated five or fewer loans with us during the nine months ended September 30, 2019. We believe this presents a compelling opportunity for us to capture incremental volume from our existing broker network.

Expand Our Network with New Mortgage Brokers

We believe that our targeted sales effort, combined with consistent high quality execution, positions us well to continue adding to the network of mortgage brokers that rely on us to serve their borrower clients. During the nine months ended September 30, 2019, we funded 2,131 loans sourced by approximately 970 different mortgage brokers, which we believe represents a small portion of the over 590,000 state-licensed mortgage originators in the United States as of December 31, 2018, according to the Nationwide Multistate Licensing System. The size of the mortgage broker market presents an attractive opportunity for us to capture significant growth with very small increases in the share of mortgage brokers that recognize our platform capabilities and utilize us as a preferred lender in our core market.

Develop New Products

Our primary product is a 30-year amortizing term loan with a three-year fixed-rate period which floats at a spread to the prime rate thereafter subject to a floor equal to the starting fixed rate. This product is used by borrowers to finance stabilized long-term real estate investments. We believe this product has strong receptivity in our market, as evidenced by our success in growing loan originations over time. Since our inception, we have continued to expand our product offering in response to developing market opportunities and the evolving financing needs of our broker network. For example, in 2013, in response to the increased demand for rental properties, we moved aggressively into the market for 1-4 unit residential rental loans, which comprised 46.8% of our held for investment loan portfolio as of September 30, 2019.

In March 2017, we began originating short-term, interest-only loans to be used for acquiring, repositioning or improving the quality of 1-4 unit residential investment properties. This product typically serves as an interim solution for borrowers and/or properties that do not meet the investment criteria of our

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primary 30-year product. The short-term, interest-only loan allows borrowers to address any qualifying issues with their credit and/or the underlying property before bridging into a longer-term loan. In June 2018, we added a second short-term, interest-only loan product which allows borrower draws for rehabbing residential rental property. Historically, we have aggregated and sold these short-term, interest-only loans at a premium to par to institutional investors, which has generated attractive income for us with limited capital while also allowing us to establish an underwriting track record and monitor the performance of these loans. Given our increased experience providing these loans, we are currently evaluating long-term financing alternatives for these loans and may elect to retain them in the future to be more consistent with our broader investment strategy of holding loans in our portfolio and earning a spread.

In June 2019, we began originating a 30-year fixed-rate amortizing term loan to complement our primary product as we believe there is meaningful demand for fixed-rate loans within our core market. More importantly, these loans provide our brokers with an alternative to the primary product enabling them to meet the specific needs of their customers.

Opportunistically Acquire Portfolios

We continually assess opportunities to acquire portfolios of loans that meet our investment criteria. Over the past 15 years, our management team has developed relationships with many financial institutions and intermediaries that have been active investor real estate loan originators or investors. We believe that our experience, reputation, and ability to effectively manage these loans makes us an attractive buyer for this asset class, and we are regularly asked to review pools of loans available for purchase. In our experience, portfolio acquisition opportunities have generally been more attractive and plentiful during market conditions when origination opportunities are less favorable. Accordingly, we believe our acquisition strategy not only augments our core origination business, but also provides a counter-cyclical benefit to our overall business.

Since 2008, we have reviewed over $10.3 billion of investor real estate loans, bid on approximately $523.8 million of loans that fell within our underwriting guidelines, and, through this process, selectively acquired 295 loans with total unpaid principal balance, or UPB, of $167.0 million.

Our Market Opportunity

We believe that there is a substantial and durable market opportunity for investor real estate loans across 1-4 unit residential rental and small commercial properties, and that our institutionalized approach to serving these fragmented market segments underpins our long-term business strategy. Our growth to date has validated the need for scaled lenders with dedication to individual investors who own ten or fewer properties, a base which we believe represents the vast majority of activity across our core market.

1-4 Unit Residential Rental Properties

Unless otherwise indicated, all statistical and economic market data and industry forecasts and projections included in this section “Summary—Our Market Opportunity—1-4 Unit Residential Rental Properties” is derived from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (which we refer to as “JBREC”), an independent research provider and consulting firm, based on the most recent data available as of September 2019. The following information contains forward-looking statements, which are subject to uncertainty, and you should review “Special Note Regarding Forward-Looking Statements.”

Residential housing is the largest real estate asset class in the United States with a total value of more than $27.2 trillion, according to the Federal Reserve Flow of Funds report for the first quarter of 2019. Since 1965, according to the U.S. Census Bureau, approximately one-third of this asset class has been rented. JBREC estimates that there were 45.7 million occupied rental units (including detached and attached units)

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in the United States as of June 2019, of which 15.7 million, or 34%, were one unit, or single-family, properties and an additional eight million units, or nearly 18%, were two to four unit properties.

(1) Source: JBREC, Federal Reserve, U.S. Census Bureau. Housing stock mix estimated using 2010 Census figures and trending data from the American Community Survey and Housing Vacancies and Homeownership.

JBREC believes a substantial portion of forecasted net household formation growth is expected to be renter households, which should strengthen demand for one to four unit residential rental properties. As the economy continues to drive job growth and the population ages, the U.S. Census Bureau reported a 1.2 million household increase year-over-year in the second quarter of 2019. This pace is similar to that experienced in other post-recessionary periods.

Demographic trends also will contribute to this future growth in renter households. Demographic shifts are forecast to increase the 35-44-year-old cohort (a primary driver of household formation) by 5.9 million people from 2018-2025, according to the U.S. Census Bureau. This cohort’s rentership rate grew from 32% in 2007 to 41% in 2019, consistent with an increasing propensity to rent across every age group driven by delaying of major life events, increasing student loan burdens, rising interest rates, and increasing underwriting criteria to obtain a mortgage.

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In addition, historically, JBREC believes many households merely preferred to rent due to the flexibility it provides. Consequently, the national rentership rate, which is the inverse of the homeownership rate as reported by the U.S. Census Bureau, has a long-term average of approximately 35% dating back to 1965. The national rentership rate is currently at 35.9%, after reaching a high of 37.1% in the second quarter of 2016, the highest rate since 1973.

(1) Source: U.S. Census Bureau. Rentership rate defined as the inverse of the homeownership rate as reported by the U.S. Census Bureau. Data for Q1 1965 through Q2 2019.

Historically, much of the ownership of one to four unit residential rental properties in the United States has been concentrated among smaller, non-institutional investors who own one to two properties. Since 2012, the single-family rental segment has been the most active, with larger institutional investors and operators acquiring these homes at scale, helping to grow the overall housing market share of single-family rental properties. Despite this growth, large institutional owners still own a very small percentage of these properties. The four largest publicly-traded, single-family rental REITs owned approximately 164,800 properties as of June 30, 2019, which constituted approximately 1.0% of the total 15.7 million single-family occupied rental housing stock. Although the precise number of properties owned by investors with 10 or more properties is unknown, JBREC believes that these institutional investors own approximately 7.0% of total single-family rental properties.

We believe the individual investors who own the vast remaining balance of these properties lack access to reliable financing given a number of factors, including government-sponsored enterprise (GSE) and bank exposure limitations and underwriting philosophies that deemphasize the meaningful personal equity typically invested, as well as a shortage of alternative lenders with the scale and desire to provide institutional financing in this market. As a result, we believe investors are forced to turn to local private money lenders or in many cases elect to purchase and hold their rental investment properties in cash. JBREC estimates that, at the time of purchase, mortgages were recorded on only 48%, or approximately 461,470, of the 963,400 non-owner occupied single-family properties purchased between October 2017 and September 2018.

Small Commercial Properties

Unless otherwise indicated, all statistical and economic market data and industry forecasts and projections included in this section “Summary—Our Market Opportunity—Small Commercial Properties” is

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derived from a market study prepared for us in connection with this offering by Boxwood Means, LLC (“Boxwood”), an independent research provider and consulting firm, based on the most recent data available as of September 2019. The following information contains forward-looking statements, which are subject to uncertainty, and you should review “Special Note Regarding Forward-Looking Statements.”

The U.S. commercial mortgage market had a record $574 billion in loan originations across various investor groups in 2018, according to an annual survey conducted by the Mortgage Bankers Association. Small-balance loans, or SBLs, account for a sizable subset of this lending market with an estimated $225 billion in loan originations in 2018, according to data from Boxwood. SBLs are typically defined as commercial mortgage loans secured by multifamily, mixed-use, and other commercial properties with an original amount of $5 million or less.

(1) Source: Boxwood. SBLs defined as commercial mortgage loans with an original amount of $5 million or less.

Given the size and diversity of collateral in the SBL market, there is substantial borrower demand for a wide range of loan sizes, which Boxwood broadly categorizes into two groupings: (i) loans of $1 million or less and (ii) loans of $1 million to $5 million. The majority of SBL originations, or nearly 70%, derive from the larger loan bucket, averaging an estimated annual volume of approximately $150 billion over the six-year period from 2013 to 2018. For loans of $1 million or less, originations averaged an estimated $70 billion per year for the same period.

Boxwood believes, however, that an enduring and distinguishing characteristic of the SBL market is the outsized quantity of smaller commercial mortgages that are backed by small income-producing and owner-user properties in communities across the country. The number of loans of $1 million or less far exceeds the amount originated in the larger bucket, averaging approximately 197 thousand per annum and representing over 70% of the total closed loans in the SBL market from 2013 to 2018. Boxwood believes this feature highlights the importance that such loans potentially play in wealth creation for private investors as well as in driving growth for small business owners, and also speaks to the significant fragmentation of the SBL market and extensive opportunities that have attracted lenders to the space.

Boxwood believes that, traditionally, commercial banks have been the leading source of debt financing in the SBL market but are increasingly vulnerable to the lending efforts of a wide variety of alternative or nonbank entities, including specialty finance companies, private lenders, debt funds, and online

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marketplace lenders. Over the six years ended in 2018, Boxwood’s research indicates that the top 15 lenders were still dominated by large national and regional banks, with only two nonbanks, CBRE Capital Markets and Arbor Commercial Mortgage, amongst the group. However, whereas these top 15 lenders commanded nearly 22% of the market in 2013, their aggregate market share narrowed to less than 18% in 2017 followed by a slight increase to 19% in 2018. Generally speaking, Boxwood believes that the market share of the top 15 lenders has been under pressure since 2012 when, following the financial crisis, the group’s share peaked at nearly 28%.

(1) Source: Boxwood. Based on top 15 lenders by origination volume from 2013 to 2018.

Boxwood believes that legacy systems, operational inefficiencies, and regulatory constraints have driven banks to pull back from SBL lending or move “up market” to larger loan sizes. Boxwood’s research indicates that the median loan size for the top 15 lenders increased steadily to over $1 million from 2013 to 2018, which Boxwood believes reflects a sharp decline in the number of loans originated by the group when combined with their declining share of annual origination volume over the same period. These factors create an opportunity for scaled nonbank lenders to both fill voids left by banks and better compete with banks through a more dedicated market focus and more nimble, technology-enabled platforms that can deliver greater speed and certainty of execution.

Our Portfolio

Loans Held for Investment

Our typical investor real estate loan is secured by a first lien on the underlying property with the added protection of a personal guarantee and, based on the loans in our portfolio as of September 30, 2019, has an average balance of approximately $323,000. As of September 30, 2019, our portfolio of loans held for investment totaled $1.8 billion of UPB on properties in 45 states and the District of Columbia. Of the 5,445 loans held for investment as of September 30, 2019, 97.7% of the portfolio, as measured by UPB, was attributable to our loan origination business, while the remaining 2.3% of the portfolio, or 91 loans, totaling

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$41.0 million in UPB, were related to acquisitions. During the year ended December 31, 2018 and the nine months ended September 30, 2019, we originated 1,708 and 1,366 loans to be held for investment totaling $587.2 million and $475.5 million, respectively.

Our investor real estate loans held for investment have longer-term maturities compared to other commercial real estate loans. As of September 30, 2019, 99.9% of our loans held for investment, as measured by UPB, were fully-amortizing. The principal amount of a fully-amortizing loan is repaid ratably over the term of the loan, as compared to a balloon loan where all, or a substantial portion of, the original loan amount is due in a single payment at the maturity date. We believe that fully-amortizing loans face a lower risk of default than balloon loans, as the final payment due under the balloon loan may require the borrower to refinance or sell the property.

We target investor real estate loans with loan-to-value ratios, or LTVs, between 60% and 75% at origination as we believe that borrower equity of 25% to 40% provides significant protection against credit losses. As of September 30, 2019, our loans held for investment had a weighted average LTV at origination of 65.2%. Additionally, as of September 30, 2019, borrowers personally guaranteed 99.9% of the loans in our held for investment portfolio and had a weighted average credit score at origination of 706, excluding the 1.1% of loans for which a credit score is not available.

The following charts illustrate the composition of our loans held for investment as of September 30, 2019:

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(*) Percentages may not sum to 100% due to rounding.

(1) Portfolio stratifications based on unpaid principal balance for loans held for investment as of September 30, 2019.

(2) Represents LTV at origination for population of loans held for investment as of September 30, 2019. In instances where LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at time of acquisition.

(3) The approximately 1% portion of our loans held for investment with an LTV greater than 75% consists primarily of acquired loans.

Loans Held for Sale

Although our primary focus is long-term maturity real estate loans, we are continually assessing market developments for attractive opportunities in which we can leverage our experience, network and personnel. In March 2017, we began originating short-term, interest-only loans to be used for acquiring, repositioning or improving the quality of 1-4 unit residential investment properties. This product typically serves as an interim solution for borrowers and/or properties that do not meet the investment criteria of our primary 30-year product. The short-term, interest-only loan allows borrowers to address any qualifying issues with their credit and/or the underlying property before bridging into a longer-term loan. In June 2018, we added a second short-term, interest-only loan product which allows borrower draws for rehabbing residential rental property. Historically, we have aggregated and sold these short-term, interest-only loans at a premium to par to institutional investors, which has generated attractive income for us with limited capital while also allowing us to establish an underwriting track record and monitor the performance of these loans. Given our increased experience providing these loans, we are currently evaluating long-term financing alternatives for these loans and may elect to retain them in the future to be more consistent with our broader investment strategy of holding loans in our portfolio and earning a spread.

As of September 30, 2019, our portfolio of loans held for sale consisted of 594 loans with an aggregate UPB of $171.5 million, and carried a weighted average original loan term of 12.7 months and a weighted average coupon of 10.0%. As of September 30, 2019, 100% of our held for sale portfolio, as measured by UPB, was attributable to our loan origination business.

In line with our overall investment strategy, we target loans held for sale with LTVs between 60% and 75% at origination as we believe that borrower equity of 25% to 40% provides significant protection against credit losses. As of September 30, 2019, our loans held for sale had a weighted average LTV at origination of 68.0%. Additionally, as of September 30, 2019, borrowers personally guaranteed 100% of the loans in our held for sale portfolio and had a weighted average credit score at origination of 660.

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The following charts illustrate the composition of our loans held for sale as of September 30, 2019:

(*) Percentages may not sum to 100% due to rounding.

(1) Portfolio stratifications based on unpaid principal balance for loans held for sale as of September 30, 2019.

(2) Represents LTV at origination for population of loans held for sale as of September 30, 2019.

Recent Developments

October 2019 Securitization

In October 2019, we completed the securitization of $162.5 million of investor real estate loans, measured by UPB as of the September 1, 2019 cut-off date, issuing $154.4 million of non-recourse notes payable through the Velocity Commercial Capital Loan Trust 2019-3, or 2019-3. We are the sole beneficial interest holder of 2019-3, a variable interest entity that will be included in our consolidated financial statements. We refer to this transaction as the “October 2019 Securitization.”

October 2019 Securitization Sale

In October 2019, the Company sold its remaining retained interests in securitization 2014-1 for approximately $9.7 million. The proceeds were used to fund our loan originations.

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Estimates for the Year Ended December 31, 2019

We expect to report total loan originations of at least $1,009.0 million for the year ended December 31, 2019, compared to total loan originations of $737.3 million for the year ended December 31, 2018, and $554.7 million for the year ended December 31, 2017.

We expect to report total loans, as measured by unpaid principal balance, of at least $2,055.0 million as of December 31, 2019, compared to total loans, as measured by unpaid principal balance, of $1,928.2 million as of September 30, 2019, and $1,631.3 million as of December 31, 2018. We expect to report nonperforming loans between 6.50% and 6.90% of total loans, as measured by unpaid principal balance, as of December 31, 2019, compared to nonperforming loans of 6.13% as of September 30, 2019, and of 5.85% as of December 31, 2018. Nonperforming loans includes all loans that are 90 or more days past due, in bankruptcy or in foreclosure.

We expect to report net income between $16.8 million and $18.6 million for the year ended December 31, 2019, compared to net income of $10.5 million for the year ended December 31, 2018, and $14.0 million for the year ended December 31, 2017. The Company was not subject to income tax prior to January 1, 2018 because prior to that time it elected to be treated as a partnership for U.S. federal income tax purposes.

We expect to report members’ equity between $155.3 million and $157.1 million as of December 31, 2019, compared to members’ equity of $150.6 million as of September 30, 2019, and of $139.7 million as of December 31, 2018. The estimated range of members’ equity as of December 31, 2019 includes the impact of $1.2 million dividends paid to the former holders of our Class C preferred units during the year ended December 31, 2019. We repurchased our outstanding Class C preferred units in connection with the refinancing of our corporate debt in August 2019.

The foregoing estimated amount of loans originated and estimated range of net income for the year ended December 31, 2019 and estimated amount of total loans and estimated ranges of nonperforming loans and members’ equity as of December 31, 2019 are preliminary and subject to completion of financial and operating closing procedures for the year ended December 31, 2019. We have begun our normal annual closing and review procedures for the year ended December 31, 2019; however, given the timing of these estimates, the actual amounts of loans originated, total loans, nonperforming loans, net income and members’ equity may differ materially, including as a result of our year-end closing procedures, review adjustments and other developments that may arise between now and the time our audited financial results for the year ended December 31, 2019 are finalized. Therefore, you should not place undue reliance on these estimates.

These estimates have been prepared by, and are the responsibility of, our management and have not been reviewed or audited or subject to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to these estimates.

Summary Risk Factors

An investment in shares of our common stock involves various risks. You should carefully consider the risks discussed below and under “Risk Factors” beginning on page 19 before purchasing shares of our common stock:

• we are dependent upon the success of the investor real estate market and conditions that negatively impact this market may reduce demand for our loans and may adversely impact our business, results of operations and financial condition;

• difficult conditions in the real estate markets, the financial markets and the economy generally may adversely impact our business, results of operations and financial condition;

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• we operate in a competitive market for loan origination and acquisition opportunities and competition may limit our ability to originate and acquire loans, which could adversely affect our ability to execute our business strategy;

• loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition;

• we have no operating history as a publicly traded company, and our inexperience could materially and adversely affect us;

• we may change our strategy or underwriting guidelines without notice or stockholder consent, which may result in changes to our risk profile and net income;

• a significant portion of our loan portfolio is in the form of investor real estate loans which are subject to increased risks;

• funds affiliated with Snow Phipps Group LLC, or Snow Phipps, and an affiliate of a fund managed by Pacific Investment Management Company LLC, or TOBI, will own a substantial amount of our outstanding common stock following the closing of this offering and will have the ability to influence us;

• we may not be able to successfully complete additional securitization transactions on attractive terms or at all, which could limit potential future sources of financing and could inhibit the growth of our business; and

• if one or more of our warehouse repurchase facilities, on which we are dependent, are terminated, we may be unable to find replacement financing on favorable terms, or at all, which could have a material adverse effect on our business, results of operations and financial condition.

Corporate Conversion

We currently operate as a limited liability company formed in 2012, organized under the law of the State of Delaware and named Velocity Financial, LLC. Prior to the closing this offering, we will engage in the following transactions, which we refer to collectively as the “Conversion”:

• we will convert from a Delaware limited liability company to a Delaware corporation by filing a certificate of conversion with the Secretary of State of the State of Delaware; and

• we will change our name to Velocity Financial, Inc.

Holders of units of Velocity Financial, LLC will receive an aggregate of 11,749,988 shares of common stock of Velocity Financial, Inc. in the Conversion.

Our Corporate Information

Our offices are located at 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362, and the telephone number of our offices is (818) 532-3700. Our internet address is www.velocitymortgage.com. Our internet website and the information contained therein or connected to or linked from our internet web site are not incorporated information and do not constitute a part of this prospectus or any amendment or supplement thereto.

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The Offering

Common stock offered by us 7,250,000 shares(1)

Common stock to be outstanding upon

    completion of this offering 18,999,988 shares(1)

Use of proceeds We estimate that the net proceeds we will receive from this offering will be approximately $96.1 million (or approximately $111.2 million if the underwriters fully exercise their over-allotment option to purchase additional shares of our common stock), after deducting the underwriting discounts and commissions of approximately $7.6 million (or approximately $8.8 million if the underwriters fully exercise their over-allotment option to purchase additional shares of our common stock) and estimated offering expenses of approximately $5.1 million payable by us.

We intend to use approximately 75% of the gross proceeds from this offering to repay a portion of our outstanding corporate debt, up to a maximum repayment of $75 million in principal amount (plus related prepayment penalties), and the remainder for general corporate purposes, including originating or acquiring investor real estate loans.

Proposed New York Stock Exchange symbol “VEL”

Risk factors Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 19.

(1) Assumes no exercise of the underwriters’ over-allotment option to purchase up to an additional 1,087,500 shares of our common stock.

Unless we indicate otherwise or the context requires, all information in this prospectus:

• assumes that the Conversion has occurred based on an initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus;

• excludes 1,520,000 shares of our common stock that may be issued in the future under our 2020 Omnibus Incentive Plan, which authorized amount includes approximately 782,500 shares of common stock that may be issued upon future exercise of stock options with an exercise price equal to the initial public offering price that we intend to grant to certain of our non-employee directors and certain of our employees, including our named executive officers, in connection with this offering. See “Executive Compensation—Director Compensation” and “Executive Compensation—2020 Omnibus Incentive Plan” for additional information;

• assumes no exercise by the underwriters of their over-allotment option to purchase up to              additional shares of common stock from us; and

• gives effect to the adoption and filing of our certificate of incorporation with the Secretary of State of Delaware and the adoption of our bylaws in connection with the Conversion.

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Summary Consolidated Financial and Other Information

The following tables summarize our consolidated financial and other data. We have derived the summary condensed results of operations data for the fiscal years ended December 31, 2018, 2017 and 2016 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary condensed results of operations data for the nine months ended September 30, 2019 and 2018 and the summary consolidated statements of financial condition data as of September 30, 2019 from our unaudited consolidated interim financial statements included elsewhere in this prospectus. Our unaudited consolidated interim financial statements were prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, on the same basis as our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, that are necessary for the fair statement of the financial information set forth in those financial statements. These interim results are not necessarily indicative of our results for the full fiscal year. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods. You should read this data in conjunction with “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

Summary Condensed Results of Operations Data	Nine Months Ended September 30,					Year Ended December 31,
	2019		2018			2018		2017		2016
	(in thousands, other than pro forma per share data and shares outstanding)
	(unaudited)
Interest income	$	113,407	$	91,163		$	124,722	$	97,830	$	78,418
Interest expense — portfolio related		61,214		44,791			62,597		47,638		37,406
Net interest income — portfolio related		52,193		46,372			62,125		50,192		41,012
Interest expense — corporate debt		10,548		9,985			13,322		13,654		13,419
Net interest income		41,645		36,387			48,803		36,538		27,593
Provision for (reversal of) loan losses		898		(21	)		201		421		1,455
Net interest income after provision for loan losses		40,747		36,408			48,602		36,117		26,138
Other operating income		1,817		2,716			2,807		2,008		710
Total operating expenses		25,308		23,289			32,160		24,136		20,051
Income before income taxes		17,256		15,835			19,249		13,989		6,797
Income tax expense		5,146		7,241			8,700		—		—
Net income	$	12,110	$	8,594		$	10,549	$	13,989	$	6,797
Pro forma net income per share of common stock(1):
Basic	$	1.03				$	0.90
Diluted	$	1.03				$	0.90
Pro forma weighted average shares of common stock outstanding(1):
Basic		11,749,988					11,749,988
Diluted		11,749,988					11,749,988

(1) Assumes conversion of Velocity Financial, LLC units into shares of our common stock in the Conversion.

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Consolidated Statements of Financial Condition Data	September 30,			December 31,
	2019			2018			2017			2016
				(in thousands)
Assets
Cash and cash equivalents	$	8,849		$	15,008		$	15,422		$	49,978
Restricted cash		3,152			1,669			305			1,766
Loans held for sale, net		170,440			78,446			5,651			—
Loans held for investment, net		1,775,935			1,567,408			1,299,041			1,039,401
Loans held for investment, at fair value		2,936			3,463			4,632			7,278
Total loans, net		1,949,311			1,649,317			1,309,324			1,046,679
Accrued interest receivables		12,450			10,096			7,678			5,954
Receivables due from servicers		38,349			40,473			25,306			22,234
Other receivables		7,585			974			1,287			439
Real estate owned, net		15,806			7,167			5,322			1,454
Property and equipment, net		4,903			5,535			5,766			3,875
Net deferred tax asset		6,597			2,986			—			—
Other assets		17,499			4,760			1,435			750
Total assets	$	2,064,501		$	1,737,985		$	1,371,845		$	1,133,129
Liabilities and Members’ Equity
Accounts payable and accrued expenses	$	41,789		$	26,629		$	22,029		$	12,264
Secured financing, net		145,285			127,040			126,486			119,286
Securitizations, net		1,377,733			1,202,202			982,393			742,890
Warehouse repurchase facilities, net		349,115			215,931			85,303			110,308
Total liabilities		1,913,922			1,571,802			1,216,211			984,748
Commitments and contingencies
Class C preferred units		—			26,465			24,691			23,036
Members’ equity		150,579			139,718			130,943			125,345
Total liabilities and members’ equity	$	2,064,501		$	1,737,985		$	1,371,845		$	1,133,129
	September 30,			December 31,
Portfolio Statistics(1)	2019			2018			2017			2016
				($ in thousands)
Total loans(2)	$	1,928,208		$	1,631,326		$	1,295,567		$	1,038,033
Loan count		6,039			5,171			4,136			3,243
Average loan balance(3)	$	319		$	315		$	313		$	320
Weighted average loan-to-value(4)		65.4	%		63.8	%		64.4	%		64.5	%
Weighted average coupon(5)		8.71	%		8.56	%		8.33	%		8.23	%
Nonperforming loans (UPB)(6)	$	118,106		$	95,385		$	74,943		$	42,498
Nonperforming loans (% of total)		6.13	%		5.85	%		5.78	%		4.09	%

(1) Reflects total portfolio of loans, including loans held for sale and loans held for investment, but does not reflect the October 2019 Securitization.

(2) Reflects the aggregate unpaid principal balance of all loans, including loans held for sale and loans held for investment, at the end of the period. It excludes deferred origination costs, acquisition discounts, fair value adjustments and allowance for loan losses.

(3) Reflects the average unpaid principal balance of all loans at the end of the period (i.e., total loans divided by loan count).

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(4) Weighted average LTV is calculated for the population of loans outstanding at the end of each specified period using the original loan amounts and appraised LTVs at the time of origination of each loan.

(5) Reflects the average coupon, or stated interest rate, on all loans at the end of the period weighted by unpaid principal balance.

(6) Reflects unpaid principal balance of all loans that are 90 or more days past due, in bankruptcy or in foreclosure.

Key Performance Metrics	Nine Months Ended September 30,						Year Ended December 31,
	2019			2018			2018			2017			2016
	($ in thousands)
Average loans(1)	$	1,715,172		$	1,387,535		$	1,429,877		$	1,167,999		$	944,437
Portfolio yield(2)		8.82	%		8.76	%		8.72	%		8.38	%		8.30	%
Average debt — portfolio related(3)	$	1,529,009		$	1,192,289		$	1,234,818		$	965,987		$	802,683
Average debt — total company(4)	$	1,660,837		$	1,319,883		$	1,362,412		$	1,090,532		$	914,467
Cost of funds — portfolio related(5)		5.34	%		5.01	%		5.07	%		4.93	%		4.66	%
Cost of funds — total company(6)		5.76	%		5.53	%		5.57	%		5.62	%		5.56	%
Net interest margin — portfolio related(7)		4.06	%		4.46	%		4.34	%		4.30	%		4.34	%
Net interest margin — total company(8)		3.24	%		3.50	%		3.41	%		3.13	%		2.92	%
Charge-offs(9)		0.03	%		0.03	%		0.03	%		0.09	%		0.13	%
Pre-tax return on equity(10)(11)		15.8	%		15.8	%		14.3	%		10.8	%		9.9	%
Return on equity(11)		11.1	%		8.6	%		7.8	%		10.8	%		9.9	%

(1) Reflects daily average of total outstanding loans, including loans held for sale and loans held for investment, as measured by unpaid principal balance, over the specified period.

(2) Reflects interest income earned on our total loan portfolio as a percentage of average loans over the specified period.

(3) Reflects monthly average of all portfolio-related debt, which includes our warehouse repurchase facilities and securitizations, as measured by outstanding principal balance, over the specified period. Excludes our corporate debt.

(4) Reflects monthly average of all company debt, which includes our portfolio-related debt and our corporate debt, as measured by outstanding principal balance, over the specified period.

(5) Reflects interest expense incurred on our portfolio-related debt as a percentage of average portfolio-related debt over the specified period. Excludes our corporate debt.

(6) Reflects interest expense incurred on all company debt as a percentage of average total debt over the specified period.

(7) Measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt as a percentage of average loans over the specified period. Excludes our corporate debt.

(8) Measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our total debt as a percentage of average loans over the specified period.

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(9) Reflects charge-offs as a percentage of average loans held for investment over the specified period. We do not record charge-offs on our loans held for sale which are carried at the lower of cost or estimated fair value.

(10) Reflects income before income taxes as a percentage of the monthly average of members’ equity over the specified period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Performance Metrics—Pre-Tax Return on Equity and Return on Equity.”

(11) Annualized in the case of the nine months ended September 30, 2019 and 2018.

The following table presents a summary of our consolidated statement of financial condition as of September 30, 2019:

• on an actual basis, derived from our unaudited statement of financial condition as of September 30, 2019;

• on a “pro forma” basis, giving effect to the October 2019 Securitization, the Conversion and the adoption and filing of our certificate of incorporation with the Delaware Secretary of State prior to the closing of this offering; and

• on a “pro forma as adjusted” basis, giving further effect to our issuance and sale of 7,250,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds from this offering as described in “Use of Proceeds.”

	September 30, 2019
	Actual		Pro Forma(1)		Pro Forma As Adjusted
	(unaudited, in thousands)
Cash and cash equivalents	$	8,849	$	19,992	$	40,783
Total assets		2,064,501		2,075,025		2,095,816
Secured financing, net		145,285		145,285		73,914
Securitizations, net		1,377,733		1,529,824		1,529,824
Warehouse repurchase facilities, net		349,115		207,650		207,650
Total liabilities		1,913,922		1,924,548		1,853,177
Members’ equity		150,579		—		—
Total stockholders’ equity		—		150,477		242,639

(1) Balances reflect the result of the October 2019 Securitization, which increased cash and cash equivalents by $11.1 million, increased securitizations, net by $152.1 million, and decreased warehouse repurchase facilities, net by $141.5 million.

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RISK FACTORS

An investment in shares of our common stock involves a number of risks. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus occurs, our business, financial condition, liquidity and results of operations could be materially and adversely affected, the market price of our common stock could decline significantly, and you could lose all or a part of your investment.

Risks Related to Our Business

We are dependent upon the success of the investor real estate market and conditions that negatively impact this market may reduce demand for our loans and adversely impact our business, results of operations and financial condition.

Our borrowers are primarily owners of residential rental and small commercial properties. Accordingly, the success of our business is closely tied to the overall success of the investors and small business owners in that market. Various changes in real estate conditions may impact this market. Any negative trends in such real estate conditions may reduce demand for our products and services and, as a result, adversely affect our results of operations. These conditions include:

• oversupply of, or a reduction in demand for, residential rental and small commercial properties;

• a change in policy or circumstances that may result in a significant number of potential residents of multifamily properties deciding to purchase homes instead of renting;

• zoning, rent control or stabilization laws, or other laws regulating multifamily housing, which could affect the profitability of residential rental developments;

• the inability of residents and tenants to pay rent;

• changes in the tax code related to investment real estate;

• increased operating costs, including increased real property taxes, maintenance, insurance, and utilities costs; and

• potential liability under environmental and other laws.

Any or all of these factors could negatively impact the investor real estate market and, as a result, reduce the demand for our loans or the terms on which we are able to make our loans and, as a result materially and adversely affect us.

Difficult conditions in the real estate markets, the financial markets and the economy generally may adversely impact our business, results of operations and financial condition.

Our results of operations may be materially affected by conditions in the real estate markets, the financial markets and the economy generally. These conditions include changes in short-term and long-term interest rates, inflation and deflation, fluctuations in the real estate and debt capital markets and developments in national and local economies, unemployment rates, commercial property vacancy rates, and rental rates. Any deterioration of real estate fundamentals generally, and in the United States in particular, and changes in general economic conditions could decrease the demand for our loans, negatively impact the value of the real estate collateral securing our loans, increase the default risk applicable to borrowers, and make it relatively more difficult for us to generate attractive risk-adjusted returns.

We also are significantly affected by the fiscal, monetary, and budgetary policies of the U.S. government and its agencies. We are particularly affected by the policies of the Board of Governors of the Federal Reserve System, which we refer to as the Federal Reserve, which regulates the supply of money and

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credit in the United States. The Federal Reserve’s policies affect interest rates, which can have a significant impact on the demand for investor real estate loans. Significant fluctuations in interest rates as well as protracted periods of increases or decreases in interest rates could adversely affect the operation and income of the investment properties securing our loans, as well as the demand from investors for investor real estate loans in the secondary market. In particular, higher interest rates often decrease the number of loans originated. An increase in interest rates could cause refinancing of existing loans to become less attractive and qualifying for a loan to become more difficult.

We cannot predict the degree to which economic conditions generally, and the conditions for real estate debt investing in particular, will improve or decline. Any stagnation in or deterioration of the real estate markets may limit our ability to originate or acquire loans on attractive terms or cause us to experience losses related to our assets. Declines in the market values of our investments may adversely affect our results of operations and credit availability.

We operate in a competitive market for loan origination and acquisition opportunities and competition may limit our ability to originate and acquire loans, which could adversely affect our ability to execute our business strategy.

We operate in a competitive market for investment and loan origination and acquisition opportunities. Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices and originate loans that allow us to generate compelling net interest margins. In acquiring our target assets or originating loans, we will compete with a variety of institutional investors, including REITs, specialty finance companies, public and private funds, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of these competitors may enjoy competitive advantages over us, including:

• greater name recognition;

• a larger, more established network of correspondents and loan originators;

• established relationships with mortgage brokers or institutional investors;

• access to lower cost and more stable funding sources;

• an established market presence in markets where we do not yet have a presence or where we have a smaller presence;

• ability to diversify and grow by providing a greater variety of commercial real estate loan products on more attractive terms, some of which require greater access to capital and the ability to retain loans on the balance sheet; and

• greater financial resources and access to capital to develop branch offices and compensate key employees.

Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. Commercial banks may have an advantage over us in originating loans if borrowers already have a line of credit or construction financing with the bank. Commercial real estate service providers may have an advantage over us to the extent they also offer a larger or more comprehensive investment sales platform. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of originations or loan acquisitions, and establish more relationships than us. Furthermore, competition for loans on our target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns, and competition in investor real estate loan origination may increase the availability of investor real estate loans which may result in a reduction of interest rates on investor real estate loans. We cannot assure you that the competitive pressures we face will not have a material and adverse effect on our business, results of operations and financial condition. In addition, future changes in laws, regulations, and consolidation in the commercial real estate finance market could lead to the entry of more competitors. We cannot

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guarantee that we will be able to compete effectively in the future, and our failure to do so would materially and adversely affect us.

Loans to small businesses involve a high degree of business and financial risk, which can result in substantial losses that would adversely affect our business, results of operation and financial condition.

Our operations and activities include, without limitation, loans to small, privately owned businesses. Often, there is little or no publicly available information about these businesses. Accordingly, we must rely on our own due diligence to obtain information in connection with our investment decisions. Our borrowers may not meet net income, cash flow and other coverage tests typically imposed by banks. A borrower’s ability to repay its loan may be adversely impacted by numerous factors, including a downturn in its industry or other negative local or more general economic conditions. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the collateral for the loan. In addition, small businesses typically depend on the management talents and efforts of one person or a small group of people for their success. The loss of services of one or more of these persons could have a material and adverse impact on the operations of the small business. Small companies are typically more vulnerable to customer preferences, market conditions and economic downturns and often need additional capital to expand or compete. These factors may have an impact on loans involving such businesses. Loans to small businesses, therefore, involve a high degree of business and financial risk, which can result in substantial losses, and in turn could have a material and adverse effect on our business, results of operations and financial condition.

We have no operating history as a publicly traded company, and our inexperience could materially and adversely affect us.

We have no operating history as a publicly traded company. Our board of directors and management team will have overall responsibility for our management. As a publicly traded company, we will be required to develop and implement substantial control systems, policies and procedures in order to satisfy our periodic Securities and Exchange Commission, or SEC, reporting and NYSE listing requirements. We cannot assure you that management’s past experience will be sufficient to successfully develop and implement these systems, policies and procedures and to operate our company. Failure to do so could jeopardize our status as a public company, and the loss of such status or the perception or anticipation by investors of a possible loss of such status could materially and adversely affect us.

The failure of a third-party servicer or the failure of our own internal servicing system to effectively service our portfolio of mortgage loans may adversely impact our business, results of operations and financial condition.

Most mortgage loans and securitizations of mortgage loans require a servicer to manage collections for each of the underlying loans. Nationstar Mortgage Holdings Inc. currently provides loan servicing on most of our loan portfolio, and we work with several other servicers for a small portion of our portfolio. We refer to these providers as our third-party loan servicers. A third-party loan servicer’s responsibilities include providing loan administration, issuing monthly statements, managing borrower insurance and tax impounds, sending delinquency notices, collection activity, all cash management and reporting on the performance of the loans. A third-party loan servicer may retain sub-servicers in any jurisdictions where licensing is required and the third-party loan servicer has not obtained the necessary license or where it otherwise deems it advisable. Both default frequency and default severity of loans may depend upon the quality of the servicer. If a third-party loan servicer or any sub-servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If a third-party loan servicer or any sub-servicers takes longer to liquidate non-performing assets, loss severities may be higher than originally anticipated. Higher loss severity may also be caused by less competent dispositions of real estate owned, or REO.

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We have implemented our own internal special servicing and asset management capabilities and, as of September 30, 2019, we special service 469 distinct assets. The ability to internally service and manage loans in our portfolio, rather than rely on third-party loan servicers, has its own set of risks, including more direct exposure to lawsuits by borrowers and maintaining the necessary infrastructure to provide such special servicing capabilities.

Servicer quality, whether performed by third-party loan servicers or internally by us, is of prime importance in the default performance of investor real estate loans and securitizations. If we are unable to maintain our relationships with our third-party loan servicers, or they become unwilling or unable to continue to perform servicing activities, we could incur additional costs to obtain replacement loan servicers and there can be no assurance that a replacement servicer could be retained in a timely manner or at similar rates. Should we have to transfer loan servicing to another servicer for any reason, the transfer of our loans to a new servicer could result in more loans becoming delinquent because of confusion or lack of attention. Servicing transfers involve notifying borrowers to remit payments to the new servicer, and these transfers could result in misdirected notices, misapplied payments, data input errors and other problems. Industry experience indicates that mortgage loan delinquencies and defaults are likely to temporarily increase during the transition to a new servicer and immediately following the servicing transfer. Further, when loan servicing is transferred, loan servicing fees may increase, which may have an adverse effect on the credit support of assets held by us.

Effectively servicing our portfolio of mortgage loans is critical to our success, particularly given our strategy of maximizing the value of our portfolio with our proprietary loan modification programs and special servicing techniques, and therefore, if one of our third-party loan servicers or our internal special servicing fails to effectively service our portfolio of mortgage loans, it could have a material and adverse effect on our business, results of operations and financial condition.

We are dependent on certain of our key personnel for our future success, and their continued service to us is not guaranteed.

Our future success depends on the continued service of key personnel, including Christopher D. Farrar, our Chief Executive Officer, Mark R. Szczepaniak, our Chief Financial Officer, and Jeffrey T. Taylor, our Executive Vice President for Capital Markets, and our ability to attract new skilled personnel. We do not have employment contracts that provide severance payments and/or change in control benefits with most of our executive officers, and there can be no assurance that we will be able to retain their services. The departure of key personnel, until suitable replacements could be identified and hired, if at all, could have a material and adverse effect on our business, results of operations and financial condition.

Our growth strategy relies upon our ability to hire and retain qualified account executives, and if we are unable to do so, our growth could be limited.

We depend on our qualified account executives to generate broker relationships which leads to repeat and referral business. Accordingly, we must be able to attract, motivate and retain qualified account executives. The market for qualified account executives is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that we will be able to attract or retain qualified account executives. If we cannot attract, motivate or retain a sufficient number of qualified account executives, or if our hiring and retention costs increase our business, results of operations and financial condition could be materially and adversely affected.

Inaccurate or incomplete information received from potential borrowers, guarantors and sellers involved in the sale of pools of loans could have a negative impact on our results of operation.

In deciding whether to extend credit or enter into transactions with potential borrowers and their guarantors, we are forced to primarily rely on information furnished to us by or on behalf of these potential borrowers or guarantors, including financial statements. We also must rely on representations of potential

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borrowers and guarantors as to the accuracy and completeness of that information and we must rely on information and representations provided by sellers involved in the sale of pools of loans that we purchase when we make bulk acquisitions. Our results of operations could be negatively impacted to the extent we rely on financial statements or other information that is misleading, inaccurate or incomplete.

Deficiencies in appraisal quality in the mortgage loan origination process may result in increased principal loss severity.

During the mortgage loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective mortgage. The quality of these appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure from the broker or lender to provide an appraisal in the amount necessary to enable the originator to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the mortgage loans, which could have a material and adverse effect on our business, results of operations and financial condition.

We use leverage in executing our business strategy, which may adversely affect the return on our assets, as well as increase losses when economic conditions are unfavorable.

We leverage certain of our assets through borrowings under warehouse repurchase facilities and securitization transactions, as well as any corporate borrowings we may incur from time to time. Our use of leverage may enhance our potential returns and increase the number of loans that can be made, but may also substantially increase the risk of loss. There are no limits on the amount of leverage we may incur in our certificate of incorporation or bylaws. Our percentage of leverage will vary depending on our ability to obtain financing. Our two warehouse repurchase facilities and our new corporate debt agreement include certain financial covenants that limit our ability to leverage our assets. Our two warehouse repurchase facilities include covenants to maintain a maximum debt-to-tangible net-worth ratio of 6:1, while our new corporate debt agreement includes covenants to maintain a consolidated tangible net worth of at least $100 million plus 25% of consolidated net income (as defined in our new corporate debt agreement), a maximum debt to equity ratio of 1.50:1 or 1.25:1 (depending on the applicable term period and excluding warehouse and securitization debt), and an interest coverage ratio of 1.50:1 or 1.75:1 (depending on the applicable period and excluding warehouse and securitization debt). Our return on equity may be reduced if market conditions cause the cost of our financing to increase relative to the income that can be derived from our loan portfolio, which could adversely affect the price of our common stock. In addition, our debt service payments will reduce cash flow available for distributions to stockholders. We may not be able to meet our debt service obligations. To the extent that we cannot meet our debt service obligations, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations.

Our underwriting guidelines in the mortgage loan origination process may result in increased delinquencies and defaults.

Mortgage originators, including us, generally underwrite mortgage loans in accordance with their pre-determined loan underwriting guidelines, and from time to time and in the ordinary course of business, originators will make exceptions to these guidelines. There can be no assurance that our underwriting guidelines will identify or appropriately assess the risk that the interest and principal payments due on a loan will be repaid when due, or at all, or whether the value of the mortgaged property will be sufficient to otherwise provide for recovery of such amounts. Our underwriting guidelines are more narrow than some other mortgage lenders because we give primary consideration to the adequacy of the property as collateral and source of repayment for the loan rather than focusing on the personal income of the borrower. For example, while we emphasize credit scores in our underwriting process, there is no minimum credit score that a potential borrower must have in order to obtain a loan from us. Although we believe that this asset-driven approach is one of our competitive advantages, it may result in higher delinquency and default rates than those experienced by mortgage lenders with broader underwriting guidelines and/or those who require minimum credit scores or verify the personal income of their borrowers.

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On a case by case basis, our underwriters may determine that a prospective borrower that does not strictly qualify under our underwriting guidelines warrants an underwriting exception, based upon compensating factors. Compensating factors may include, but are not limited to, a lower LTV ratio, a higher debt coverage ratio, experience as a real estate owner or investor, higher borrower net worth or liquidity, stable employment, longer length of time in business and length of time owning the property. Loans originated with exceptions may result in a higher number of delinquencies and defaults, which could have a material and adverse effect on our business, results of operations and financial condition.

We may change our strategy or underwriting guidelines without notice or stockholder consent, which may result in changes to our risk profile and net income.

Our board of directors may change our strategy or any of our underwriting guidelines at any time without notice or the consent of our stockholders. We may also change our target assets and financing strategy without notice or the consent of our stockholders. Any of these changes could result in us holding a loan portfolio with a different risk profile from the risk profile described in this prospectus. Additionally, a change in our strategy or underwriting guidelines may increase our exposure to interest rate risk, default risk, real estate market fluctuations and liquidity risk, all of which could have a material and adverse effect on our business, results of operations and financial condition.

Our inability to manage future growth effectively could have an adverse impact on our business, results of operations and financial condition.

Our ability to grow will depend on our management’s ability to originate and/or acquire investor real estate loans. In order to do this, we will need to identify, hire, train, supervise and manage new employees. Any failure to effectively manage our future growth, including a failure to successfully expand our loan origination activities could have a material and adverse effect on our business, results of operations and financial condition.

If we fail to develop, enhance and implement strategies to adapt to changing conditions in the real estate and capital markets, our business, results of operations and financial condition may be materially and adversely affected.

The manner in which we compete and the loans for which we compete are affected by changing conditions, which can take the form of trends or sudden changes in our industry, regulatory environment, changes in the role of government-sponsored entities, changes in the role of credit rating agencies or their rating criteria or process or the United States economy more generally. If we do not effectively respond to these changes, or if our strategies to respond to these changes are not successful, our business, results of operations and financial condition may be materially and adversely affected.

Operational risks, including the risk of cyberattacks, could disrupt our business and materially and adversely affect our business, results of operations and financial condition.

Our financial, accounting, communications and other data processing systems may fail to operate properly or become disabled as a result of tampering or a breach of the network security systems or otherwise. In addition, such systems may be from time to time subject to cyberattacks and other cybersecurity incidents, which may continue to increase in sophistication and frequency in the future.

Breaches of our network security systems could involve attacks that are intended to obtain unauthorized access to our proprietary information or personal identifying information of our stockholders, destroy data or disable, degrade or sabotage our systems, including through the introduction of computer viruses and other malicious code, network failures, computer and telecommunication failures, infiltration by unauthorized persons and security breaches, usage errors by their respective professionals or service providers. If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete or modify private and sensitive information. Although we take various

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measures to ensure the integrity of such systems, there can be no assurance that these measures will provide protection. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing it from being addressed appropriately.

Moreover, we are highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us.

We are headquartered in Westlake Village, California, in an area known for seismic activity and prone to wildfires. An earthquake, wildfire or other disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. Insurance and other safeguards might only partially reimburse us for our losses, if at all.

In addition, we rely on third-party service providers for certain aspects of our business, including software vendors for portfolio management and accounting software, outside financial institutions for back office processing and custody of securities and third-party broker-dealers for the execution of trades. An interruption or deterioration in the performance of these third parties or failures of their information systems and technology could cause system interruptions, delays, loss, corruption or exposure of critical data or intellectual property and impair the quality of our operations, which could impact our reputation and hence adversely affect our business.

Any such interruption or deterioration in our operations could result in substantial recovery and remediation costs and liability. While we have implemented disaster recovery plans and backup systems to lessen the risk of any material adverse impact, its disaster recovery planning may not be sufficient to mitigate the harm and cannot account for all eventualities, and a catastrophic event that results in the destruction or disruption of any data or critical business or information technology systems could severely affect our ability to conduct our business operations, and as a result, our future operating results could be materially and adversely affected.

Any disruption in the availability or functionality of our technology infrastructure and systems could have a material adverse effect on our business.

Our ability to originate and acquire investor real estate loans, execute securitizations, and manage any related interest rate risks and credit risks is critical to our success and is highly dependent upon the efficient and uninterrupted operation of our computer and communications hardware and software systems. Some of these systems are located at our facility and some are maintained by third-party vendors. Any significant interruption in the availability and functionality of these systems could harm our business. In the event of a systems failure or interruption by our third-party vendors, we will have limited ability to affect the timing and success of systems restoration. If such interruptions continue for a prolonged period of time, it could, have a material and adverse impact on our business, results of operations and financial condition.

Our security measures may not effectively prohibit others from obtaining improper access to our information. If a person is able to circumvent our security measures, he or she could destroy or misappropriate valuable information or disrupt our operations. Any security breach could expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation.

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Risks Related to Our Loan Portfolio

A significant portion of our loan portfolio is in the form of investor real estate loans which are subject to increased risks.

Investor real estate loans are directly exposed to losses resulting from default and foreclosure. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority and enforceability of the lien will significantly impact the value of such mortgages. Whether or not we have participated in the negotiation of the terms of any such mortgages, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests. Furthermore, claims may be asserted that might interfere with enforcement of our rights. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Any costs or delays involved in the completion of a foreclosure of the loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss.

A portion of our loan portfolio currently is, and in the future may be, delinquent and subject to increased risks of credit loss for a variety of reasons, including, without limitation, because the underlying property is too highly-leveraged or the borrower falls upon financial distress. Whatever the reason, the borrower may be unable to meet its contractual debt service obligation to us. Delinquent loans may require a substantial amount of workout negotiations or restructuring, which may divert our attention from other activities and entail, among other things, a substantial reduction in the interest rate or capitalization of past due interest. However, even if restructurings are successfully accomplished, risks still exist that borrowers will not be able or willing to maintain the restructured payments or refinance the restructured mortgage upon maturity.

Investor real estate loans, including performing and delinquent, are also subject to “special hazard” risk (property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies) and to bankruptcy risk (reduction in a borrower’s mortgage debt by a bankruptcy court). In addition, claims may be assessed against us on account of our position as mortgage holder or property owner, including responsibility for tax payments, environmental hazards and other liabilities.

Loans on properties in transition will involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured borrowers.

While our primary focus is long-term maturity investor real estate loans, in March 2017, we began originating short-term, interest-only loans to be used for acquiring, repositioning or improving the quality of 1-4 unit residential investment properties. This product typically serves as an interim solution for borrowers and/or properties that do not meet the investment criteria of our primary 30-year product. The typical borrower of these rehab and resell loans has usually identified an undervalued asset that has been under-managed or is located in a recovering market. If the market in which the asset is located fails to improve according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we bear the risk that we may not recover some or all of our investment.

In addition, borrowers usually use the proceeds of a conventional mortgage to repay a rehab and resell loan. Rehab and resell loans therefore are subject to risks of a borrower’s inability to obtain permanent financing to repay the loan. Rehab and resell loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. In the event of any default under rehab and resell loans that may be held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the transitional loan. To the extent we suffer such losses with respect to these loans, our business, results of operations and financial condition may be materially adversely affected.

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Any costs or delays involved in the completion of a foreclosure or liquidation of the underlying property may further reduce proceeds from the property and may increase the loss.

In the future, it is possible that we may find it necessary or desirable to foreclose on some, if not many, of the loans we acquire, and the foreclosure process may be lengthy and expensive. Borrowers may resist mortgage foreclosure actions by asserting numerous claims, counterclaims and defenses against us including, without limitation, numerous lender liability claims and defenses, even when such assertions may have no basis in fact, in an effort to prolong the foreclosure action and force us into a modification of the loan or a favorable buy-out of the borrower’s position. In some states, foreclosure actions can sometimes take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process. Foreclosure may create a negative public perception of the related mortgaged property, resulting in a decrease in its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs or delays involved in the completion of a foreclosure of the loan or a liquidation of the underlying property will further reduce the proceeds and thus increase the loss. Any such reductions could materially and adversely affect the value of the commercial loans in which we invest and, therefore, could have a material and adverse effect on our business, results of operations and financial condition. In addition, if the federal or a U.S. state government imposes freezes on the ability of lenders to foreclose on property or requires lenders to modify loans, we may be precluded from foreclosing on, or exercising other remedies with respect to, the property underlying loans, or may be required to accept modifications not favorable to us.

Insurance on collateral underlying mortgage loans and real estate securities may not cover all losses.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. Uninsured losses may also reduce the value of the underlying property. Any uninsured or underinsured loss could result in the loss of cash flow from, and the asset value of, the affected property.

Some of the mortgage loans we originate or acquire are loans made to self-employed borrowers who may have a higher risk of delinquency and default, which could have a material and adverse effect on our business, results of operations and financial condition.

Many of our borrowers are self-employed. The unpaid principal balance, or UPB, of loans to self-employed borrowers represented 69.8% of our total loan portfolio, or $1.3 billion, as of September 30, 2019. Self-employed borrowers may be more likely to default on their mortgage loans than salaried borrowers and generally have less predictable income. In addition, many self-employed borrowers are small business owners who may be personally liable for their business debt. Consequently, a higher number of self-employed borrowers may result in increased defaults on the mortgage loans we originate or acquire and, therefore, could have a material and adverse effect on our business, results of operations and financial condition.

We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses.

A number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting

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in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. We cannot assure prospective investors that such claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.

Our portfolio of assets may at times be concentrated in certain property types or secured by properties concentrated in a limited number of geographic areas, which increases our exposure to economic downturn and natural disasters with respect to those property types or geographic locations.

We are not required to observe specific diversification criteria, except as may be set forth in the underwriting guidelines adopted by our board of directors. Therefore, our portfolio of assets may, at times, be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations.

Our loan portfolio changes over time, however, as of September 30, 2019, our loans were primarily concentrated in New York, California, Florida and New Jersey. Deterioration of economic conditions or natural disasters in these or in any other state in which we have a significant concentration of borrowers could have a material and adverse effect on our business by reducing demand for new financings, limiting the ability of customers to repay existing loans and impairing the value of our real estate collateral and real estate owned properties.

To the extent that our portfolio is concentrated in any region, or by type of property, downturns relating generally to such region, type of borrower or security, or the occurrence of natural disasters in those regions, may result in defaults on a number of our assets within a short time period, which may reduce our net income and the value of our common stock and accordingly reduce our ability to pay dividends to our stockholders.

The investor real estate loans we originate or acquire are dependent on the ability of the property owner to generate net income from operating the property, which may result in the inability of such property owner to repay a loan, as well as the risk of foreclosure.

The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be adversely affected by, among other things:

• tenant mix;

• success of tenant businesses;

• property management decisions;

• property location, condition and design;

• competition from comparable types of properties;

• changes in national, regional or local economic conditions or specific industry segments;

• declines in regional or local real estate values;

• declines in regional or local rental or occupancy rates;

• increases in interest rates, real estate tax rates and other operating expenses;

• costs of remediation and liabilities associated with environmental conditions;

• the potential for uninsured or underinsured property losses;

• changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs of compliance; and

• acts of God, terrorism, social unrest and civil disturbances.

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In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of interest and principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure can be an expensive and lengthy process and foreclosing on certain properties where we directly hold the mortgage loan and the borrower’s default under the mortgage loan is continuing could result in actions that could be costly to our operations, in addition to having a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties.

In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected. In addition, an owner or operator of real property may become liable under various federal, state and local laws, for the costs of removal of certain hazardous substances released on its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage-related assets held by us.

We will utilize analytical models and data in connection with the projections for our loan portfolio, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.

We rely on analytical models (both proprietary models developed by us and those supplied by third parties) and information and data (both generated by us and supplied by third parties). Models and data will be used to make projections for our loan portfolio. When models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. Some of the analytical models we use, such as mortgage prepayment models or mortgage default models, are predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to volatility in results. In addition, the predictive models used by us may differ substantially from those models used by other market participants.

We may be required to repurchase or substitute mortgage loans or indemnify investors if we breach representations and warranties, which could harm our business, cash flow, results of operations and financial condition.

We have sold and, on occasion, we may sell some of our loans in the secondary market or as a part of a securitization of a portfolio of our loans. When we sell loans, we are required to make customary representations and warranties about such loans to the loan purchaser. Our mortgage loan sale agreements may require us to repurchase or substitute loans or indemnify investors in the event we breach a

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representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. Likewise, we may be required to repurchase or substitute loans or indemnify investors if we breach a representation or warranty in connection with our securitizations, if any.

The remedies available to a purchaser of mortgage loans are generally broader than those available to us against the originating broker or correspondent. Further, if a purchaser enforces its remedies against us, we may not be able to enforce the remedies we have against the sellers. The repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. They are also typically sold at a significant discount to the UPB. Significant repurchase activity could harm our business, cash flow, results of operations and financial condition.

Some of our portfolio assets may be recorded at fair value as estimated by management and may not reflect the price we could realize upon disposal.

Most of our portfolio assets will be in the form of loans that are not publicly traded. The fair value of securities and other assets that are not publicly traded is not readily determinable. Depending on whether these securities and other investments are classified as available-for-sale or held-to-maturity, we will value certain of these investments at fair value, as determined in accordance with Accounting Standards Codification™, or ASC, 820 — Fair Value Measurements, which may include unobservable inputs. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our results of operations and the value of our common stock could be adversely affected if our determinations regarding the fair value of these assets are materially higher than the values that we ultimately realize.

Risks Related to Our Organization and Structure

Snow Phipps and TOBI will own a substantial amount of our outstanding common stock following the closing of this offering and will have the ability to substantially influence us.

Following the closing of this offering, Snow Phipps will beneficially own approximately 37% of our outstanding common stock and TOBI will beneficially own approximately 23% of our outstanding common stock (in each case, assuming we offer the number of shares as set forth on the front cover of this prospectus at an initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus, and no exercise of the underwriters’ over-allotment option). In addition, pursuant to a stockholders agreement we intend to enter into with Snow Phipps and TOBI in connection with this offering, each of Snow Phipps and TOBI will have the right to designate certain persons as nominees for election as directors. Specifically, Snow Phipps will be entitled to designate up to two persons as director nominees and TOBI will be entitled to designate one person as a director nominee. As a result, although Snow Phipps and TOBI are not affiliated with each other, they may each be in a position to exercise significant influence over us, our board of directors and our management, affairs and transactions in a manner that you may not agree with or that you may not consider is in the best interest of all of our stockholders. In addition, the degree of control on our board of directors held by Snow Phipps and TOBI may be greater than their proportionate ownership of our common stock.

By virtue of Snow Phipps’ and TOBI’s stock ownership and voting power, in addition to their board nomination rights. Snow Phipps and TOBI have the power to significantly influence our business and affairs and are able to influence the outcome of matters required to be submitted to stockholders for approval, including the election of our directors, amendments to our certificate of incorporation, mergers or sales of assets. The influence exerted by Snow Phipps and TOBI over our business and affairs might not be consistent with the interests of some or all of our other stockholders. In addition, the concentration of ownership in our directors or stockholders associated with them may have the effect of delaying or preventing a change in control of our company, including transactions that would be in the best interests of

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our stockholders and would result in receipt of a premium to the price of our shares of common stock, and might negatively affect the market price of our common stock.

Our certificate of incorporation will provide that our directors who are affiliates of Snow Phipps and TOBI may engage in similar activities and lines of business as us, which may result in competition between us and such stockholders or another portfolio company of such stockholders for certain corporate opportunities.

Our certificate of incorporation will provide that our directors who are also employees or affiliates of Snow Phipps and TOBI may engage in similar activities or lines of business as us. Our certificate of incorporation will provide that no employees or affiliates of such stockholders, including those persons who are also our directors, have any obligation to refrain from (1) engaging directly or indirectly in the same or similar business activities or lines of business as us or developing or marketing any products or services that compete, directly or indirectly, with us, (2) investing or owning any interest in, or developing a business relationship with, any person or entity engaged in the same or similar business activities or lines of business as, or otherwise in competition with, us or (3) doing business with any of our clients or customers. In addition, our certificate of incorporation will provide that we have waived any interest or expectancy in any business or other opportunity that becomes known to a director of ours who is also an employee or affiliate of such stockholders unless the opportunity becomes known to that individual solely in his or her capacity as our director. As a result, certain of our directors who are also employees or affiliates of Snow Phipps or TOBI may compete with us for business and other opportunities, which may not be in the interest of all of our stockholders.

Some provisions of Delaware law and our organizational documents may deter third parties from acquiring us and may diminish the value of our common stock.

Certain provisions of the certificate of incorporation and bylaws that we will adopt upon the Conversion may have the effect of delaying or preventing a merger, acquisition, tender offer, takeover attempt or other change of control transaction that a stockholder might consider to be in its best interest, including attempts that might result in a premium over the market price of our common stock.

These provisions provide for, among other things:

• the ability of our board of directors to issue one or more series of preferred stock with voting or other rights or preferences that could have the effect of impeding the success of an attempt to acquire us or otherwise effect a change of control;

• advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at stockholder meetings;

• certain limitations on convening special stockholder meetings; and

• certain limitations regarding business combinations with any “interested stockholder.”

These provisions could make it more difficult for a third party to acquire us, even if the third-party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts. These provisions could also make it more difficult for our stockholders to nominate directors for election to our board of directors and take other corporate actions. See “Description of Capital Stock.”

Failure to comply with requirements to design, implement and maintain effective internal controls, as well as a failure to remediate any identified weaknesses in our internal controls, could have a material adverse effect on our reputation, business and stock price.

As a privately-held company, we were not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of

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the Sarbanes-Oxley Act, or Section 404. As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. In addition, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report following the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Testing and maintaining internal controls may divert management’s attention from other matters that are important to our business. We will be required to include an attestation report on the effectiveness of our internal controls over financial reporting issued by our independent registered public accounting firm in our second annual report following the completion of this offering.

In reviewing the accounting for a certain transaction we completed in January 2018, as part of our 2018 election to be treated as a corporation for U.S. federal and state income tax purposes, as described below under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Components of Results of Operations—Provision for Income Taxes,” our management identified a deficiency in the effectiveness of a control intended to properly document and review relevant facts and apply the appropriate tax accounting under U.S. GAAP, which impacted the beginning of year deferred tax asset and income tax benefit accounts and related disclosures. Our personnel responsible for preparing the opening deferred tax assets and liabilities and year-end deferred tax assets and liabilities did not have sufficient expertise to properly calculate the deferred tax positions. We did not perform a risk assessment to identify their lack of expertise in order to implement a sufficient control structure to prevent or detect the material misstatements in their income taxes accounts. The beginning of year deferred tax assets and liabilities, and the income tax benefits accounts and related disclosures were corrected as of the end of 2018. Management has concluded that the deficiency constitutes a material weakness in our internal control over financial reporting and, as a result, our internal control over financial reporting was not effective as of December 31, 2018.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We have implemented a plan to remediate this material weakness by contracting with a nationally recognized accounting firm to have experienced tax personnel supplement and train our current accounting team. Although we believe this plan will be adequate to address the material weakness, there can be no assurance that the material weakness will be remediated on a timely basis or at all, or that additional material weaknesses will not be identified in the future. If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the SEC, could be adversely affected which, in turn, to may adversely affect our reputation and business and the market price of our common stock.

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Our certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will be the sole and exclusive forums for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our certificate of incorporation will provide, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of our company, (2) action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee or stockholder of our company to the Company or our stockholders, creditors or other constituents, (3) action asserting a claim against the Company or any director or officer of the Company arising pursuant to any provision of the Delaware General Corporation Law, or the DGCL, or our certificate of incorporation or our bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (4) action asserting a claim against the Company or any director or officer of the Company governed by the internal affairs doctrine. Our certificate of incorporation will further provide that, to the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the United States federal securities laws.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our certificate of incorporation. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

Our board of directors will be authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.

Our certificate of incorporation will authorize our board of directors, without the approval of our stockholders, to issue 25,000,000 shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.

Risks Related to Sources of Financing

We may not be able to successfully complete additional securitization transactions on attractive terms or at all, which could limit potential future sources of financing and could inhibit the growth of our business.

We have financed a large portion of our loan portfolio as securitizations, and we plan to securitize newly originated loans to repay our warehouse repurchase facilities, provide for long-term financing and generate cash for funding new loans. We plan to continue to structure these securitizations so that they are treated as financing transactions, and not as sales, for U.S. GAAP purposes. This involves creating a special-purpose vehicle, contributing a pool of our assets to the entity and selling non-recourse debt securities to purchasers. We retain a portion of the “first loss” subordinated securities issued by our trusts and, as a result, we are the first tranche exposed to principal losses in the event the trust experiences a loss.

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We use short-term credit facilities to finance the origination or acquisition of investor real estate loans until a sufficient quantity of eligible assets has been accumulated, at which time we would refinance these short-term facilities through a securitization of the eligible assets, such as issuances of commercial mortgage-backed securities or collateralized loan obligations or the private placement of loan participations or other long-term financing. When we employ this strategy, we are subject to the risk that we would not be able to obtain, during the period that our short-term facilities are available, a sufficient amount of eligible assets to maximize the efficiency of a securitization. We are also subject to the risk that we are not able to obtain short-term credit facilities or are not able to renew any short-term credit facilities after they expire should we find it necessary to extend such short-term credit facilities to allow more time to obtain the necessary eligible assets for a long-term financing.

From time to time one or more credit rating agencies may rate our new or existing securitizations. A lower than expected rating by one or more of these agencies or a reduction or withdrawal of a credit rating may adversely impact our ability to complete new securitizations on attractive terms or at all.

The inability to consummate securitizations of our portfolio or secure other financing arrangements on satisfactory terms to finance our loans on a long-term basis could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could have a material and adverse effect on our business, results of operations and financial condition.

If one or more of our warehouse repurchase facilities, on which we are dependent, are terminated, we may be unable to find replacement financing on favorable terms on a timely basis, or at all, which would have a material adverse effect on our business, results of operations and financial condition.

We require a significant amount of short-term funding capacity for loans we originate. Consistent with industry practice, two of our existing warehouse repurchase facilities are short-term, requiring annual renewal. If any of our committed facilities are terminated or are not renewed or our uncommitted facilities are not honored, we may be unable to find replacement financing on favorable terms on a timely basis, or at all, and we might not be able to originate loans, which would have a material adverse effect on us. Additionally, as our business continues to expand, we may need additional warehouse funding capacity for loans we originate. There can be no assurance that, in the future, we will be able to obtain additional warehouse funding capacity on favorable terms, on a timely basis, or at all.

We may be required to maintain certain levels of collateral or provide additional collateral under our warehouse repurchase facilities, which may restrict us from leveraging our assets as fully as desired or forcing us to sell assets under adverse market conditions, resulting in potentially lower returns.

We currently finance our originations and investments in investor real estate using three warehouse repurchase facilities, which are our short-term revolving full recourse master repurchase agreements secured by certain of our underlying mortgage loans. Under our revolving warehouse repurchase facilities, the amount of available financing on our investor real estate loan portfolio is reduced based on the delinquency performance of the individual loans pledged under these facilities, and if the delinquency in our loan portfolio increases beyond certain levels, we may be required to pledge additional collateral, pay down a portion of the outstanding balance of these warehouse repurchase facilities, or liquidate assets at a disadvantageous time to avoid violating certain financial covenants contained therein and triggering a foreclosure on our collateral, any of which could cause us to incur further losses and have a material and adverse effect on our business, results of operations and financial condition.

In the event we do not have sufficient liquidity to pay down the financing when loan performance deteriorates, lending institutions can accelerate our indebtedness, increase our borrowing rates, liquidate our collateral and terminate our ability to borrow.

Further, our revolving warehouse repurchase facility agreements contain various financial and other restrictive covenants, including covenants that require us to maintain a certain amount of cash that is not invested or to set aside non-levered assets sufficient to maintain a specified liquidity position, which would

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allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. In the event that we are unable to meet these collateral obligations, as described above, our financial condition could deteriorate rapidly. In addition, if we fail to satisfy any of the financial or other restrictive covenants, or otherwise default under our revolving warehouse repurchase facilities, the lenders have the right to accelerate repayment and terminate the facilities. Accelerating repayment and terminating the facilities would require immediate repayment by us of the borrowed funds, which may require us to liquidate assets at a disadvantageous time, causing us to incur further losses and have a material and adverse effect on our business, our results of operations and financial condition.

If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying asset back to us at the end of the transaction term, or if the value of the underlying asset has declined as of the end of that term, or if we default on our obligations under the repurchase agreement, we will lose money on our repurchase transactions.

When we engage in repurchase transactions, we generally sell assets to lenders and receive cash from these lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the assets to the lender is less than the value of those assets (this difference is the haircut), if the lender defaults on its obligation to resell the same assets back to us we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the assets). We would also lose money on a repurchase transaction if the value of the underlying assets has declined as of the end of the transaction term, as we would have to repurchase the assets for their initial value but would receive assets worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate all of the outstanding repurchase transactions with us and can cease entering into any other repurchase transactions with us. Our repurchase agreements contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase transactions could have a material and adverse effect on our business, our results of operations and financial condition.

Interest rate fluctuations could negatively impact our net interest income, cash flows and the market value of our investments.

Our primary interest rate exposures will relate to the yield on our investments and the financing cost of our debt, as well as interest rate swaps we may utilize for hedging purposes. Changes in interest rates will affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. Changes in the level of interest rates also may affect our ability to invest in assets, the value of our investments and our ability to realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates if a significant percentage of borrowers have mortgages that reset to a substantially higher interest rate and are unable to make their new monthly payments as obligated under the terms of the mortgage loan.

While the interest rates used to calculate interest expense on our financing lines are subject to floors to the extent that our financing costs will be determined by reference to floating rates (such as LIBOR or a Treasury index) plus a margin, the amount of such margin will depend on a variety of factors, including, without limitation, (1) for collateralized debt, the value and liquidity of the collateral, and for non-collateralized debt, our credit, (2) the level and movement of interest rates and (3) general market conditions and liquidity. In a period of rising interest rates, our interest expense on floating rate debt would increase, and it is possible that any additional interest income we earn on our floating rate investments may not compensate for such increase in interest expense. Furthermore, during a period of rising interest rates, the interest income we earn on our fixed rate investments would not change, the duration and weighted average life of our fixed rate investments would increase and the market value of our fixed rate investments would decrease. Similarly, in a period of declining interest rates, the interest income generated on floating

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rate investments would decrease, while any decrease in the interest we are charged on our floating rate debt may not compensate for such decrease in interest income and interest we are charged on our fixed rate debt would not change. Any such scenario could materially and adversely affect or business, results of operations and financial condition.

Interest rate mismatches between our loans and our borrowings used to fund our portfolio may reduce our income during periods of changing interest rates.

We fund some of our loan portfolio with borrowings that have interest rates based on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of our loans. Accordingly, if short-term interest rates increase, this may adversely affect our profitability.

The majority of our loan portfolio is comprised of adjustable rate mortgages, or ARMs. The interest rate indices and re-pricing terms of the loans and their funding sources will not be identical, thereby creating an interest rate mismatch between our assets and liabilities. There have been periods when the spread between these indices was volatile. During periods of changing interest rates, these mismatches could reduce our net income and the market price of our common stock.

Interest rate caps on our ARMs may reduce our income or cause us to suffer a loss during periods of rising interest rates.

Our ARMs are subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through maturity of a loan. Our borrowings, including our warehouse repurchase facilities and securitizations, are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while interest rate caps would limit the interest rates on our ARMs. This problem is magnified for our ARMs that are not fully indexed. As a result, we could receive less cash income on ARMs than we need to pay interest on our related borrowings. These factors could lower our net interest income or cause us to suffer a loss during periods of rising interest rates.

Our existing and future financing arrangements and any debt securities we may issue could restrict our operations and expose us to additional risk.

Our existing and future financing arrangements (including term loan facilities, revolving credit facilities, warehouse repurchase facilities and securitizations) and any debt securities we may issue in the future are or will be governed by a credit agreement, indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We will bear the cost of issuing and servicing such credit facilities, arrangements or securities.

Under our warehouse repurchase facilities, the lenders have specific rights, including but not limited to, the right to review assets for which we are seeking financing, the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the warehouse repurchase facilities, the right to restrict dividend payments made to us by certain of our wholly owned subsidiaries and the right to approve the sale of assets. We are a holding company that conducts all of our operations through wholly owned subsidiaries. Although our warehouse repurchase facilities do not limit our rights to pay dividends directly to stockholders, restrictions on our subsidiaries paying dividends to us limits our ability to receive cash from such wholly owned subsidiaries. These restrictive covenants and operating restrictions could have a material adverse effect on our business and operating results, restrict our ability to finance or securitize new originations and acquisitions, force us to liquidate collateral.

We may use derivative instruments, which could subject us to increased risk of loss.

We may use derivative instruments to help manage interest rate exposure. The prices of derivative instruments, including futures and options, are highly volatile. Payments made pursuant to swap

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agreements may also be highly volatile. In addition, our derivative instruments are subject to the risk of the failure of the exchanges on which our positions trade or of our clearinghouses or counterparties. Our option transactions may be part of a hedging strategy (i.e., offsetting the risk involved in another securities position) or a form of leverage, in which we will have the right to benefit from price movements in a large number of securities with a small commitment of capital. These activities involve risks that can be substantial, depending on the circumstances.

Uncertainty about the future of LIBOR could negatively impact our cost of funds, net interest income, cash flows and financial performance.

Borrowings under our 2019 Term Loans, revolving credit facility and warehouse repurchase facilities bear interest at rates that are calculated based on LIBOR. On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR in its current form cannot be assured after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, if the administrator will continue to quote LIBOR after 2021 or, if it does continue to quote LIBOR, whether it will be determined on a consistent basis with the existing definition and will behave in a consistent manner to existing LIBOR, or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Although alternative reference rates have been proposed, it is unknown whether these alternative reference rates will attain market acceptance as replacements of LIBOR.

If LIBOR ceases to exist, the method and rate used to calculate our interest rates and/or payments on our 2019 Term Loans, revolving credit facility and warehouse repurchase facilities in the future may result in interest rates and/or payments that are higher than, lower than, or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR was available in its current form. Furthermore, although the variable interest component of our existing loan portfolio is based on the prime rate rather than LIBOR, uncertainty in the lending markets related to the future of LIBOR could increase the prime rate, which may increase borrower defaults and increase our credit losses. In addition, while our existing securitizations are largely fixed-rate debt, uncertainty in the lending markets related to the future of LIBOR could increase the general level of interest rates and risk spreads on our future securitizations. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital, financial results, cash flows and financial performance cannot yet be determined.

Risks Relating to Regulatory Matters

The increasing number of proposed United States federal, state and local laws may affect certain mortgage-related assets in which we intend to invest and could materially increase our cost of doing business.

Various legislation, including related to federal bankruptcy law and foreclosure actions under state law, has been proposed that, among other provisions, could allow judges to modify the terms of residential mortgages in bankruptcy proceedings, could hinder the ability of the servicer to foreclose promptly on defaulted mortgage loans or permit limited assignee liability for certain violations in the mortgage loan origination process, any or all of which could adversely affect our business or result in us being held responsible for violations in the mortgage loan origination process even where we were not the originator of the loan. We do not know what impact this type of legislation, which has been primarily, if not entirely, focused on residential mortgage originations, would have on the investor real estate loan market. We are unable to predict whether United States federal, state or local authorities, or other pertinent bodies, will enact legislation, laws, rules, regulations, handbooks, guidelines or similar provisions that will affect our business or require changes in our practices in the future, and any such changes could materially and adversely affect our cost of doing business and profitability. We may be subject to liability for potential

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violations of various lending laws, which could adversely impact our business, results of operations and financial condition.

Mortgage loan originators and servicers operate in a highly regulated industry and are required to comply with various federal, state and local laws and regulations. If any of our loans are found to have been originated, serviced or owned by us or a third-party in violation of applicable law, we could be subject to lawsuits or governmental actions, or we could be fined or incur losses. In respect of our mortgage loan originations and acquisitions, if any third-party mortgage brokers, originators or servicers fail to comply with applicable law, it could subject us, as lender, assignee or purchaser of the related mortgage loans, to monetary penalties or other losses. Any such outcome could have a material and adverse effect on our business, results of operations and financial condition.

The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business.

As a result of the dislocation of the credit markets during the previous recession, and in anticipation of more extensive regulation, including regulations promulgated pursuant to the Dodd-Frank Act, the securitization industry has crafted and continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines. Various U.S. federal agencies, including the SEC, as well as the European Union have promulgated regulations with respect to issues that affect securitizations.

On October 21, 2014, the final rules implementing the credit risk retention requirements of Section 941 of the Dodd–Frank Act, or the U.S. Risk Retention Rules, were issued and have since become effective with respect to all asset classes. The risk retention rules generally require the sponsor of a securitization to retain not less than 5% of the credit risk of the assets collateralizing the issuer’s mortgage- backed securities. When applicable, the risk retention rules generally require the “securitizer” of a “securitization transaction” to retain at least 5% of the “credit risk” of “securitized assets,” as such terms are defined for purposes of that statute, and generally prohibit a securitizer from directly or indirectly eliminating or reducing its credit exposure by hedging or otherwise transferring the credit risk that the securitizer is required to retain. Our securitizations are subject to the U.S. Risk Retention Rules and, as a result, we have retained at least 5% of the credit risk for all of our securitizations since the U.S. Risk Retention Rules went into effect. The European Union has also adopted certain risk retention and due diligence requirements in respect of various types of European Union-regulated investors that, among other things, restrict investors from taking positions in securitizations. To the extent our securitizations are marketed in Europe, we would become subject to these additional regulations, which may increase our risk retention requirements and increase the complexity and costs of new securitizations.

The current regulatory environment may be impacted by future legislative developments, such as amendments to key provisions of the Dodd-Frank Act, including provisions setting forth capital and risk retention requirements. On February 3, 2017, President Trump signed an executive order calling for the administration to review U.S. financial laws and regulations in order to determine their consistency with a set of core principles identified in the order. The full scope of President Trump’s short-term legislative agenda is not yet fully known, but it may include certain deregulatory measures for the U.S. financial services industry, including changes to the Financial Stability Oversight Board, the Volcker Rule and credit risk retention requirements, among other areas. These legislative developments or those in the European Union, and other proposed regulations affecting securitization, could alter the structure of securitizations in the future, pose additional risks to our participation in future securitizations or reduce or eliminate the economic incentives for participating in future securitizations, increase the costs associated with our origination, securitization or acquisition activities, or otherwise increase the risks or costs of our doing business.

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We are subject to state licensing and operational requirements in certain states that may result in substantial compliance costs.

Although we do not engage in the highly regulated residential mortgage lending practice, we may be subject to licensing and operational requirements in certain states in which we do business. There can be no assurance that will be able to obtain any or all of the approvals and licenses that we desire or that we will avoid experiencing significant delays in seeking such approvals and licenses. In addition, in those states in which we are licensed, we are subject to periodic examinations by state regulators, which can result in refunds to borrowers of certain fees earned by us, and we may be required to pay substantial penalties imposed by state regulators due to compliance errors. Future regulatory changes may increase our costs and obligations by expanding the types of lending to which such laws apply or through stricter licensing laws, disclosure laws or increased fees, or may impose conditions to licensing that we are unable to meet. Future state legislation and changes in existing regulation may significantly increase our compliance costs or reduce the amount of ancillary fees, including late fees, that we may charge to borrowers. This could make our business cost-prohibitive in the affected state or states and could materially and adversely affect our business, results of operations and financial condition.

Any failure to obtain or maintain required licenses will restrict our options and ability to engage in desired activities, and could subject us to fines, suspensions, terminations and various other adverse actions if it is determined that we have engaged without the requisite approvals or licenses in activities that required an approval or license, which could have a material and adverse effect on our business, results of operation and financial condition.

Maintenance of our Investment Company Act exclusion imposes limits on our operations, which may adversely affect our operations.

We currently conduct, and intend to continue to conduct, our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act.

We believe we are not an investment company under Section 3(a)(1) of the 1940 Act because we will not engage primarily, or hold ourselves out as being engaged primarily, in the business of investing, reinvesting or trading in securities, nor will we own investment securities with a combined value in excess of 40% of the value of our total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis. Rather, we, through our wholly owned subsidiaries, are primarily engaged in the business of originating and managing investor real estate loans.

We hold our assets primarily through direct or indirect wholly owned subsidiaries, certain of which are excluded from the definition of investment company pursuant to Section 3(c)(5)(C) and/or Section 3(c)(6) of the 1940 Act. To qualify for the exclusion pursuant to Section 3(c)(5)(C), based on positions set forth by the staff of the SEC, each such subsidiary generally is required to hold at least (i) 55% of its assets in “qualifying” real estate assets and (ii) at least 80% of its assets in “qualifying” real estate assets and “real estate-related” assets. “Qualifying” real estate assets for this purpose include mortgage loans that satisfy conditions set forth in SEC staff no-action letters and other guidance, and other assets that the SEC staff has determined are the functional equivalent of whole mortgage loans for the purposes of the 1940 Act. Section 3(c)(6) of the 1940 Act excludes, among other categories of issuers, issuers that are primarily engaged in a Section 3(c)(5)(C) business activity directly or through majority-owned subsidiaries. The SEC staff has stated in a no-action letter that an issuer that acquires whole mortgage loans that are eventually transferred into a securitization trust which it sponsors for the purpose of obtaining financing to acquire additional whole mortgage loans, may treat as qualifying real estate assets for purposes of Section 3(c)(5)(C) any securities issued by that trust that it retains because such securities are acquired as a direct result of the issuer being engaged in the business of purchasing or otherwise acquiring whole mortgage loans. As the factual basis of this no-action position aligns with our business model, we accordingly the treat mortgage backed securities issued by our securitization trusts that we have retained as qualifying real estate assets.

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As a consequence of our seeking to avoid the need to register under the 1940 Act on an ongoing basis, we and/or our subsidiaries may be restricted from holding certain securities or may structure securitizations in a manner that would be less advantageous to us than would be the case in the absence of such requirements. For example, the restrictions of Section 3(c)(5)(C) may limit our and our subsidiaries’ ability to retain certain mortgage-backed securities issued by our securitization trusts. Thus, avoiding registration under the 1940 Act may hinder our ability to finance our operations using securitizations and execute our growth strategy.

There can be no assurance that we and our subsidiaries will be able to successfully maintain the exceptions to the 1940 Act we currently rely on. If it were established that we or any of our subsidiaries were operating as an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action or actions brought by the SEC, that we would be unable to enforce contracts with third parties, that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company, and that we would be subject to limitations on corporate leverage that would have an adverse impact on our investment returns.

If we fail to comply with laws, regulations and market standards regarding the privacy, use, and security of customer information, or if we are the target of a successful cyber-attack, we may be subject to legal and regulatory actions and our reputation would be harmed.

We receive, maintain, and store non-public personal information of our loan applicants. The technology and other controls and processes designed to secure our customer information and to prevent, detect, and remedy any unauthorized access to that information were designed to obtain reasonable, not absolute, assurance that such information is secure and that any unauthorized access is identified and addressed appropriately. We are not aware of any data breaches, successful hacker attacks, unauthorized access and misuse, or significant computer viruses affecting our networks that may have occurred in the past; however, our controls may not have detected, and may in the future fail to prevent or detect, unauthorized access to our borrower information. In addition, we are exposed to the risks of denial-of-service, or DOS, attacks and damage to or destruction of our network or other information systems. A successful DOS attack or damage to our systems could result in a delay in the processing of our business, or even lost business. Additionally, we could incur significant costs associated with the recovery from a DOS attack or damage to our systems.

If borrower information is inappropriately accessed and used by a third-party or an employee for illegal purposes, such as identity theft, we may be responsible to the affected applicant or borrower for any losses he or she may have incurred as a result of misappropriation. In such an instance, we may also be liable to a governmental authority for fines or penalties associated with a lapse in the integrity and security of our customers’ information. Additionally, if we are the target of a successful cyber-attack, we may experience reputational harm that could impact our standing with our borrowers and adversely impact our financial results.

We may be subject to liability for potential violations of predatory lending laws, which could adversely impact our business, results of operations and financial condition.

Although we have certain controls and procedures in place in order to confirm that all loans we make or acquire are undertaken for business purposes, from time to time we may inadvertently originate or acquire a loan subject to the various U.S. federal, state and local laws that have been enacted to discourage predatory lending practices. The Federal Home Ownership and Equity Protection Act of 1994, or the HOEPA, prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in the HOEPA.

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There can be no assurance that we will not inadvertently originate or acquire a consumer loan. If we were to originate or acquire such a loan, we would be required to comply with these laws and any breach of such laws could subject us to monetary penalties or give the borrowers a rescission right. Lawsuits have been brought in various states making claims against assignees or purchasers of high cost loans for violations of state law. If any of our loans are found to have been originated in violation of predatory or abusive lending laws, we could incur losses, which could materially and adversely impact our business, results of operations and financial condition.

Risks Related to this Offering

There is currently no public market for our common stock and an active trading market for our common stock may never develop following this offering, which could cause our common stock to trade at a discount and make it difficult for holders of our common stock to sell their shares.

Prior to this offering, there has not been a public market for our common stock. An active trading market for our common stock may never develop or be sustained, which may affect your ability to sell your common stock and could depress the market price of your common stock. Our common stock has been approved for listing, subject to official notice of issuance on the NYSE. Listing on the NYSE would not ensure that an actual market will develop for our common stock. As a result, no assurances can be given that you will be able to readily sell your common stock at a price equal to or above the price you paid.

You will incur immediate dilution in the net tangible book value of the shares you purchase in this offering.

The initial public offering price of our common stock will be higher than the pro forma net tangible book value per share of outstanding common stock prior to completion of this offering after giving effect to the October 2019 Securitization and the Conversion. Based on our pro forma net tangible book value as of September 30, 2019 after giving effect to the October 2019 Securitization and the Conversion and upon the issuance and sale of 7,250,000 shares of common stock by us at an assumed initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus, if you purchase our common stock in this offering, you will suffer immediate dilution of approximately $2.23 per share in net tangible book value. Dilution is the amount by which the offering price paid by purchasers of our common stock in this offering will exceed the pro forma as adjusted net tangible book value per share of our common stock upon completion of this offering. A total of 1,520,000 shares of common stock have been reserved for future issuance under our 2020 Omnibus Incentive Plan. You may experience additional dilution upon future equity issuances or the exercise of stock options to purchase common stock that may be granted from time to time to our directors, officers and employees under our current and future stock incentive plans, including our 2020 Omnibus Incentive Plan. See “Dilution.”

The trading and price of our common stock may be volatile and could decline substantially following this offering.

The initial public offering price will be determined through negotiations between us and the representative of the underwriters and may bear no relationship to the price at which the common stock will trade upon completion of this offering. Further, the stock markets, including the NYSE, have experienced significant price and volume fluctuations. As a result, the market price of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this prospectus, and others such as:

• our operating performance and the performance of other similar companies;

• actual or anticipated changes in our business strategy prospects;

• actual or anticipated valuations in our quarterly operating results or dividends;

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• our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts;

• publication of research reports about the real estate industry;

• speculation in the press or investment community;

• equity issuances by us, or stock resales by our stockholders, or the perception that such issuances or resales could occur;

• the passage of legislation or other regulatory developments that adversely affect us or the assets in which we seek to invest;

• the use of significant leverage to finance our assets;

• loss of a major funding source;

• changes in market valuations of similar companies;

• actions by our stockholders;

• general market and economic conditions and trends including inflationary concerns, and the current state of the credit and capital markets;

• actual or anticipated accounting problems;

• price and volume fluctuations in the overall stock market from time to time;

• additions or departures of our executive officers or key personnel;

• changes in the value of our portfolio;

• any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; and

• the realization of any other risk factor in this prospectus.

If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the initial public offering price. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly.

We will incur increased costs as a result of being a public company.

As a privately held company, we have not been subject to the corporate governance and financial reporting practices and policies required of a publicly traded company. Following the completion of this offering, as a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes Oxley Act, related regulations of the SEC and the requirements of the NYSE. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our board of directors and management and will significantly increase our costs and expenses. We will need to:

• institute a more comprehensive compliance function;

• design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes Oxley Act and the related rules and regulations of the SEC and the PCAOB;

• comply with rules promulgated by the NYSE;

• prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

• establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;

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• involve and retain to a greater degree outside counsel and accountants in the above activities;

• increased costs associated with employee equity compensation; and

• establish an investor relations function.

Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings or distributions of equity securities, including commercial paper, medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock, if issued, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, would likely have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of any future offerings reducing the market price of our common stock and diluting their stock holdings in us.

Future sales of shares of our common stock, including by our existing stockholders, could depress the market price of our shares.

We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the value of our common stock. Sales of these shares by our existing stockholders, or the perception that such sales could occur, may cause the trading price of our common stock to decrease or be lower than it might be in the absence of those sales or perceptions.

Upon completion of this offering and after giving effect to the Conversion, Snow Phipps and TOBI and certain members of our management and our other existing stockholders collectively will own approximately 62% of our outstanding shares of common stock (or approximately 58% of our outstanding shares of common stock if the underwriters fully exercise their over-allotment option), assuming we offer the number of shares as set forth on the front cover of this prospectus at an initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus. In addition, in connection with this offering we intend to enter into a registration rights agreement with Snow Phipps, TOBI, certain other stockholders, and certain members of our management and directors which, among other things, will give Snow Phipps and TOBI and their respective affiliates the right to cause us to file registration statements under the Securities Act covering their shares of our common stock, or to include the shares of common stock held by such stockholders in registration statements that we may file. If we were to include common stock held by such stockholders in a registration statement initiated by us, those additional shares could impair our ability to raise needed capital by depressing the price at which we could sell common stock.

You should not rely on lock-up agreements in connection with this offering to limit the amount of common stock sold into the market.

Snow Phipps, TOBI, certain other stockholders, and certain members of our management and directors have generally agreed, for a period of 180 days after the date of this prospectus, that they will

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(1) not issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or preferred stock or other capital stock, or any securities convertible into or exchangeable or exercisable for shares of our common stock or other capital stock, (2) in the case of us, file or cause the filing of any registration statement under the Securities Act with the SEC with respect to any common stock or other capital stock or any securities convertible into or exercisable or exchangeable for any common stock or other capital stock (other than any registration statement filed pursuant to Rule 462(b) under the Securities Act to register securities to be sold to the underwriters pursuant to the underwriting agreement), nor publicly disclose the intention to make any filings relating to any registration statement, or (3) enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any shares of our common stock or preferred stock or other capital stock, or any securities convertible into or exchangeable or exercisable for shares of our common stock or other capital stock, subject to specified exceptions, without the prior consent of Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and JMP Securities LLC. However, Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and JMP Securities LLC may, at any time, release all or a portion of the securities subject to these lock-up agreements. See “Underwriting.” If the restrictions under the lock-up agreements with the persons or entities subject to the lock-up agreements are waived or terminated, or upon expiration of the lock-up periods, approximately 11,749,988 shares will be available for sale into the market, subject only to applicable securities rules and regulations. These sales or a perception that these sales may occur could reduce the market price for our common stock.

We have not historically paid dividends on our common stock and, as a result, your only opportunity to achieve a return on your investment may be if the price of our common stock appreciates.

We have not declared or paid cash dividends to date on our common stock and do not intend to pay dividends for the foreseeable future. Instead, we anticipate that all of our earnings in the foreseeable future will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any determination to declare or pay dividends in the future will be at the discretion of our board of directors, subject to applicable laws and dependent upon a number of factors, including our earnings, capital requirements, overall financial conditions and limitations in our debt instruments. In addition, our ability to pay dividends on our common stock is currently limited by the covenants of our warehouse repurchase facilities and other credit facilities and may be further restricted by the terms of any future debt or preferred securities. Accordingly, your only opportunity to achieve a return on your investment in our company may be if the market price of our common stock appreciates and you sell your shares at a profit. The market price for our common stock may never exceed, and may fall below, the price that you pay for such common stock.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our core market, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business or industry. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business or industry, the price of our stock could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements (other than statements of historical facts) in this prospectus regarding the prospects of the industry and our prospects, plans, financial position and business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate,” “plan,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct. Such statements reflect the current views of our management with respect to our operations, results of operations and future financial performance. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:

• conditions in the real estate markets, the financial markets and the economy generally;

• failure of a third-party servicer or the failure of our own internal servicing system to effectively service our portfolio of mortgage loans;

• the high degree of risk involved in loans to small businesses, self-employed borrowers, properties in transition, certain portions of our investment real estate portfolio;

• possibility of receiving inaccurate and/or incomplete information from potential borrowers, guarantors and loan sellers;

• deficiencies in appraisal quality in the mortgage loan origination process;

• competition in the market for loan origination and acquisition opportunities;

• risks associated with our underwriting guidelines and our ability to change our underwriting guidelines;

• loss of our key personnel or our inability to hire and retain qualified account executives;

• any inability to manage future growth effectively or failure to develop, enhance and implement strategies to adapt to changing conditions in the real estate and capital markets;

• operational risks, including the risk of cyberattacks, or disruption in the availability and/or functionality of our technology infrastructure and systems;

• any inability of our borrowers to generate net income from operating the property that secures our loans;

• costs or delays involved in the completion of a foreclosure or liquidation of the underlying property;

• lender liability claims, requirements that we repurchase mortgage loans or indemnify investors, or allegations of violations of predatory lending laws;

• economic downturns or natural disasters in geographies where our assets are concentrated;

• environmental liabilities with respect to properties to which we take title;

• inadequate insurance on collateral underlying mortgage loans and real estate securities;

• use of incorrect, misleading or incomplete information in our analytical models and data;

• failure to realize a price upon disposal of portfolio assets that are recorded at fair value;

• any inability to successfully complete additional securitization transactions on attractive terms or at all;

• the termination of one or more of our warehouse repurchase facilities;

• interest rate fluctuations or mismatches between our loans and our borrowings;

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• legal or regulatory developments related to mortgage-related assets, securitizations or state licensing and operational requirements;

• our ability to maintain our Investment Company Act exclusion;

• fiscal policies or inaction at the U.S. federal government level, which may lead to federal government shutdowns or negative impacts on the U.S. economy;

• cyber-attacks and our ability to comply with laws, regulations and market standards regarding the privacy, use, and security of customer information;

• our ability to remediate the material weakness in our internal controls over financial reporting and to comply with requirements to maintain effective internal controls over financial reporting;

• the influence of Snow Phipps and TOBI over us;

• adverse legislative or regulatory changes; and

• the other factors discussed in “Risk Factors.”

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the events described under the caption “Risk Factors” and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial condition.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

When considering forward-looking statements, you should keep in mind the risks and other cautionary statements set forth in this prospectus, including those contained in “Risk Factors.” The risks and other cautionary statements noted throughout this prospectus could cause our actual results to differ significantly from those contained in or implied by any forward-looking statement.

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of our common stock in this offering will be approximately $96.1 million (or approximately $111.2 million if the underwriters fully exercise their over-allotment option to purchase up to an additional 1,087,500 shares of our common stock), in each case after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $15.00 per share would increase (decrease) the net proceeds we will receive from this offering by approximately $6.7 million, assuming the number of shares offered by us, as set forth on the front cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use approximately 75% of the gross proceeds from this offering to repay a portion of our outstanding corporate debt, up to a maximum repayment of $75 million in principal amount (plus related prepayment penalties), and the remainder for general corporate purposes, including originating or acquiring investor real estate loans. In August 2019, we redeemed and paid in full our outstanding senior secured notes, which would have matured in December 2019 and bore interest at either 10% per annum (to the extent paid in cash) or 11% per annum (to the extent paid-in-kind), with a portion of the proceeds from new term loans, the 2019 Term Loans, under a new five-year $153.0 million corporate debt agreement with a new lender. The 2019 Term Loans bear interest at a rate equal to one-month LIBOR plus 7.50% and mature in August 2024.

DIVIDEND POLICY

We have not declared or paid cash dividends to date on our common stock and we do not intend to pay dividends for the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions, limitations in our debt instruments and other factors that our board of directors may deem relevant.

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CAPITALIZATION

The following table sets forth our actual cash and cash equivalents and capitalization as of September 30, 2019:

• on an actual basis;

• on a pro forma basis to give effect to the October 2019 Securitization, the Conversion and the adopting and filing of our certificate of incorporation with the Delaware Secretary of State prior to the closing of this offering; and

• on a pro forma as adjusted basis to give further effect to our issuance and sale of 7,250,000 shares of our common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds from this offering thereof as described in “Use of Proceeds.”

The pro forma as adjusted amounts as of September 30, 2019 assume that the underwriters do not exercise their over- allotment option to purchase up to an additional 1,087,500 shares of our common stock. You should read this table together with “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

	September 30, 2019
	Actual		Pro Forma(1)		Pro Forma As Adjusted
	(unaudited, in thousands)
Cash and cash equivalents	$	8,849	$	19,992	$	40,783
Secured financing, net	$	145,285	$	145,285	$	73,914
Securitizations, net		1,377,733		1,529,824		1,529,824
Warehouse repurchase facilities, net		349,115		207,650		207,650
Members’ equity		150,579		—		—
Stockholders’ equity:
Preferred stock, par value $0.01 per share, 25,000,000 shares authorized; 0 shares outstanding, actual; 0 shares outstanding, pro forma and pro forma as adjusted		—		—		—
Common stock, par value $0.01 per share, 100,000,000 shares authorized; 0 shares outstanding, actual; 11,749,988 shares outstanding, pro forma; 18,999,988 shares outstanding, pro forma as adjusted		—		117		190
Additional paid-in capital		—		150,359		242,449
Total stockholders’ equity		—		150,477		242,639
Total capitalization	$	2,022,712	$	2,033,236	$	2,054,027

(1) Balances reflect the result of the October 2019 Securitization, which increased cash and cash equivalents by $11.1 million, increased securitizations, net by $152.1 million, and decreased warehouse repurchase facilities, net by $141.5 million.

A $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus, would increase or decrease, as applicable, on a pro forma as adjusted basis, cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $6.7 million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us and the

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application of the net proceeds thereof as described in “Use of Proceeds.” An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease, as applicable, on a pro forma as adjusted basis, cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $1.4 million, assuming an initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds thereof as described in “Use of Proceeds.”

The number of shares of our common stock to be outstanding upon the completion of this offering is based on 11,749,988 shares of our common stock outstanding as of September 30, 2019 after giving effect to the Conversion, assuming we offer the number of shares as set forth on the front cover of this prospectus and no exercise of the underwriters’ over-allotment option. Such number of outstanding shares excludes 1,520,000 shares of our common stock that may be issued in the future under our 2020 Omnibus Incentive Plan.

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the net tangible book value per share attributable to our existing equity holders.

Our historical pro forma net tangible book value as of September 30, 2019 was approximately $150.6 million, or $12.81 per share of our common stock after giving effect to the October 2019 Securitization and the Conversion, including the restricted shares of common stock issued upon the conversion of all outstanding unvested Class B units. Our historical net tangible book value represents the amount of total tangible assets (total assets less capitalized software) less total liabilities after giving effect to the Conversion. Historical pro forma net tangible book value per share represents historical pro forma net tangible book value after giving effect to the October 2019 Securitization divided by the 11,749,988 shares of our common stock outstanding as of September 30, 2019 after giving effect to the Conversion (assuming an initial public offering price of $15.00, which is the mid-point of the price range set forth on the front cover of this prospectus).

The following table illustrates this dilution on a per share basis assuming the underwriters do not exercise their over-allotment option.

Assumed public offering price per share	$	15.00
Historical pro forma net tangible book value per share as of September 30, 2019 after giving effect to the October 2019 Securitization and the Conversion, including the restricted shares of common stock issued upon the conversion of all outstanding unvested Class B units, but before giving effect to this offering	$	12.81
Decrease in net tangible book value per share attributable to this offering	$	0.04
Pro forma as adjusted net tangible book value per share on September 30, 2019, after giving effect to this offering	$	12.77
Dilution in as adjusted net tangible book value per share to new investor	$	2.23

A $1.00 increase or decrease in the assumed initial public offering of $15.00 per share would increase or decrease the net proceeds we will receive from this offering by approximately $6.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

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The following table summarizes, on a pro forma basis as of September 30, 2019, after giving effect to the Conversion and the adoption and filing of our certificate of incorporation prior to the closing of this offering, the differences between the average price per share paid by our existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us in this offering:

	Shares Purchased(1)					Total Consideration					Average Price Per Share
	Number		%			Amount		%
						(in thousands)
Shares purchased by existing stockholders		11,749,988		62	%	$	154,995		59	%	$	13.19
New investors		7,250,000		38			108,750		41			15.00
Total		18,999,988		100	%	$	263,745		100	%

(1) Assumes no exercise of the underwriters’ over-allotment option to purchase an additional                  shares of our common stock from us.

If the underwriters fully exercise their over-allotment option to purchase up to an additional 1,087,500 shares of our common stock from us, the number of shares of common stock held by existing holders will be reduced to 58% of the aggregate number of shares of common stock outstanding after this offering, and the number of shares of common stock held by new investors will be increased to 8,337,500, or 42% of the aggregate number of shares of common stock outstanding after this offering.

Assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, a $1.00 increase or decrease in the assumed initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus, would increase or decrease total consideration paid by new investors and total consideration paid by all stockholders by $6.7 million.

The number of shares purchased from us by existing stockholders is based on shares of our common stock outstanding as of September 30, 2019 after giving effect to the Conversion. Such number of outstanding shares excludes shares of our common stock that may be issued in the future under our 2020 Omnibus Incentive Plan.

Holders of our Class B units, including officers, directors and affiliated persons, will receive an aggregate of 156,113 shares of our common stock pursuant to the Conversion, assuming an initial public offering price of $15.00 per share, which is the mid-point of the price range set forth on the front cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price would, as applicable, increase by 55,015 or decrease by 60,048 the number of shares received by holders of our Class B units pursuant to the Conversion.

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following table presents summary consolidated financial information as of September 30, 2019 and December 31, 2018, 2017, 2016, 2015 and 2014, and for the nine months ended September 30, 2019 and 2018, and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014. The consolidated statements of income information for the years ended December 31, 2018, 2017 and 2016 and the consolidated statements of financial condition information presented below as of December 31, 2018 and 2017, have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of income information for the years ended December 31, 2015 and 2014 and the consolidated statements of financial condition information as of December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements not included in this prospectus. The consolidated statement of financial condition as of September 30, 2019 and the consolidated statements of income for the nine months ended September 30, 2019 and 2018 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus. These unaudited consolidated financial statements have been prepared on substantially the same basis as our audited consolidated financial statements and reflect all adjustments which are, in the opinion of management, necessary to provide a fair presentation of our consolidated financial position as of September 30, 2019, and the results of our operations for the interim periods ended September 30, 2019 and 2018. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of our results for the full fiscal year. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

The information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes. You should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements, including the related notes, included elsewhere in this prospectus.

Consolidated Statements of Income Information	Nine Months Ended September 30,						Year Ended December 31,
	2019			2018			2018		2017		2016		2015		2014
	(unaudited)						(in thousands)
Interest income	$	113,407		$	91,163		$	124,722	$	97,830	$	78,418	$	55,544	$	23,288
Interest expense — portfolio related		61,214			44,791			62,597		47,638		37,406		25,159		9,979
Net interest income — portfolio related		52,193			46,372			62,125		50,192		41,012		30,385		13,309
Interest expense — corporate debt		10,548			9,985			13,322		13,654		13,419		9,717		4,927
Net interest income		41,645			36,387			48,803		36,538		27,593		20,668		8,382
Provision for (reversal of) loan losses		898			(21	)		201		421		1,455		378		279
Net interest income after provision for loan losses		40,747			36,408			48,602		36,117		26,138		20,290		8,103
Other operating income
Gain on disposition of loans		2,914			1,173			1,200		984		196		683		3,130
Unrealized (loss) gain on fair value loans		(51	)		300			241		39		152		1,209		(663	)
Other (expense) income		(1,046	)		1,243			1,366		985		362		272		75
Total other operating income		1,817			2,716			2,807		2,008		710		2,164		2,542
Operating expenses
Compensation and employee benefits		11,519			11,277			15,105		11,904		10,085		6,617		4,307
Rent and occupancy		1,105			985			1,320		1,115		801		500		366
Loan servicing		5,457			4,191			6,009		4,907		3,657		3,139		1,793
Professional fees		1,587			1,804			3,040		1,661		2,637		2,284		334
Real estate owned, net		1,348			1,089			1,373		603		451		710		2,972
Corporate debt prepayment expense		—			—			—		—		—		—		5,676
Other operating expenses		4,292			3,943			5,313		3,946		2,420		2,050		1,500
Total operating expenses		25,308			23,289			32,160		24,136		20,051		15,300		16,948
Income (loss) before income taxes		17,256			15,835			19,249		13,989		6,797		7,154		(6,303	)
Income tax expense		5,146			7,241			8,700		—		—		—		—
Net income (loss)	$	12,110		$	8,594		$	10,549	$	13,989	$	6,797	$	7,154	$	(6,303	)

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Consolidated Statements of Financial Condition Information	September 30, 2019		December 31,
			2018		2017		2016		2015		2014
	(unaudited)		(in thousands)
Assets
Cash and cash equivalents	$	8,849	$	15,008	$	15,422	$	49,978	$	4,726	$	2,935
Restricted cash		3,152		1,669		305		1,766		7,561		2,701
Loans held for sale, net		170,440		78,446		5,651		—		—		—
Loans held for investment, net		1,775,935		1,567,408		1,299,041		1,039,401		868,592		417,058
Loans held for investment at fair value		2,936		3,463		4,632		7,278		10,143		13,091
Total loans, net		1,949,311		1,649,317		1,309,324		1,046,679		878,735		430,149
Accrued interest receivables		12,450		10,096		7,678		5,954		4,633		2,348
Receivables due from servicers		38,349		40,473		25,306		22,234		12,667		3,534
Other receivables		7,585		974		1,287		439		1,591		1,223
Real estate owned, net		15,806		7,167		5,322		1,454		751		4,434
Property and equipment, net		4,903		5,535		5,766		3,875		1,473		690
Net deferred tax asset		6,597		2,986		—		—		—		—
Other assets		17,499		4,760		1,435		750		512		516
Total assets	$	2,064,501	$	1,737,985	$	1,371,845	$	1,133,129	$	912,649	$	448,530
Liabilities and Members’ Equity
Accounts payable and accrued expenses	$	41,789	$	26,629	$	22,029	$	12,264	$	8,562	$	3,706
Secured financing, net		145,285		127,040		126,486		119,286		96,169		48,020
Securitizations, net		1,377,733		1,202,202		982,393		742,890		396,983		174,755
Warehouse repurchase facilities, net		349,115		215,931		85,303		110,308		324,502		142,770
Total liabilities		1,913,922		1,571,802		1,216,211		984,748		826,216		369,251
Commitments and contingencies
Class C preferred units		—		26,465		24,691		23,036		—		—
Members’ equity		150,579		139,718		130,943		125,345		86,433		79,279
Total liabilities and members’ equity	$	2,064,501	$	1,737,985	$	1,371,845	$	1,133,129	$	912,649	$	448,530

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this prospectus, particularly under “Risk Factors.”

Our Company

We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and small commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 15 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.

We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model capable of generating compelling risk-adjusted returns for our stockholders throughout various business cycles. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.

Our growth strategy is predicated on continuing to serve and build loyalty within our network of mortgage brokers, while also expanding our network with new mortgage brokers through targeted marketing, improved brand awareness, and the growth and development of our team of account executives. We believe our reputation and 15-year history within our core market position us well to capture future growth opportunities.

Our primary source of revenue is interest income earned on our loan portfolio. Our typical loan is secured by a first lien on the underlying property with a personal guarantee and, based on the loans in our portfolio as of September 30, 2019, has an average balance of approximately $319,000. As of September 30, 2019, our loan portfolio, including both loans held for investment and loans held for sale, totaled $1.9 billion of UPB on properties in 45 states and the District of Columbia. The total portfolio had a weighted average loan-to-value ratio, or LTV at origination, of 65.4%, and was concentrated in 1-4 unit residential rental loans, which we refer to as investor 1-4 loans, representing 51.5% of the UPB. During the nine months ended September 30, 2019, the yield on our total portfolio was 8.82%.

We fund our portfolio primarily through a combination of committed and uncommitted secured warehouse repurchase facilities, securitizations, corporate debt and equity. The securitization market is our primary source of long-term financing. We have successfully executed twelve securitizations, resulting in a total of over $2.5 billion in gross debt proceeds from May 2011 through October 2019. We intend to repay a portion of our existing corporate debt with a portion of the net proceeds from this offering.

One of our core profitably measurements is our portfolio related net interest margin, which measures the difference between interest income earned on our loan portfolio and interest expense paid on our portfolio-related debt, relative to the amount of loans outstanding over the period. Our portfolio-related debt consists of our warehouse repurchase facilities and securitizations and excludes our corporate debt. For the nine months ended September 30, 2019, our portfolio related net interest margin was 4.06%. We generate

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profits to the extent that our portfolio related net interest income exceeds our interest expense on corporate debt, provision for loan losses and operating expenses. For the nine months ended September 30, 2019, we generated income before income taxes and net income of $17.3 million and $12.1 million, respectively, and earned a pre-tax return on equity and return on equity of 15.8% and 11.1%, respectively.

Items Affecting Comparability of Results

Due to a number of factors, our historical financial results may not be comparable, either from period to period, or to our financial results in future periods. We have summarized the key factors affecting the comparability of our financial results below.

Income Taxes

Velocity Financial, LLC was formed as a Delaware Limited Liability Company, or LLC, in 2012. Until January 1, 2018, we had elected to be treated as a partnership for U.S. federal and state income tax purposes, and as such, had generally not been subject to federal and state income taxes prior to January 1, 2018. Accordingly, the results of operations presented in this prospectus for the years ended December 31, 2017 and 2016 do not include any provision for federal or state income taxes.

Effective January 1, 2018, we elected to be treated as a corporation for U.S. federal and state income tax purposes. Accordingly, the results of operations for the year ended December 31, 2018 include the impacts of income taxes. As a result, the historical net income reported for any period prior to January 1, 2018, is not comparable to the net income reported for the year ended December 31, 2018 or the net income anticipated in future periods.

Furthermore, in connection with the new tax treatment, we began recognizing, and will continue to recognize, deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that included the enactment date, as applicable.

We calculated our deferred tax as of January 1, 2018 and, per U.S. GAAP, recognized a deferred tax liability offsetting to income in January 2018, the period in which the change was made. The January 1, 2018 deferred tax liability was $2.6 million. The Company recorded approximately $5.6 million of deferred tax assets for the year ended December 31, 2018, resulting in a net deferred tax asset of approximately $3.0 million as of December 31, 2018. Our provision for deferred income taxes is primarily due to the difference between the tax and U.S. GAAP treatment on the issuance of our securitizations. For tax purposes, the issuances are considered taxable sales; whereas, for U.S. GAAP purposes, the securities issued in our securitizations are considered financings.

As part of our 2018 election to be treated as a corporation for U.S. federal and state income tax purposes, management identified a deficiency in the effectiveness of a control intended to properly document and review relevant facts and apply the appropriate tax accounting under U.S. GAAP, which impacted the beginning of year deferred tax asset and income tax benefit accounts and related disclosures. Our personnel responsible for preparing the beginning of year deferred tax assets and liabilities and year-end deferred tax assets and liabilities did not have sufficient expertise to properly calculate the deferred tax positions. We did not perform a risk assessment to identify their lack of expertise in order to implement a sufficient control structure to prevent or detect the material misstatements in their income taxes accounts. The beginning of year deferred tax assets and liabilities, and the income tax benefits accounts and related disclosures were corrected as of the end of 2018. Management has concluded that the deficiency constitutes a material weakness in our internal control over financial reporting and, as a result, our internal control over financial reporting was not effective as of December 31, 2018.

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A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We have implemented a plan to remediate this material weakness by contracting with a nationally recognized accounting firm to have experienced tax personnel supplement and train our current accounting team. Although we believe this plan will be adequate to address the material weakness, there can be no assurance that the material weakness will be remediated on a timely basis or at all, or that additional material weaknesses will not be identified in the future.

In addition, prior to the closing of this offering, we will convert into a Delaware corporation and change our name to Velocity Financial, Inc., a transaction that we refer to as the “Conversion” in this prospectus. For more information regarding the Conversion, see “Summary—Corporate Conversion.” The Conversion will be accounted for in accordance with ASC 805-50 –Business Combinations, as a transaction between entities under common control. The Conversion is not expected to impact our provision for income taxes or our deferred tax assets and liabilities.

Interest Expense on Corporate Debt

In 2014, we entered into a five-year, $100.0 million corporate debt agreement with the owners of our Class C preferred units, pursuant to which we issued at par senior secured notes, the 2014 Senior Secured Notes, that mature on December 16, 2019. The 2014 Senior Secured Notes bear interest, at our election, at either 10% annually paid in cash or 11% annually paid in kind.

In August 2019, we entered into a five-year $153.0 million corporate debt agreement with Owl Rock Capital Corporation. The 2019 Term Loans under this agreement bear interest at a rate equal to one-month LIBOR plus 7.50% and mature in August 2024. A portion of the net proceeds from the 2019 Term Loans was used to redeem the 2014 Senior Secured Notes. Another portion of the net proceeds from the 2019 Term Loans, together with cash on hand, was used to repurchase our outstanding Class C preferred units.

As of September 30, 2019 and December 31, 2018, including paid-in-kind interest, the 2014 Senior Secured Notes balance was zero and $127.6 million, respectively, and is presented as secured financing, net of debt issuance costs, on the consolidated statement of financial condition. The 2019 Term Loans balance was $153.0 million as of September 30, 2019. During the nine months ended September 30, 2019, we incurred $10.5 million of interest expense related to the 2014 Senior Secured Notes and the 2019 Term Loans.

We intend to use a portion of the net proceeds from this offering to lower our interest expense through the partial repayment of the outstanding balance on the 2019 Term Loans. See “Use of Proceeds.”

Public Company Costs

Following the completion of this offering, we expect to incur additional costs associated with operating as a public company. We expect that these costs will include additional personnel, legal, consulting, regulatory, insurance, audit, and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules adopted by the SEC and national securities exchanges, requires public companies to implement specified corporate governance practices that are currently not applicable to us as a private company.

New Accounting Standard for Measuring Credit Losses

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes how entities will be required to account for credit losses. Under the current standard, credit losses are measured in accordance with an incurred loss model, which delays recognition of credit losses until it is probable that a loss has occurred. ASC 2016-13 replaces the incurred loss model with an expected credit loss model, referred to as the Current Expected Credit Loss, or CECL, model. The new standard requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable

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forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will become effective January 1, 2020. The Company has selected a CECL software program and is currently working with the vendor to implement the software. The Company expects model validation and parallel runs to begin in the fourth quarter of 2019. Additionally, the Company is assessing updates to accounting policies, and documenting new processes and controls. The Company expects to adopt this ASU on January 1, 2020.

Recent Developments

October 2019 Securitization

In October 2019, we completed the securitization of $162.5 million of investor real estate loans, measured by UPB as of the September 1, 2019 cut-off date, issuing $154.4 million of non-recourse notes payable through the Velocity Commercial Capital Loan Trust 2019-3, or 2019-3. We are the sole beneficial interest holder of 2019-3, a variable interest entity that will be included in our consolidated financial statements.

October 2019 Securitization Sale

In October 2019, the Company sold its remaining retained interests in securitization 2014-1 for approximately $9.7 million. The proceeds were used to fund our loan originations.

Estimates for the Year Ended December 31, 2019

We expect to report total loan originations of at least $1,009.0 million for the year ended December 31, 2019, compared to total loan originations of $737.3 million for the year ended December 31, 2018, and $554.7 million for the year ended December 31, 2017.

We expect to report total loans, as measured by unpaid principal balance, of at least $2,055.0 million as of December 31, 2019, compared to total loans, as measured by unpaid principal balance, of $1,928.2 million as of September 30, 2019, and $1,631.3 million as of December 31, 2018. We expect to report nonperforming loans between 6.50% and 6.90% of total loans, as measured by unpaid principal balance, as of December 31, 2019, compared to nonperforming loans of 6.13% as of September 30, 2019, and of 5.85% as of December 31, 2018. Nonperforming loans includes all loans that are 90 or more days past due, in bankruptcy or in foreclosure.

We expect to report net income between $16.8 million and $18.6 million for the year ended December 31, 2019, compared to net income of $10.5 million for the year ended December 31, 2018, and $14.0 million for the year ended December 31, 2017. The Company was not subject to income tax prior to January 1, 2018 because prior to that time it elected to be treated as a partnership for U.S. federal income tax purposes.

We expect to report members’ equity between $155.3 million and $157.1 million as of December 31, 2019, compared to members’ equity of $150.6 million as of September 30, 2019, and of $139.7 million as of December 31, 2018. The estimated range of members’ equity as of December 31, 2019 includes the impact of $1.2 million dividends paid to the former holders of our Class C preferred units during the year ended December 31, 2019. We repurchased our outstanding Class C preferred units in connection with the refinancing of our corporate debt in August 2019.

The foregoing estimated amount of loans originated and estimated range of net income for the year ended December 31, 2019 and estimated amount of total loans and estimated ranges of nonperforming loans and members’ equity as of December 31, 2019 are preliminary and subject to completion of financial and operating closing procedures for the year ended December 31, 2019. We have begun our normal

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annual closing and review procedures for the year ended December 31, 2019; however, given the timing of these estimates, the actual amounts of loans originated, total loans, nonperforming loans, net income and members’ equity may differ materially, including as a result of our year-end closing procedures, review adjustments and other developments that may arise between now and the time our audited financial results for the year ended December 31, 2019 are finalized. Therefore, you should not place undue reliance on these estimates.

These estimates have been prepared by, and are the responsibility of, our management and have not been reviewed or audited or subject to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to these estimates.

How We Assess Our Business Performance

Net income is the primary metric by which we assess our business performance. Accordingly, we closely monitor the primary drivers of net income which consist of the following:

Net Interest Income

Net interest income is the largest contributor to our net income and is monitored on both an absolute basis and relative to provisions for loan losses and operating expenses. We generate net interest income to the extent that the rate at which we lend in our portfolio exceeds the cost of financing our portfolio, which we primarily achieve through long-term securitizations. Accordingly, we closely monitor the financing markets and maintain consistent dialogue with investors and financial institutions as we evaluate our financing sources and cost of funds.

To evaluate net interest income, we measure and monitor: (1) the yields on our loans, (2) the costs of our funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread measures the difference between the rates earned on our loans and the rates paid on our funding sources. Net interest margin measures the difference between our annualized interest income and annualized interest expense, or net interest income, as a percentage of average loans outstanding over the specified time period.

Periodic changes in net interest income are primarily driven by: (1) origination volume and changes in average outstanding loan balances and (2) interest rates and changes in interest earned on our portfolio or paid on our debt. Historically, origination volume and portfolio size have been the largest contributors to the growth in our net interest income. We measure net interest income before and after interest expense related to our corporate debt and before and after our provisions for loan losses.

Credit Losses

We strive to minimize actual credit losses through our rigorous screening and underwriting process and life of loan portfolio management and special servicing practices. We closely monitor the credit performance of our loan portfolio, including delinquency rates and expected and actual credit losses, as a key factor in assessing our overall business performance.

Operating Expenses

We incur operating expenses from compensation and benefits related to our employee base, rent and other occupancy costs associated with our leased facilities, our third-party primary loan servicing vendors, professional fees to the extent we utilize third-party legal, consulting and advisory firms, and costs associated with the resolution and disposition of real estate owned, among other items. We monitor and strive to prudently manage operating expenses and to balance current period profitability with investment in the continued development of our platform.

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Because volume and portfolio size determine the magnitude of the impact of each of the above factors on our earnings, we also closely monitor origination volume along with all key terms of new loan originations, such as interest rates, loan-to-value ratios, estimated credit losses and expected duration.

Factors Affecting Our Results of Operations

We believe there are a number of factors that impact our business, including those discussed below and in the section of this prospectus titled “Risk Factors.”

Our results of operations depend on, among other things, the level of our net interest income, the credit performance of our loan portfolio and the efficiency of our operating platform. These measures are affected by a number of factors, including the demand for investor real estate loans, the competitiveness of the market for originating or acquiring investor real estate loans, the cost of financing our portfolio, the availability of funding sources and the underlying performance of the collateral supporting our loans. While we have been successful at managing these elements in the past, there are certain circumstances beyond our control, including macroeconomic conditions and market fundamentals, which can affect each of these factors and potentially impact our business performance.

Origination Volume

Portfolio related net interest income is the largest contributor to our net income. We have grown our portfolio related net interest income by $11.9 million or 23.8% from $50.2 million for the year ended December 31, 2017 to $62.1 million for the year ended December 31, 2018 and by $5.8 million or 12.6% from $46.4 million for the nine months ended September 30, 2018 to $52.2 million for the nine months ended September 30, 2019. The growth in net interest income is largely attributable to our growth in loan originations which we have achieved by executing our principal strategies of expanding our broker network and further penetrating our network of existing brokers. We anticipate that our future performance will continue to depend on growing our origination volume and believe that the large and highly fragmented nature of our core market provides meaningful opportunity to achieve this. We intend to grow originations by continuing to serve and build loyalty within our existing network of brokers while expanding our network with new brokers through targeted marketing and improved brand awareness.

Our future performance could be impacted to the extent that our origination volumes decline as we rely on new loans to offset maturities and prepayments in our existing portfolio. To augment our core origination business, we continually assess opportunities to acquire portfolios of loans that meet our investment criteria. In our experience, portfolio acquisition opportunities have generally been more attractive and plentiful during market conditions when origination opportunities are less favorable. Accordingly, we believe our acquisition strategy not only expands our core business, but also provides a counter-cyclical benefit.

Competition

The investor real estate loan market is highly competitive which could affect our profitability and growth. We believe we compete favorably through diversified borrower access driven by our extensive network of mortgage brokers and by emphasizing a high level of real estate and financial expertise, customer service, and flexibility in structuring transactions, as well as by attracting and retaining experienced managerial and marketing personnel. However, some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services.

Availability and Cost of Funding

Our primary funding sources have historically included cash from operations, warehouse repurchase facilities, term securitizations, corporate debt and equity. We believe we have an established brand in the term securitization market and that this market will continue to support our portfolio growth with long-term

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financing. Changes in macroeconomic conditions can adversely impact our ability to issue securitizations and, thereby, limit our options for long-term financing. In consideration of this potential risk, we have entered into a credit facility for longer-term financing that will provide us with capital resources to fund loan growth in the event we are not able to issue securitizations.

We intend to use a portion of the net proceeds from this offering to lower our interest expense through the partial repayment of the outstanding balance on the 2019 Term Loans.

Loan Performance

We underwrite and structure our loans to minimize potential losses. We believe our fully amortizing loan structures and avoidance of large balloon payments, coupled with meaningful borrower equity in properties, limit the probability of losses and that our proven in-house asset management capability allows us to minimize potential losses in situations where there is insufficient equity in the property. Our income is highly dependent upon borrowers making their payments and resolving delinquent loans as favorably as possible. Macroeconomic conditions can, however, impact credit trends in our core market and have an adverse impact on financial results.

Macroeconomic Conditions

The investor real estate loan market may be impacted by a wide range of macroeconomic factors such as interest rates, residential and commercial real estate prices, home ownership and unemployment rates, and availability of credit, among others. We believe our prudent underwriting, conservative loan structures and interest rate protections, and proven in-house asset management capability leave us well positioned to manage changing macroeconomic conditions.

Operating Efficiency

We generate positive operating leverage to the extent that our revenue grows at a faster rate than our expenses. We believe our platform is highly scalable and that we can generate positive operating leverage in future periods, primarily due to the technology and other investments we have made in our platform to date and our focus on a scalable, cost-effective mortgage broker network to generate new loan originations.

Portfolio and Asset Quality

Key Portfolio Statistics

	September 30,			December 31,
	2019			2018			2017			2016
	($ in thousands)
Total loans	$	1,928,208		$	1,631,326		$	1,295,567		$	1,038,033
Loan count		6,039			5,171			4,136			3,243
Average loan balance	$	319		$	315		$	313		$	320
Weighted average loan-to-value		65.4	%		63.8	%		64.4	%		64.5	%
Weighted average coupon		8.71	%		8.56	%		8.33	%		8.23	%
Nonperforming loans (UPB)	$	118,106		$	95,385		$	74,943		$	42,498
Nonperforming loans (% of total)		6.13	%		5.85	%		5.78	%		4.09	%

Total Loans.    Total loans reflects the aggregate UPB at the end of the period. It excludes deferred origination costs, acquisition discounts, fair value adjustments and allowance for loan losses.

Loan Count.    Loan count reflects the number of loans at the end of the period. It includes all loans with an outstanding principal balance.

Average Loan Balance.    Average loan balance reflects the average UPB at the end of the period (i.e., total loans divided by loan count).

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Weighted Average Loan-to-Value.    Loan-to-value, or LTV, reflects the ratio of the original loan amount to the appraised value of the underlying property at the time of origination. In instances where the LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at the time of acquisition. Weighted average LTV is calculated for the population of loans outstanding at the end of each specified period using the original loan amounts and appraised LTVs at the time of origination of each loan. LTV is a key statistic because requiring the borrower to invest more equity in the collateral minimizes our exposure for future credit losses.

Nonperforming Loans.    Loans that are 90 or more days past due, in bankruptcy, or in foreclosure are not accruing interest and are considered nonperforming loans. The dollar amount of nonperforming loans presented in the table above reflects the UPB of all loans that meet this definition.

Originations and Acquisitions

The following table presents new loan originations and acquisitions and includes average loan size, weighted average coupon and weighted average loan-to-value for the periods indicated:

($ in thousands)	Loan Count		Loan Balance		Average Loan Size		Weighted Average Coupon			Weighted Average LTV
Nine Months Ended September 30, 2019:
Loan originations — held for investment		1,366	$	475,463	$	348		8.5	%		66.9	%
Loan originations — held for sale		765	$	215,634	$	282		10.0	%		68.1	%
Total loan originations		2,131	$	691,097	$	324		9.0	%		67.3	%
Loan acquisitions — held for investment		35	$	9,062	$	259		7.2	%		61.9	%
Total loans originated and acquired		2,166	$	700,159
Nine Months Ended September 30, 2018:
Loan originations — held for investment		1,292	$	436,861	$	338		8.4	%		63.4	%
Loan originations — held for sale		378	$	89,404	$	237		9.9	%		65.5	%
Total loan originations		1,670	$	526,265	$	315		8.7	%		63.8	%
Loan acquisitions — held for investment		—	$	—		—		—			—
Total loans originated and acquired		1,670	$	526,265
Year Ended December 31, 2018:
Loan originations — held for investment		1,708	$	587,241	$	344		8.4	%		63.4	%
Loan originations — held for sale		619	$	150,056	$	242		9.9	%		65.1	%
Total loan originations		2,327	$	737,297	$	317		8.7	%		63.8	%
Loan acquisitions — held for investment		19	$	16,243	$	855		7.3	%		53.5	%
Total loans originated and acquired		2,346	$	753,540
Year Ended December 31, 2017:
Loan originations — held for investment		1,630	$	511,284	$	314		8.4	%		64.3	%
Loan originations — held for sale		176	$	43,426	$	247		9.6	%		69.7	%
Total loan originations		1,806	$	554,710	$	307		8.5	%		64.7	%
Loan acquisitions — held for investment		6		985	$	164		6.9	%		64.4	%
Total loans originated and acquired		1,812	$	555,695
Year Ended December 31, 2016:
Loan originations — held for investment		1,104	$	348,419	$	316		8.4	%		63.8	%
Loan originations — held for sale		—		—
Total loan originations		1,104	$	348,419	$	316		8.4	%		63.8	%
Loan acquisitions — held for investment		—		—
Total loans originated and acquired		1,104	$	348,419

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Over the periods shown, we have increased our origination volume by executing our strategy of continuing to serve and build loyalty within our network of mortgage brokers, while also expanding our network with new mortgage brokers through improved brand recognition. For the nine months ended September 30, 2019, we originated $691.1 million of loans, which was an increase of $164.8 million, or 31.3% from $526.3 million for the nine months ended September 30, 2018. For the year ended December 31, 2018, we originated $737.3 million of loans, which was an increase of $182.6 million, or 32.9%, from $554.7 million for the year ended December 31, 2017. For the year ended December 31, 2017, we originated $554.7 million of loans, which was an increase of $206.3 million, or 59.2%, from $348.4 million for the year ended December 31, 2016.

Loans Held for Investment

Our total portfolio of loans held for investment consists of both loans held for investment at cost, which are presented in the consolidated financial statements as loans held for investment, net, and loans held for investment at fair value, which are presented in the financial statements as loans held for investment at fair value. The following tables show the various components of loans held for investment as of the dates indicated:

	September 30, 2019			December 31,
(in thousands)				2018			2017			2016
Unpaid principal balance	$	1,756,711		$	1,551,866		$	1,289,739		$	1,037,857
Discount on acquired loans		—			(541	)		(911	)		(1,300	)
Valuation adjustments on FVO loans		(486	)		(586	)		(841	)		(917	)
Deferred loan origination costs		24,757			21,812			17,572			13,568
Total loans held for investment, gross		1,780,982			1,572,551			1,305,559			1,049,208
Allowance for loan losses		(2,111	)		(1,680	)		(1,886	)		(2,529	)
Total loans held for investment, net	$	1,778,871		$	1,570,871		$	1,303,673		$	1,046,679

The following table illustrates the contractual maturities for our loans held for investment in aggregate UPB and as a percentage of our total held for investment loan portfolio as of September 30, 2019:

	September 30, 2019
($ in thousands)	UPB		%
Loans due in less than one year	$	2,177		0.1	%
Loans due in one to five years		3,460		0.2
Loans due in more than five years		1,751,074		99.7
Total loans held for investment	$	1,756,711		100.0	%

Allowance for Loan Losses

Our allowance for loan losses increased to $2.1 million as of September 30, 2019, compared to $1.5 million as of September 30, 2018. The increase in allowance is primarily due to the increase in our loan portfolio from September 30, 2018 to September 30, 2019.

Our allowance decreased to $1.7 million as of December 31, 2018, compared to $1.9 million as of December 31, 2017, and $2.5 million as of December 31, 2016. The decrease in the allowance for loan losses is based on an analysis of historical loan loss data from January 1, 2012 through December 31, 2018. We strive to minimize actual credit losses through our rigorous screening and underwriting process, life of loan portfolio management and special servicing practices. Additionally, we believe borrower equity of 25% to 40% provides significant protection against credit losses should a loan become impaired.

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To estimate the allowance for loan losses in our loans held for investment portfolio, we follow a detailed internal process, considering a number of different factors including, but not limited to, our ongoing analyses of loans, historical loss rates, relevant environmental factors, relevant market research, trends in delinquencies, effects and changes in credit concentrations, and ongoing evaluation of fair values.

In June 2016, the FASB issued ASU 2016-13, which significantly changes the way entities recognize credit losses and impairment of financial assets recorded at amortized cost. Currently, the credit loss and impairment model for loans and leases is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. Under the new CECL model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. This new standard will be significant to the policies, processes, and methodology used to determine credit losses; however, the Company has not yet determined the quantitative effect ASU 2016-13 will have on its consolidated financial statements.

The following table illustrates the activity in our allowance for loan losses over the periods indicated:

	Nine Months Ended September 30,						Year Ended December 31,
($ in thousands)	2019			2018			2018			2017			2016
Beginning balance	$	1,680		$	1,886		$	1,886		$	2,529		$	2,343
Provision for (reversal of) loan losses		898			(21	)		201			421			1,455
Charge-offs		(467	)		(347	)		(407	)		(1,064	)		(1,269	)
Ending balance	$	2,111		$	1,518		$	1,680		$	1,886		$	2,529

Credit Quality — Loans Held for Investment

The following table provides delinquency information on our held for investment loan portfolio as of the dates indicated:

	September 30, 2019					December 31, 2018					December 31, 2017					December 31, 2016
($ in thousands)	UPB		%			UPB		%			UPB		%			UPB		%
Current	$	1,509,537		85.9	%	$	1,358,043		87.5	%	$	1,138,749		88.3	%	$	920,070		88.7	%
30-59 days past due		110,484		6.3			78,848		5.1			59,207		4.6			53,102		5.1
60-89 days past due		34,729		2.0			23,881		1.5			18,467		1.4			22,364		2.2
Nonperforming loans:
90+ days past due		20,894		1.2			16,181		1.0			22,114		1.7			25,111		2.4
Bankruptcy		9,626		0.5			5,901		0.4			5,631		0.4			2,916		0.3
In foreclosure		71,441		4.1			69,012		4.5			45,571		3.5			14,294		1.4
Total nonperforming loans		101,961		5.8			91,094		5.9			73,316		5.7			42,321		4.1
Total loans held for investment	$	1,756,711		100.0	%	$	1,551,866		100.0	%	$	1,289,739		100.0	%	$	1,037,857		100.0	%

Loans that are 90+ days past due, in bankruptcy, or in foreclosure are not accruing interest and are considered nonperforming loans. Nonperforming loans were $102.0 million, or 5.8% of our held for investment loan portfolio as of September 30, 2019, compared to $91.1 million, or 5.9% as of December 31, 2018, $73.3 million, or 5.7% as of December 31, 2017, and $42.3 million, or 4.1% of the loan portfolio as of December 31, 2016. We believe the significant equity cushion at origination and the active management of loans will continue to minimize credit losses on the resolution of defaulted loans and disposition of REO properties.

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Historically, most loans that become nonperforming resolve prior to converting to REO. This is due to low LTVs at origination and our active management of the portfolio. The following table summarizes the cumulative number and UPB of all loans originated since January 1, 2013 that became nonperforming at some point through September 30, 2019. We classify a loan as nonperforming when it becomes 90 days delinquent or when it enters bankruptcy or foreclosure. Of the 802 loans totaling $301.0 million in UPB that became nonperforming over the specified period, we have resolved 440 loans totaling $168.3 million in UPB, or 55.9% of the cumulative nonperforming loans. We realized a net gain of $4.9 million, or 2.9% of the resolved principal balance, on these resolutions, which is largely the result of collecting default interest and prepayment penalties in excess of the contractual interest due and collected.

($ in thousands)	Loan Count		UPB(1)		% of Total Resolved UPB			Gain / (Loss) ($)			Gain / (Loss) (%)
Resolved — paid in full		305	$	120,697		71.7	%	$	6,111			5.1	%
Resolved — paid current		105		34,758		20.7			343			1.0
Resolved — REO sold		30		12,892		7.6			(1,528	)		(11.9	)
Total resolutions		440		168,347		100.0	%		4,926			2.9	%
Not yet resolved		362		132,652
Cumulative nonperforming loans(2)		802	$	300,999

(1) Reflects the unpaid principal balance at time of delinquency.

(2) Reflects all loans originated since 2013 that became nonperforming at some point on or prior to September 30, 2019.

Our actual losses incurred are very small as a percentage of all loans that have ever become nonperforming. The table below shows our actual loan losses from January 1, 2013 through September 30, 2019, and through the years ended December 31, 2018, 2017 and 2016. Our average annual charge-off percentage since January 1, 2013 is approximately 0.02%. The table includes all loans originated over those periods, the year-end UPB amounts, the amount of loans that were ever nonperforming during those periods, and the actual losses for all loans that were either liquidated or converted to REO (life of loan) during the periods.

($ in thousands)	January 1, 2013 to September 30, 2019			January 1, 2013 to December 31, 2018			January 1, 2013 to December 31, 2017			January 1, 2013 to December 31, 2016
Loan originations	$	2,848,497		$	2,373,034		$	1,786,023		$	1,274,509
End of period UPB		1,705,213			1,502,526			1,248,087			982,191
Nonperforming loans(1)		300,999			227,469			152,209			76,449
Cumulative charge- offs(2)		1,957			1,551			1,171			326
Average annual charge-offs(3)		290			258			234			81
Cumulative charge-off percentage(4)		0.11	%		0.10	%		0.09	%		0.03	%
Average annual charge-off percentage(5)		0.02	%		0.02	%		0.02	%		0.01	%

(1) Reflects UPB of all loans originated since January 1, 2013 that became nonperforming at some point during the period indicated.

(2) Reflects the total charge-offs on loans that were nonperforming and have been liquidated or converted to REO from January 1, 2013 through the date indicated.

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(3) Reflects the average annual charge-offs on loans that were nonperforming and have been liquidated or converted to REO from January 1, 2013 through the date indicated.

(4) Reflects the cumulative charge-offs as a percent of the end of period UPB.

(5) Reflects the average annual charge-offs as a percent of the end of period UPB.

Concentrations – Loans Held for Investment

As of September 30, 2019, our held for investment loan portfolio was concentrated in investor 1-4 loans, representing 46.8% of the UPB. Mixed used properties represented 13.7% of the UPB and multifamily properties represented 11.1% of the UPB. No other property type represented more than 10.0% of our held for investment loan portfolio. By geography, the principal balance of our loans held for investment were concentrated 23.6% in New York, 22.2% in California, 12.3% in Florida, and 8.2% in New Jersey.

Property Type	September 30, 2019
($ in thousands)	Loan Count		UPB		% of Total UPB
Investor 1-4		3,145	$	821,767		46.8	%
Mixed use		646		240,911		13.7
Multifamily		479		194,268		11.1
Retail		394		168,769		9.6
Office		258		103,206		5.9
Warehouse		180		95,220		5.4
Other(1)		343		132,570		7.5
Total loans held for investment		5,445	$	1,756,711		100.0	%

(1) All other properties individually comprise less than 5.0% of the total unpaid principal balance.

Geography (State)	September 30, 2019
($ in thousands)	Loan Count		UPB		% of Total UPB
New York		908	$	413,996		23.6	%
California		902		389,936		22.2
Florida		783		216,420		12.3
New Jersey		598		143,419		8.2
Other(1)		2,254		592,940		33.7
Total loans held for investment		5,445	$	1,756,711		100.0	%

(1) All other states individually comprise less than 5.0% of the total unpaid principal balance.

Loans Held for Sale

We started originating short-term, interest-only loans in March 2017, which we have historically aggregated and sold at a premium to par to institutional investors. During the nine months ended September 30, 2019 and September 30, 2018, we originated $215.6 million and $89.4 million of loans held for sale and sold $114.0 million and $28.1 million of held for sale loans, respectively. Given our increased experience providing these loans, we are currently evaluating long-term financing alternatives for these short-term, interest-only loans, and may elect to retain these loans in the future to be more consistent with our investment strategy of holding loans in our portfolio and earning a longer-term spread. As of September 30, 2019, our portfolio of loans held for sale, which were carried at the lower of cost or estimated fair value consisted of 594 loans with an aggregate UPB of $171.5 million, and carried a weighted average original loan term of 12.7 months, a weighted average coupon of 10.0%, and a weighted average LTV at origination of 68.0%.

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The following tables show the various components of loans held for sale as of the dates indicated:

	September 30, 2019			December 31,
(in thousands)				2018			2017			2016
UPB	$	171,496		$	79,335		$	5,701			—
Valuation adjustments		(88	)		(173	)		—			—
Deferred loan origination fees, net		(968	)		(716	)		(50	)		—
Total loans held for sale, net	$	170,440		$	78,446		$	5,651			—

Concentrations – Loans Held for Sale

As of September 30, 2019, our held for sale loan portfolio was entirely concentrated in investor 1-4 loans, representing 100.0% of the UPB. By geography, the principal balance of our loans held for sale were concentrated 29.9% in California, 15.3% in New York, 9.1% in Florida, 7.9% in New Jersey, and 5.7% in Massachusetts.

Geography (State)	September 30, 2019
($ in thousands)	Loan Count		UPB		% of Total UPB
California		80	$	51,332		29.9	%
New York		51		26,153		15.3
Florida		75		15,526		9.1
New Jersey		72		13,594		7.9
Massachusetts		18		9,831		5.7
Other(1)		298		55,060		32.1
Total loans held for sale		594	$	171,496		100	%

(1) All other states individually comprise less than 5.0% of the total UPB.

Real Estate Owned (REO)

REO includes real estate we acquire through foreclosure or by deed-in-lieu of foreclosure. REO assets are initially recorded at fair value, less estimated costs to sell, on the date of foreclosure. Adjustments that reduce the carrying value of the loan to the fair value of the real estate at the time of foreclosure are recognized as charge-offs in the allowance for loan losses. Positive adjustments at the time of foreclosure are recognized in other operating income. After foreclosure, we periodically obtain new valuations and any subsequent changes to fair value, less estimated costs to sell, are reflected as valuation adjustments.

As of September 30, 2019, our REO included 24 properties with an estimated fair value of $15.8 million compared to 12 properties with an estimated fair value of $7.2 million as of December 31, 2018, 14 properties with an estimated fair value of $5.3 million as of December 31, 2017, and seven properties with an estimated fair value of $1.5 million as of December 31, 2016.

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Key Performance Metrics

	Nine Months Ended September 30,						Year Ended December 31,
($ in thousands)	2019			2018			2018			2017			2016
Average loans	$	1,715,172		$	1,387,535		$	1,429,877		$	1,167,999		$	944,437
Portfolio yield		8.82	%		8.76	%		8.72	%		8.38	%		8.30	%
Average debt — portfolio related	$	1,529,009		$	1,192,289		$	1,234,818		$	965,987		$	802,683
Average debt — total company	$	1,660,837		$	1,319,883		$	1,362,412		$	1,090,532		$	914,467
Cost of funds — portfolio related		5.34	%		5.01	%		5.07	%		4.93	%		4.66	%
Cost of funds — total company		5.76	%		5.53	%		5.57	%		5.62	%		5.56	%
Net interest margin — portfolio related		4.06	%		4.46	%		4.34	%		4.30	%		4.34	%
Net interest margin — total company		3.24	%		3.50	%		3.41	%		3.13	%		2.92	%
Charge-offs		0.03	%		0.03	%		0.03	%		0.09	%		0.13	%
Pre-tax return on equity		15.8	%		15.8	%		14.3	%		10.8	%		9.9	%
Return on equity		11.1	%		8.6	%		7.8	%		10.8	%		9.9	%

Average Loans

Average loans reflects the daily average of total outstanding loans, including both loans held for investment and loans held for sale, as measured by UPB, over the specified time period.

Portfolio Yield

Portfolio yield is an annualized measure of the total interest income earned on our loan portfolio as a percentage of average loans over the given period. Interest income includes interest earned on performing loans, cash interest received on nonperforming loans, default interest and prepayment fees. The increase in our portfolio yield over the periods shown was driven by higher collections of contractual and default interest on nonperforming loans due to the efficiency and expertise of our asset management area, and, to a lesser extent, an increase in the weighted average coupon on the loans in our portfolio.

Average Debt — Portfolio Related and Total Company

Portfolio-related debt consists of borrowings related directly to financing our loan portfolio, which includes our warehouse repurchase facilities and securitizations. Total company debt consists of portfolio-related debt and corporate debt. The measures presented here reflects the monthly average of all portfolio-related and total company debt, as measured by outstanding principal balance, over the specified time period.

Cost of Funds — Portfolio Related and Total Company

Portfolio related cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt as a percentage of average portfolio-related debt outstanding over the given period. Total company cost of funds is an annualized measure of the interest expense incurred on our portfolio-related debt and corporate debt outstanding over the given period. Interest expense includes the amortization of expenses incurred in connection with our portfolio related financing activities and corporate debt. Through the issuance of long-term securitizations, we have been able to fix a significant portion of our borrowing costs over time. The strong credit performance on our securitizations has allowed us to issue debt at attractive rates. Our portfolio related cost of funds increased to 5.34% for the nine months

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ended September 30, 2019 from 5.01% for the nine months ended September 30, 2018, and from 5.07%, 4.93%, and 4.66% for the years ended December 31, 2018, 2017 and 2016, respectively. The increase in portfolio related cost of funds was the result of the seasoning of older, more costly securitizations, and to a lesser extent, the increasing LIBOR index rates, partially offset by lower spreads paid to investors in our more recent securitizations.

Net Interest Margin — Portfolio Related and Total Company

Portfolio related net interest margin measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt as a percentage of average loans over the specified time period. Total company net interest margin measures the difference between the interest income earned on our loan portfolio and the interest expense paid on our portfolio-related debt and corporate debt as a percentage of average loans over the specified time period. Over the periods shown, our portfolio related net interest margin decreased as a result of the seasoning of older, more costly securitizations and, to a lesser extent, the increasing LIBOR index rates, partially offset by higher portfolio yields and lower spreads paid to investors in our more recent securitizations. In addition to achieving lower spreads in our more recent securitizations, we have also been able to utilize more favorable structures that will result in a lower and more stable cost of funds over the life of the securities.

The following tables show the average outstanding balance of our loan portfolio and portfolio-related debt, together with interest income and the corresponding yield earned on our portfolio, and interest expense and the corresponding rate paid on our portfolio-related debt for the periods indicated:

	Nine Months Ended September 30, 2019							Nine Months Ended September 30, 2018
($ in thousands)	Average Balance		Interest Income / Expense		Average Yield / Rate(1)			Average Balance		Interest Income / Expense		Average Yield / Rate(1)
Loan portfolio:
Loans held for sale	$	81,534						$	19,966
Loans held for investment		1,633,638							1,367,569
Total loans	$	1,715,172	$	113,407		8.82	%	$	1,387,535	$	91,163		8.76	%
Debt:
Warehouse repurchase facilities	$	216,613	$	9,362		5.76	%	$	180,543	$	7,240		5.35	%
Securitizations		1,312,396		51,852		5.27	%		1,011,746		37,551		4.95	%
Total debt — portfolio related		1,529,009		61,214		5.34	%		1,192,289		44,791		5.01	%
Corporate debt		131,828		10,548		10.67	%		127,594		9,985		10.43	%
Total debt	$	1,660,837	$	71,762		5.76	%		1,319,883	$	54,776		5.53	%
Net interest spread — portfolio related(2)						3.48	%						3.75	%
Net interest margin — portfolio related						4.06	%						4.46	%
Net interest spread — total company(3)						3.05	%						3.23	%
Net interest margin — total company						3.24	%						3.50	%

(1) Annualized.

(2) Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.

(3) Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.

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	Year Ended December 31, 2018							Year Ended December 31, 2017
($ in thousands)	Average Balance		Interest Income / Expense		Average Yield / Rate			Average Balance		Interest Income / Expense		Average Yield / Rate
Loan portfolio:
Loans held for sale	$	26,306						$	3,657
Loans held for investment		1,403,571							1,164,342
Total loans	$	1,429,877	$	124,722		8.72	%	$	1,167,999	$	97,830		8.38	%
Debt:
Warehouse repurchase facilities	$	171,637	$	9,213		5.37	%	$	145,878	$	7,185		4.93	%
Securitizations		1,063,181		53,384		5.02	%		820,109		40,453		4.93	%
Total debt — portfolio related		1,234,818		62,597		5.07	%		965,987		47,638		4.93	%
Corporate debt		127,594		13,322		10.44	%		124,545		13,654		10.96	%
Total debt	$	1,362,412	$	75,919		5.57	%		1,090,532	$	61,292		5.62	%
Net interest spread — portfolio related(1)						3.65	%						3.45	%
Net interest margin — portfolio related						4.34	%						4.30	%
Net interest spread — total company(2)						3.15	%						2.76	%
Net interest margin — total company						3.41	%						3.13	%

(1) Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.

(2) Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.

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	Year Ended December 31, 2017							Year Ended December 31, 2016
($ in thousands)	Average Balance		Interest Income / Expense		Average Yield / Rate			Average Balance		Interest Income / Expense		Average Yield / Rate
Loan portfolio:
Loans held for sale	$	3,657						$	—
Loans held for investment		1,164,342							944,437
Total loans	$	1,167,999	$	97,830		8.38	%	$	944,437	$	78,418		8.30	%
Debt:
Warehouse repurchase facilities	$	145,878	$	7,185		4.93	%	$	206,162	$	9,064		4.40	%
Securitizations		820,109		40,453		4.93	%		596,521		28,342		4.75	%
Total debt — portfolio related		965,987		47,638		4.93	%		802,683		37,406		4.66	%
Corporate debt		124,545		13,654		10.96	%		111,784		13,419		12.00	%
Total debt	$	1,090,532	$	61,292		5.62	%	$	914,467	$	50,825		5.56	%
Net interest spread — portfolio related(1)						3.45	%						3.64	%
Net interest margin — portfolio related						4.30	%						4.34	%
Net interest spread — total company(2)						2.76	%						2.75	%
Net interest margin — total company						3.13	%						2.92	%

(1) Net interest spread — portfolio related is the difference between the rate earned on our loan portfolio and the interest rates paid on our portfolio-related debt.

(2) Net interest spread — total company is the difference between the rate earned on our loan portfolio and the interest rates paid on our total debt.

Charge-Offs

The charge-offs ratio reflects charge-offs as a percentage of average loans held for investment over the specified time period. We do not record charge-offs on our loans held for sale which are carried at the lower of cost or estimated fair value.

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Pre-Tax Return on Equity and Return on Equity

Pre-tax return on equity and return on equity reflect income before income taxes and net income, respectively, as a percentage of the monthly average of members’ equity over the specified time period. The Company was not subject to income tax prior to January 1, 2018 because prior to that time it elected to be treated as a partnership for U.S. federal income tax purposes.

	Nine Months Ended September 30,						Year Ended December 31,
($ in thousands)	2019			2018			2018			2017			2016
Income before income taxes (A)	$	17,256		$	15,835		$	19,249		$	13,989		$	6,797
Net income (B)	$	12,110		$	8,594		$	10,549		$	13,989		$	6,797
Monthly average balance:
Members’ equity (C)		145,619			133,438			134,913			128,940			68,433
Pre-tax return on equity (A / C)(1)		15.8	%		15.8	%		14.3	%		10.8	%		9.9	%
Return on equity (B / C)(1)		11.1	%		8.6	%		7.8	%		10.8	%		9.9	%

(1) Annualized, in the case of nine months ended September 30, 2019 and 2018.

Components of Results of Operations

Interest Income

We accrue interest on the UPB of our loans in accordance with the individual terms and conditions of each loan, discontinuing interest and reversing previously accrued interest once a loan becomes 90 days or more past due (nonaccrual status). When a loan is placed on nonaccrual status, the accrued and unpaid interest is reversed as a reduction to interest income and accrued interest receivable. Interest income is subsequently recognized only to the extent that cash payments are received or when the loan has returned to accrual status. Payments received on nonaccrual loans are first applied to interest due, then principal. Interest accrual resumes once a borrower has made all principal and interest payments due, bringing the loan back to current status.

Interest income on loans held for investment is comprised of interest income on loans and prepayment fees less the amortization of deferred net costs related to the origination of loans. Interest income on loans held for sale is comprised of interest income earned on loans prior to their sale. The net fees and costs associated with loans held for sale are deferred as part of the carrying value of the loan and recognized as a gain or loss on the sale of the loan.

Interest Expense — Portfolio Related

Portfolio related interest expense is incurred on the debt we incur to fund our loan origination and portfolio activities and consists of our warehouse repurchase facilities and securitizations. Portfolio related interest expense also includes the amortization of expenses incurred as a result of issuing the debt, which are amortized using the level yield method. Key drivers of interest expense include the debt amounts outstanding, interest rates, and the mix of our securitizations and warehouse liabilities.

Net Interest Income — Portfolio Related

Portfolio related net interest income represents the difference between interest income and portfolio related interest expense.

Interest Expense — Corporate Debt

Through September 30, 2019, interest expense on corporate debt primarily consists of interest expense paid with respect to the 2014 Senior Secured Notes and the 2019 Term Loans, as reflected on our consolidated statement of financial condition, and the related amortization of deferred debt issuance costs.

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In August 2019, we redeemed the 2014 Senior Secured Notes and repurchased our outstanding Class C preferred units with the proceeds of the 2019 Term Loans, which bear interest at a rate equal to the one-month LIBOR plus 7.50% and mature in August 2024, together with cash on hand. We expect to repay a portion of the outstanding balance of the 2019 Term Loans with a portion of the net proceeds from this offering.

Net Interest Income

Net interest income represents the difference between portfolio related net interest income and interest expense on corporate debt.

Provision for Loan Losses

Provision for loan losses consists of amounts charged to income during the period to maintain an estimated allowance for loan and lease losses, or ALLL, to provide for probable credit losses inherent in our existing portfolio of loans held for investment (excluding those loans which we have elected to carry at fair value). The ALLL consists of a specific valuation allowance on those loans that are 90 days or more delinquent, in bankruptcy, or in foreclosure, and a general reserve allowance for all other loans in our existing portfolio.

Other Operating Income

Gain on Disposition of Loans.    When we sell a loan held for sale, we record a gain or loss that reflects the difference between the proceeds received for the sale of the loans and their respective carrying values. The gain or loss that we ultimately realize on the sale of our loans held for sale is primarily determined by the terms of the originated loans, current market interest rates and the sales price of the loans. In addition, when we transfer a loan to REO, we record the REO at its fair value at the time of the transfer. The difference between the fair value of the real estate and the carrying value of the loan is recorded as a gain or loss. Lastly, when our acquired loans, which were purchased at a discount, pay off, we record a gain related the write-off of the remaining purchase discount.

Unrealized Gain/(Loss) on Fair Value Loans.    We have elected to account for certain purchased distressed loans at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825). We regularly estimate the fair value of these loans as discussed more fully in the notes to our consolidated financial statements included elsewhere in this prospectus. Changes in fair value are reported as a component of other operating income within our consolidated statements of operations.

Other Income.    Other income includes the following:

Unrealized Gains/(Losses) on Retained Interest Only Securities.    As part of the proceeds received for the sale of our held for sale loans, we may receive an interest only security that we mark to fair value at the end of each period.

Fee Income.    In certain situations we collect fee income by originating loans and realizing miscellaneous fees such as late fees.

Operating Expenses

Compensation and Employee Benefits.    Costs related to employee compensation, commissions and related employee benefits, such as health, retirement, and payroll taxes.

Rent and Occupancy.    Costs related to occupying our locations, including rent, maintenance and property taxes.

Loan Servicing.    Costs related to our third-party servicers.

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Professional Fees.    Costs related to professional services, such as external audits, legal fees, tax, compliance and outside consultants.

Real Estate Owned, Net.    Costs related to our real estate owned, net, including gains/(losses) on disposition of REO, maintenance of REO properties, and taxes and insurance.

Other Operating Expenses.    Other operating expenses consist of general and administrative costs such as, travel and entertainment, marketing, data processing, insurance and office equipment.

Provision for Income Taxes

The provision for income taxes consists of the current and deferred U.S. federal and state income taxes we expect to pay, currently and in future years, with respect to the net income for the year. The amount of the provision is derived by adjusting our reported net income with various permanent differences. The tax-adjusted net income amount is then multiplied by the applicable federal and state income tax rates to arrive at the provision for income taxes. Prior to January 1, 2018, we had elected to be treated as a partnership for U.S. federal income tax purposes and were, therefore, not required to pay income taxes because of our treatment as a pass-through entity. Effective January 1, 2018, we changed our election to be taxed as a corporation for U.S. federal income tax purposes and are now recording provisions for income taxes.

Consolidated Results of Operations

The following table summarizes our consolidated results of operations for the periods indicated:

Summary Consolidated Results of Operations	Nine Months Ended September 30,					Year Ended December 31,
($ in thousands)	2019		2018			2018		2017		2016
	(unaudited)
Interest income	$	113,407	$	91,163		$	124,722	$	97,830	$	78,418
Interest expense — portfolio related		61,214		44,791			62,597		47,638		37,406
Net interest income — portfolio related		52,193		46,372			62,125		50,192		41,012
Interest expense — corporate debt		10,548		9,985			13,322		13,654		13,419
Net interest income		41,645		36,387			48,803		36,538		27,593
Provision for (reversal of) loan losses		898		(21	)		201		421		1,455
Net interest income after provision for loan losses		40,747		36,408			48,602		36,117		26,138
Other operating income		1,817		2,716			2,807		2,008		710
Total operating expenses		25,308		23,289			32,160		24,136		20,051
Income before income taxes		17,256		15,835			19,249		13,989		6,797
Income tax expense		5,146		7,241			8,700		—		—
Net income	$	12,110	$	8,594		$	10,549	$	13,989	$	6,797

Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018

Our earnings increase is mainly attributable to significant growth in our loan originations of 31.4% and the corresponding income earned from a higher balance of loans under management. Net interest income increased 14.5% partially offset by an increase in operating costs of 8.7%. Our net income increased 40.9% from $8.6 million for the nine months ended September 30, 2018 to $12.1 million for the nine months ended September 30, 2019.

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Net Interest Income — Portfolio Related

	Nine Months Ended September 30,
($ in thousands)	2019		2018		$ Change		% Change
Interest income	$	113,407	$	91,163	$	22,244		24.4	%
Interest expense — portfolio related		61,214		44,791		16,423		36.7
Net interest income — portfolio related	$	52,193	$	46,372	$	5,821		12.6	%

Interest Income.    Interest income increased by $22.2 million, or 24.4%, to $113.4 million during the nine months ended September 30, 2019, compared to $91.2 million during the nine months ended September 30, 2018. The increase is almost entirely attributable to an increase in average loans (volume), which increased $327.6 million, or 23.6%, from $1.4 billion during the nine months ended September 30, 2018 to $1.7 billion during the nine months ended September 30, 2019. The average yield (rate) over those same periods increased from 8.76% to 8.82%.

The following table distinguishes between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate. The effect of changes in volume is determined by multiplying the change in volume (i.e., $327.6 million) by the previous period’s average rate (i.e., 8.76% annualized). Similarly, the effect of rate changes is calculated by multiplying the change in average rate (i.e., 0.06% annualized) by the current period’s volume (i.e., $1.7 billion).

($ in thousands)	Average Loans		Interest Income		Average Yield(1)
Nine months ended September 30, 2019	$	1,715,172	$	113,407		8.82	%
Nine months ended September 30, 2018		1,387,535		91,163		8.76
Volume variance	$	327,637	$	21,526
Rate variance				718		0.06	%
Total interest income variance			$	22,244

(1) Annualized.

Interest Expense — Portfolio Related.    Interest expense related to our warehouse repurchase facilities increased $2.1 million to approximately $9.3 million during the nine months ended September 30, 2019, compared to approximately $7.2 million during the nine months ended September 30, 2018. Interest expense related to our securitizations increased by $14.3 million to approximately $51.9 million during the nine months ended September 30, 2019, compared to approximately $37.6 million during the nine months ended September 30, 2018. Our cost of funds increased to 5.34% during the nine months ended September 30, 2019 from 5.01% during the nine months ended September 30, 2018. The increase in interest expense — portfolio related was primarily due to the increase in borrowings for loan originations, as well as the impact of increased seasoning of older securitizations.

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The following table presents information regarding the increase in portfolio related interest expense and distinguishes between the dollar amount of change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate).

($ in thousands)	Average Debt(1)		Interest Expense		Cost of Funds(2)
Nine months ended September 30, 2019	$	1,529,009	$	61,214		5.34	%
Nine months ended September 30, 2018		1,192,289		44,791		5.01
Volume variance	$	336,720	$	12,650
Rate variance				3,773		0.33	%
Total interest expense variance			$	16,423

(1) Includes securitizations and warehouse repurchase agreements.

(2) Annualized.

Net Interest Income After Provision for Loan Losses

	Nine Months Ended September 30,
($ in thousands)	2019		2018			$ Change		% Change
Net interest income — portfolio related	$	52,193	$	46,372		$	5,821		12.6	%
Interest expense — corporate debt		10,548		9,985			563		5.6
Net interest income		41,645		36,387			5,258		14.5
Provision for (reversal of) loan losses		898		(21	)		919		(4,376.2	)
Net interest income after provision for loan losses	$	40,747	$	36,408		$	4,339		11.9	%

Interest Expense — Corporate Debt.     For the nine months ended September 30, 2019 and 2018, the interest due was paid in cash. In August 2019, we refinanced the 2014 Senior Secured Notes with a portion of the net proceeds from the 2019 Term Loans — a five-year $153.0 million corporate debt agreement with a new lender. In connection with the use of proceeds from this offering, we intend to pay down a portion of the 2019 Term Loans to reduce our interest expense on corporate debt.

Provision for Loan Losses.    Our provision for loan losses increased $0.9 million from negative provision of $21 thousand during the nine months ended September 30, 2018 to $0.9 million during the nine months ended September 30, 2019 primarily due to the increase in the loan portfolio.

Other Operating Income

The table below presents the various components of other operating income for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. The $0.9 million net decrease is primarily due to the increase in gain on disposition of loans, offset by the valuation adjustments on interest-only strips.

	Nine Months Ended September 30,
($ in thousands)	2019			2018		$ Change			% Change
Gain on disposition of loans	$	2,914		$	1,173	$	1,741			148.4	%
Unrealized gain (loss) on fair value loans		(51	)		300		(351	)		(117.0	)
Other income (loss)		(1,046	)		1,243		(2,289	)		(184.2	)
Total other operating income	$	1,817		$	2,716	$	(899	)		(33.1	)%

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Operating Expenses

Total operating expenses increased $2.0 million, or 8.7%, to $25.3 million during the nine months ended September 30, 2019 from $23.3 million during the nine months ended September 30, 2018. This increase is primarily the result of additional personnel and loan servicing costs associated with higher loan origination volumes.

	Nine Months Ended September 30,
($ in thousands)	2019		2018		$ Change			% Change
Compensation and employee benefits	$	11,519	$	11,277	$	242			2.1	%
Rent and occupancy		1,105		985		120			12.2
Loan servicing		5,457		4,191		1,266			30.2
Professional fees		1,587		1,804		(217	)		(12.0	)
Real estate owned, net		1,348		1,089		259			23.8
Other operating expenses		4,292		3,943		349			8.9
Total operating expenses	$	25,308	$	23,289	$	2,019			8.7	%

Compensation and Employee Benefits.    Compensation and employee benefits increased from $11.3 million during the nine months ended September 30, 2018 to $11.5 million during the nine months ended September 30, 2019, mainly due to higher commission expenses and increased operations and sales staff to support our growth in loan origination volume.

Rent and Occupancy.    Rent and occupancy expenses increased from $1.0 million during the nine months ended September 30, 2018 to $1.1 million during the nine months ended September 30, 2019, due to the increase in office space.

Loan Servicing.    Loan servicing expenses increased from $4.2 million during the nine months ended September 30, 2018 to $5.5 million during the nine months ended September 30, 2019. The $1.3 million increase during the nine months ended September 30, 2019 is mainly due to the increase in our loan portfolio.

Professional Fees.    Professional fees decreased from $1.8 million for the nine months ended September 30, 2018 to $1.6 million for the nine months ended September 30, 2019, mainly due to the timing of legal and external audit services rendered related to our public offering initiative.

Net Expenses of Real Estate Owned.    Net expenses of real estate owned increased from $1.1 million during the nine months ended September 30, 2018 to $1.3 million during the nine months ended September 30, 2019, mainly due to a $0.2 million increase in REO operating expenses.

Other Operating Expenses.    Other operating expenses increased from $3.9 million for the nine months ended September 30, 2018 to $4.3 million for the nine months ended September 30, 2019, mainly due to increased data processing costs related to technology investments.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Our income before income taxes increased 37.6% from $14.0 million for the year ended December 31, 2017 to $19.2 million for the year ended December 31, 2018. Our strong earnings growth is mainly attributable to significant growth in our loan originations and a slight increase in our net interest margin. Net interest margin expansion was attributable to an increase in portfolio yield, partially offset by increasing portfolio related cost of funds.

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Net Interest Income — Portfolio Related

	Year Ended December 31,
($ in thousands)	2018		2017		$ Change		% Change
Interest income	$	124,722	$	97,830	$	26,892		27.5	%
Interest expense — portfolio related		62,597		47,638		14,959		31.4
Net interest income — portfolio related	$	62,125	$	50,192	$	11,933		23.8	%

Interest Income.    Interest income increased by $26.9 million, or 27.5%, to $124.7 million during the year ended December 31, 2018, compared to $97.8 million during the year ended December 31, 2017. The increase is attributable to a combination of an increase in average loans (volume) and an increase in average yield (rate). Average loans increased $261.9 million, or 22.4%, from $1.2 billion during the year ended December 31, 2017 to $1.4 billion during the year ended December 31, 2018. The average yield over those same periods increased from 8.38% to 8.72%.

The following table distinguishes between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate. The effect of changes in volume is determined by multiplying the change in volume (i.e., $261.9 million) by the previous period’s average rate (i.e., 8.38%). Similarly, the effect of rate changes is calculated by multiplying the change in average rate (i.e., 0.34%) by the current period’s volume (i.e., $1.4 billion).

($ in thousands)	Average Loans		Interest Income		Average Yield
Year ended December 31, 2018	$	1,429,877	$	124,722		8.72	%
Year ended December 31, 2017		1,167,999		97,830		8.38
Volume variance	$	261,878	$	21,929
Rate variance				4,963		0.34	%
Total interest income variance			$	26,892

Interest Expense — Portfolio Related.    Interest expense related to our warehouse repurchase facilities increased $2.0 million, or 28.2%, to approximately $9.2 million during the year ended December 31, 2018, compared to approximately $7.2 million during the year ended December 31, 2017. Interest expense related to our securitizations increased by $12.9 million to approximately $53.4 million during the year ended December 31, 2018, compared to approximately $40.5 million during the year ended December 31, 2017. The increase in interest expense — portfolio related was primarily due to the increase in borrowings for loan originations. Our average cost of funds increased slightly to 5.07% during the year ended December 31, 2018 from 4.93% during the year ended December 31, 2017.

The following table presents information regarding the increase in portfolio related interest expense and distinguishes between the dollar amount of change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate).

($ in thousands)	Average Debt(1)		Interest  Expense		Cost of Funds
Year ended December 31, 2018	$	1,234,818	$	62,597		5.07	%
Year ended December 31, 2017		965,987		47,638		4.93
Volume variance	$	268,831	$	13,257
Rate variance				1,702		0.14	%
Total interest expense variance			$	14,959

(1) Includes securitizations and warehouse repurchase agreements.

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Net Interest Income After Provision for Loan Losses

	Year Ended December 31,
($ in thousands)	2018		2017		$ Change			% Change
Net interest income — portfolio related	$	62,125	$	50,192	$	11,933			23.8	%
Interest expense — corporate debt		13,322		13,654		(332	)		(2.4	)
Net interest income		48,803		36,538		12,265			33.6
Provision for loan losses		421		1,455		(1,034	)		(71.1	)
Net interest income after provision for loan losses	$	36,117	$	26,138	$	9,979			38.2	%

Interest Expense — Corporate Debt.    Under the 2014 Senior Secured Notes, interest paid-in-kind accrues at an 11.0% interest rate and interest paid in cash accrues at a 10.0% interest rate. During the first half of 2017, the interest due on the 2014 Senior Secured Notes was paid-in-kind. During the second half of 2017, and during the year ended 2018, the interest due was paid in cash. The change in interest payments resulted in a 2.4% decrease in corporate debt interest expense from $13.7 million during the year ended December 31, 2017 to $13.3 million during the year ended December 31, 2018. In connection with the use of proceeds from this offering, we intend to reduce this interest expense through the partial repayment of the 2019 Term Loans, which refinanced the 2014 Senior Secured Notes in August 2019.

Provision for Loan Losses.    Our provision for loan losses decreased $0.2 million from $0.4 million during the year ended December 31, 2017 to $0.2 million during the year ended December 31, 2018 as a result of an improvement in incurred losses, as the Company experienced fewer losses in 2018.

Other Operating Income

The table below presents the various components of other operating income for the year ended December 31, 2018 compared to the year ended December 31, 2017. The $0.8 million increase is primarily the result of the increased gain on sale of loans.

	Year Ended December 31,
($ in thousands)	2018		2017		$ Change		% Change
Gain on disposition of loans	$	1,200	$	984	$	216		22.0	%
Unrealized gain on fair value loans		241		39		202		—
Other income		1,366		985		381		38.7
Total other operating income	$	2,807	$	2,008	$	799		39.8	%

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Operating Expenses

Total operating expenses increased $8.0 million, or 33.2%, to $32.2 million during the year ended December 31, 2018 from $24.1 million during the year ended December 31, 2017. This increase is primarily the result of additional personnel and loan servicing costs associated with higher loan origination volumes.

	Year Ended  December 31,
($ in thousands)	2018		2017		$ Change		% Change
Compensation and employee benefits	$	15,105	$	11,904	$	3,201		26.9	%
Rent and occupancy		1,320		1,115		205		18.4
Loan servicing		6,009		4,907		1,102		22.5
Professional fees		3,040		1,661		1,379		83.0
Real estate owned, net		1,373		603		770		127.7
Other operating expenses		5,313		3,946		1,367		34.6
Total operating expenses	$	32,160	$	24,136	$	8,024		33.2	%

Compensation and Employee Benefits.    Compensation and employee benefits increased from $11.9 million during the year ended December 31, 2017 to $15.1 million during the year ended December 31, 2018 mainly due to higher commission expenses and increased operations and sales staff to support our growth in loan origination volume.

Rent and Occupancy.    Rent and occupancy expenses increased from $1.1 million during the year ended December 31, 2017 to $1.3 million during the year ended December 31, 2018 due to the opening of two new sales offices.

Loan Servicing.    Loan servicing expenses increased from $4.9 million during the year ended December 31, 2017 to $6.0 million during the year ended December 31, 2018. The $1.1 million increase during 2018 is primarily related to the increase in our loan portfolio.

Professional Fees.    Professional fees increased from $1.7 million for the year ended December 31, 2017 to $3.0 million for the year ended December 31, 2018 mainly due to increased legal and external audit fees related to our public offering initiative.

Net Expenses of Real Estate Owned.    Net expenses of real estate owned increased from $0.6 million during the year ended December 31, 2017 to $1.4 million during the year ended December 31, 2018, mainly as a result of a $0.7 million increase in REO valuation adjustments.

Other Operating Expenses.    Other operating expenses increased from $3.9 million for the year ended December 31, 2017 to $5.3 million for the year ended December 31, 2018 mainly due to increased data processing costs related to technology investments.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Net income increased approximately $7.2 million, or 105.8%, to $14.0 million for the year ended December 31, 2017 from $6.8 million for the year ended December 31, 2016. The increase in net income was primarily attributable to the $8.9 million, or 32.4%, increase in net interest income from $27.6 million for the year ended December 31, 2016 to $36.5 million for the year ended December 31, 2017.

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Net Interest Income — Portfolio Related

	Year Ended December 31,
($ in thousands)	2017		2016		$ Change		% Change
Interest income	$	97,830	$	78,418	$	19,412		24.8	%
Interest expense – portfolio related		47,638		37,406		10,232		27.4
Net interest income – portfolio related	$	50,192	$	41,012	$	9,180		22.4	%

Interest Income.    Interest income increased by $19.4 million, or 24.8%, to approximately $97.8 million for the year ended December 31, 2017, compared to approximately $78.4 million for the year ended December 31, 2016. The increase is almost entirely attributable to an increase in average loans (volume), which increased $223.6 million, or 23.7%, from $944.4 million for the year ended December 31, 2016 to $1.2 billion for the year ended December 31, 2017. The average yield over that same period increased from 8.30% for the year ended December 31, 2016 to 8.38% for the year ended December 31, 2017.

The following table distinguishes between the change in interest income attributable to change in volume and the change in interest income attributable to change in rate. The effect of changes in volume is determined by multiplying the change in volume (i.e., $223.6 million) by the previous period’s average rate (i.e., 8.30%). Similarly, the effect of rate changes is calculated by multiplying the change in average rate (i.e., 0.08%) by the current period’s volume (i.e., $1.2 billion).

($ in thousands)	Average Loans		Interest Income		Average Yield
Year ended December 31, 2017	$	1,167,999	$	97,830		8.38	%
Year ended December 31, 2016		944,437		78,418		8.30
Volume variance	$	223,562	$	18,563
Rate variance				849		0.08	%
Total interest income variance			$	19,412

Interest Expense — Portfolio Related.    Interest expense related to our warehouse repurchase facilities and securitizations increased by approximately $10.2 million from $37.4 million for the year ended December 31, 2016 to $47.6 million for the year ended December 31, 2017. The average portfolio related debt balance for the year ended December 31, 2017 increased by $163.3 million to $966.0 million as compared to $802.7 million for the year ended December 31, 2016. Our average cost of funds increased by 0.27% to 4.93% for the year ended December 31, 2017 compared to 4.66% for the year ended December 31, 2016. The increase in cost of funds is primarily related to increase in interest rates on our borrowings.

The following table presents information regarding the increase in portfolio related interest expense and distinguishes between the dollar amount of change in interest expense attributable to changes in the average outstanding debt balance (volume) versus changes in cost of funds (rate).

($ in thousands)	Average Debt(1)		Interest Expense		Cost of Funds
Year ended December 31, 2017	$	965,987	$	47,638		4.93	%
Year ended December 31, 2016		802,683		37,406		4.66
Volume variance	$	163,304	$	7,610
Rate variance				2,622		0.27	%
Total interest expense variance			$	10,232

(1) Includes securitizations and warehouse repurchase agreements.

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Net Interest Income After Provisions for Loan Losses

	Year Ended December 31,
($ in thousands)	2017		2016		$ Change			% Change
Net interest income - portfolio related	$	50,192	$	41,012	$	9,180			22.4	%
Interest expense - corporate debt		13,654		13,419		235			1.8
Net interest income		36,538		27,593		8,945			32.4
Provision for loan losses		421		1,455		(1,034	)		(71.1	)
Net interest income after provision for loan losses	$	36,117	$	26,138	$	9,979			38.2	%

Interest Expense — Corporate Debt.    During the year ended December 31, 2016, the interest due was paid-in-kind and was added to the principal balance of the 2014 Senior Secured Notes, resulting in a higher interest cost for the year ended December 31, 2017. However, for the second half of the year ended December 31, 2017, the interest due was paid in cash, stabilizing the balance on which interest is accrued and partially offsetting the increase in corporate debt interest expense resulting from the paid-in-kind election in prior periods.

Provision for Loan Losses.    During the year ended December 31, 2017, our provision for loan losses of $0.4 million was approximately $1.0 million lower than the $1.4 million recorded in the year ended December 31, 2016 as a result of an improvement in the historical losses experienced in 2017.

Other Operating Income

The table below presents the various components of other operating income. The $1.3 million increase is primarily attributable to gains on sales of loans held for sale, and the valuation gains on the interest-only strips included in other income. We did not have any loans held for sale in 2016.

	Year Ended December 31,
($ in thousands)	2017		2016		$ Change			% Change
Gain on disposition of loans	$	984	$	196	$	788			402.0	%
Unrealized gain on fair value loans		39		152		(113	)		(74.3	)
Other income		985		362		623			172.1
Total other operating income	$	2,008	$	710	$	1,298			182.8	%

Operating Expenses

	Year Ended December 31,
($ in thousands)	2017		2016		$ Change			% Change
Compensation and employee benefits	$	11,904	$	10,085	$	1,819			18.0	%
Rent and occupancy		1,115		801		314			39.2
Loan servicing		4,907		3,657		1,250			34.2
Professional fees		1,661		2,637		(976	)		(37.0	)
Real estate owned, net		603		451		152			33.7
Other operating expenses		3,946		2,420		1,526			63.1
Total operating expenses	$	24,136	$	20,051	$	4,085			20.4	%

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Compensation and Employee Benefits.    Compensation and employee benefits increased from $10.1 million for the year ended December 31, 2016 to $11.9 million for the year ended December 31, 2017 mainly due to increased operations and sales staff to support our growth in origination volume.

Rent and Occupancy.    Rent and occupancy expenses increased from $0.8 million for the year ended December 31, 2016 to $1.1 million for the year ended December 31, 2017 due to the opening of new sales offices.

Loan Servicing.    Loan servicing expenses increased to approximately $4.9 million during the year ended December 31, 2017 compared to approximately $3.7 million during the year ended December 31, 2016. The $1.2 million increase during the year ended December 31, 2017 is primarily related to the increase in our loan portfolio.

Professional Fees.    Professional fees decreased from $2.6 million for the year ended December 31, 2016 to $1.7 million for the year ended December 31, 2017 mainly due to reduced consultant spending on a new data warehouse system implemented in December 2016.

Net Expenses of Real Estate Owned.    Net expenses of real estate owned increased to $0.6 million during the year ended December 31, 2017 compared to $0.5 million during the year ended December 31, 2016 due to an increase in the number of REO properties.

Other Operating Expenses.    Other operating expenses increased from $2.4 million for the year ended December 31, 2016 to $3.9 million for the year ended December 31, 2017 primarily due to increased data processing costs related to technology investments.

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Quarterly Results of Operations

The following table sets forth certain financial information for each completed fiscal quarter since the quarter ended March 31, 2017. The quarterly information has been prepared on the same basis as the consolidated financial statements and includes all adjustments (consisting of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of the information presented. This information should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this prospectus. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.

	Quarter Ended
	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018		June 30, 2018			March 31, 2018		December 31, 2017			September 30, 2017		June 30, 2017			March 31, 2017
	(unaudited) (in thousands)
Interest income	$	40,379		$	36,884		$	36,143		$	33,560		$	32,207	$	30,297		$	28,659	$	27,061		$	24,852	$	23,986		$	21,931
Interest expense— portfolio related		21,827			20,324			19,062			17,807			16,428		14,671			13,692		12,832			12,240		11,815			10,750
Net interest income— portfolio related		18,552			16,560			17,081			15,753			15,779		15,626			14,967		14,229			12,612		12,171			11,181
Interest expense— corporate debt		3,842			3,353			3,353			3,337			3,328		3,328			3,328		2,977			3,668		3,520			3,489
Net interest income		14,710			13,207			13,728			12,416			12,451		12,298			11,639		11,252			8,944		8,651			7,692
Provision for (reversal of) loan losses		338			212			348			221			213		(269	)		36		(717	)		164		675			299
Net interest income after provision for loan losses		14,372			12,995			13,380			12,195			12,238		12,567			11,603		11,969			8,780		7,976			7,393
Other operating income
Gain on disposition of loans		56			863			1,995			27			234		523			415		358			480		160			(15	)
Unrealized gain/(loss) on fair value loans		(18	)		(26	)		(8	)		(58	)		90		99			112		32			39		(14	)		(17	)
Other income		(250	)		(529	)		(266	)		121			850		193			201		195			574		147			69
Total other operating income (expense)		(212	)		308			1,721			90			1,174		815			728		585			1,093		293			37
Operating expenses
Compensation and employee benefits		3,712			3,801			4,006			3,828			3,752		3,762			3,764		3,470			3,019		2,749			2,666
Rent and occupancy		369			398			338			336			373		305			306		296			296		267			256
Loan servicing		1,957			1,637			1,863			1,817			1,746		1,174			1,271		1,319			1,314		1,199			1,075

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	Quarter Ended
	September 30, 2019		June 30, 2019		March 31, 2019		December 31, 2018		September 30, 2018		June 30, 2018		March 31, 2018		December 31, 2017		September 30, 2017		June 30, 2017			March 31, 2017
	(unaudited) (in thousands)
Professional fees		398		534		656		1,235		772		473		561		371		465		447			378
Real estate owned, net		485		561		301		285		396		457		235		316		142		(116	)		261
Provision for held for sale loan leases		—		—		—		—		—		—		—		68		—		—			—
Other operating expenses		1,563		1,393		1,336		1,370		1,527		1,238		1,177		995		941		1,000			943
Total operating expenses		8,484		8,324		8,500		8,871		8,566		7,409		7,314		6,835		6,177		5,546			5,579
Income before income taxes		5,676		4,979		6,601		3,414		4,846		5,973		5,017		5,719		3,696		2,723			1,851
Income tax expense		1,796		1,444		1,906		1,459		1,528		1,653		4,061		—		—		—			—
Net income	$	3,880	$	3,535	$	4,695	$	1,955	$	3,318	$	4,320	$	956	$	5,719	$	3,696	$	2,723		$	1,851

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Liquidity and Capital Resources

Sources and Uses of Liquidity

We fund our lending activities primarily through borrowings under our warehouse repurchase facilities, securitizations, shareholders’ equity and other corporate-level debt, the net proceeds from this offering and future offerings of equity and debt securities, and net cash provided by operating activities to manage our business. We use cash to originate and acquire investor real estate loans, repay principal and interest on our borrowings, fund our operations and meet other general business needs.

Cash and Cash Equivalents

As of September 30, 2019, we had liquidity of approximately $30.3 million in cash and available borrowings under our warehouse facilities. Cash comprised $8.8 million of our liquidity and uncommitted available borrowings under our warehouse facilities comprised $21.5 million of our liquidity. As of September 30, 2019, we had $150.1 million of uncommitted available capacity under our warehouse facilities. Total commitments under our warehouse facilities were $500.0 million and we had outstanding borrowings of $349.9 million as of September 30, 2019. The $349.1 million in the consolidated statements of financial condition is net of issuance costs of $0.7 million at September 30, 2019.

During the nine months ended September 30, 2019, we used approximately $4.7 million of net cash and cash equivalents from operations, investing and financing activities. During the nine months ended September 30, 2018, we had an increase in net cash and cash equivalents of $18.8 million.

As of December 31, 2018, we had liquidity of approximately $60.0 million in cash and available borrowings under our warehouse facilities. Cash comprised $15.0 million of our liquidity and uncommitted available borrowings under our warehouse facilities comprised $45.0 million of our liquidity. As of December 31, 2018, we had $283.3 million of uncommitted available capacity under our warehouse facilities. Total commitments under our warehouse facilities were $500.0 million and we had outstanding borrowings of $216.7 million as of December 31, 2018. The $215.9 million in the consolidated statements of financial condition is net of issuance costs of $0.8 million at December 31, 2018.

During the year ended December 31, 2018, we generated approximately $1.0 million of net cash and cash equivalents from operations, investing and financing activities. During the year ended December 31, 2017, we had a decrease in net cash and cash equivalents of $36.0 million, compared to a net increase during the year ended December 31, 2016 of $39.5 million primarily as a result of the equity investment from TOBI, an affiliate of a fund managed by Pacific Investment Management Company LLC. The net decrease in the year ended December 31, 2017 was largely attributable to the increase in loan originations compared to the year ended December 31, 2016.

Warehouse Repurchase Facilities

As of September 30, 2019, we had two warehouse repurchase agreements to support our loan origination and acquisition activities. Both agreements are short-term borrowing facilities. The borrowings are collateralized by pools of primarily performing loans, bearing interest at one-month LIBOR plus a margin that ranges from 2.75% to 3.00%. As of September 30, 2019, these two agreements had an aggregated maximum borrowing capacity of $450 million, of which $200.0 million were committed amounts and $250.0 million were uncommitted amounts. Borrowings under these repurchase facilities as of September 30, 2019 were $345.9 million.

As of December 31, 2018, we had two warehouse repurchase agreements to support our loan origination and acquisition activities. Both agreements are short-term borrowing facilities. The borrowings are collateralized by pools of primarily performing loans, bearing interest at one-month LIBOR plus a margin that ranges from 2.75% to 3.00%. As of December 31, 2018, these two agreements had an aggregated maximum borrowing capacity of $450.0 million, of which $200.0 million were committed amounts and $250.0 million were uncommitted amounts. Borrowings under these repurchase facilities as of December 31, 2018 were $216.4 million.

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In addition to the two warehouse repurchase agreements, we also have a longer term warehouse agreement, which was added in September 2018. The borrowings are collateralized by pools of primarily performing loans, with a maximum borrowing capacity of $50 million, bearing interest at one-month LIBOR plus a margin of 3.50%. The warehouse repurchase facility has a maturity date of September 12, 2021 and allows loans to be financed for a period of up to three years. Borrowings under this warehouse agreement as of September 30, 2019 were $3.9 million.

All warehouse repurchase facilities fund less than 100% of the principal balance of the mortgage loans we own requiring us to use working capital to fund the remaining portion. We may need to use additional working capital if loans become delinquent, because the amount permitted to be financed by the facilities may change based on the delinquency performance of the pledged collateral.

All borrower payments on loans financed under the warehouse agreements are segregated into pledged accounts with the loan servicer. All principal amounts in excess of the interest due are applied to reduce the outstanding borrowings under the warehouse repurchase facilities, which then allows us to draw additional funds on a revolving basis under the facilities. The revolving warehouse repurchase facilities also contain customary covenants, including financial covenants that require us to maintain a minimum net worth, a maximum debt-to-net worth ratio and a ratio of a minimum earnings before interest, taxes, depreciation and amortization to interest expense. If we fail to meet any of the covenants or otherwise default under the facilities, the lenders have the right to terminate their facility and require immediate repayment, which may require us to sell our loans at less than optimal terms. As of September 30, 2019, we were in compliance with these covenants.

Securitizations

From May 2011 through September 2019, we have completed eleven securitizations of $2.6 billion of investor real estate loans, issuing $2.4 billion in principal amount of securities to third parties through eleven respective transactions. In October 2019, we completed our twelfth securitization issuing $154.4 million in principal amount of securities for $162.5 million of mortgage loans. All borrower payments are segregated into remittance accounts at the primary servicer and remitted to the trustee of each trust monthly. We are the sole beneficial interest holder of the applicable trusts, which are variable interest entities included in our consolidated financial statements. The transactions are accounted for as a secured borrowings under U.S. GAAP. The following table summarizes the investor real estate loans securitized, securities issued, securities retained by the Company at the time of the securitization, and as of September 30, 2019 and December 31, 2018, and the stated maturity for each securitization. The securities are callable by us when the stated principal balance is less than a certain percentage, ranging from 5%—30%, of the original stated principal balance of loans at issuance. As a result, the actual maturity date of the securities issued will likely be earlier than their respective stated maturity date.

	At Issuance				Securities Retained as of
($ in thousands)	Mortgage Loans		Securities Issued		Issuance Date		September 30, 2019		December 31, 2018		Stated Maturity Date
2011-1 Trust	$	74,898	$	61,042	$	13,856	$	—	$	13,856		August 2040
2014-1 Trust		191,757		161,076		30,682		9,596		9,596		September 2044
2015-1 Trust		312,829		285,457		27,372		15,569		15,657		July 2045
2016-1 Trust		358,601		319,809		38,792		17,931		17,931		April 2046
2016-2 Trust		190,255		166,853		23,402		9,514		9,514		October 2046
2017-1 Trust		223,064		211,910		11,154		11,154		11,154		April 2047
2017-2 Trust		258,528		245,601		12,927		8,916		10,631		October 2047
2018-1 Trust		186,124		176,816		9,308		7,282		8,256		April 2048
2018-2 Trust		324,198		307,988		16,210		13,153		15,893		October 2048
2019-1 Trust		247,979		235,580		12,399		11,767		—		February 2049
2019-2 Trust		217,921		207,020		10,901		10,831		—		June 2049
Total	$	2,586,154	$	2,379,152	$	207,003	$	115,711	$	112,488

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The following table summarizes outstanding bond balances for each securitization as of September 30, 2019 and December 31, 2018 (in thousands).

	September 30, 2019		December 31, 2018
2011-1 Trust	$	—	$	3,593
2014-1 Trust		24,852		36,751
2015-1 Trust		58,775		91,246
2016-1 Trust		100,921		164,715
2016-2 Trust		81,726		114,143
2017-1 Trust		125,692		147,326
2017-2 Trust		172,897		205,388
2018-1 Trust		141,713		159,116
2018-2 Trust		258,748		298,556
2019-1 Trust		225,526		—
2019-2 Trust		205,611		—

As of September 30, 2019 and December 31, 2018, the weighted average rate on the securities and certificates for the Trusts are as follows:

	September 30, 2019			December 31, 2018
2011-1 Trust		—	%		6.19	%
2014-1 Trust		8.78			7.09
2015-1 Trust		7.52			6.63
2016-1 Trust		6.60			5.48
2016-2 Trust		5.24			4.67
2017-1 Trust		4.55			4.35
2017-2 Trust		3.54			3.56
2018-1 Trust		3.99			3.99
2018-2 Trust		4.38			4.40
2019-1 Trust		3.99			—
2019-2 Trust		3.42			—

Our intent is to use the proceeds from the issuance of new securities primarily to repay our warehouse borrowings and originate new investor real estate loans in accordance with our underwriting guidelines, as well as for general corporate purposes. Our financing sources may include borrowings in the form of additional bank credit facilities (including term loans and revolving credit facilities), repurchase agreements, warehouse repurchase facilities and other sources of private financing. We also plan to continue using securitization as long-term financing for our portfolio, and we do not plan to structure any securitizations as sales or utilize off-balance-sheet vehicles. We believe any financing of assets and/or securitizations we may undertake will be sufficient to fund our working capital requirements.

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Cash Flows

The following table summarizes the net cash provided by (used in) operating activities, investing activities and financing activities as of the periods indicated:

	Nine Months Ended September 30,						Year Ended December 31,
($ in thousands)	2019			2018			2018			2017			2016
Cash provided by (used in):
Operating activities	$	(77,193	)	$	(21,053	)	$	(72,485	)	$	37,644		$	29,767
Investing activities		(219,034	)		(199,427	)		(270,196	)		(274,779	)		(181,094	)
Financing activities		291,551			239,284			343,631			201,118			190,784
Net change in cash, cash equivalents, and restricted cash	$	(4,676	)	$	18,804		$	950		$	(36,017	)	$	39,457

Operating Activities

Cash flows from operating activities primarily includes net income adjusted for (1) cash used for origination of held for sale loans and the related cash proceeds from the sales of such loans, (2) non-cash items including depreciation, provision for loan loss, discount accretion, and valuation changes, and (3) changes in the balances of operating assets and liabilities.

For the nine months ended September 30, 2019, our net cash used in operating activities of $77.2 million consisted mainly of $214.4 million cash used to originate held for sale loans, offset by $114.0 million proceeds from sale of loans held for sale, $11.2 million in repayments on loans held for sale, and net income of $12.1 million.

For the nine months ended September 30, 2018, our net cash used in operating activities of $21.1 million consisted mainly of $88.7 million in cash used to originate held for sale loans, offset by $28.1 million proceeds from sale of loans held for sale, $36.5 million in repayments on loans held for sale, and net income of $8.6 million. Changes in accrued interest and other receivables resulted in cash used of $11.3 million, mainly as a result of an increase in interest receivable due to portfolio growth.

For the year ended December 31, 2018, our net cash used in operating activities of $72.5 million consisted mainly of net income of $10.5 million, offset by $148.8 million in cash used to originate held for sale loans and a $3.0 million increase in deferred tax asset, less proceeds from the sale and repayments of loans held for sale of $72.9 million and $3.5 million, respectively. Changes in operating assets and liabilities resulted in cash used of $19.3 million, mainly as a result of a $16.2 million increase in interest receivable due to portfolio growth.

For the year ended December 31, 2017, our net cash provided by operating activities of $37.6 million consisted mainly of net income of $14.0 million, offset by $42.9 million in cash used to originate held for sale loans, less proceeds from the sale of such loans of $46.3 million. Changes in operating assets and liabilities resulted in cash provided of $4.8 million. Interest paid in kind on our corporate debt resulted in a positive non-cash adjustment to net income of $6.7 million.

For the year ended December 31, 2016, our net cash provided by operating activities of $29.8 million consisted mainly of net income of $6.8 million. Interest paid in kind on our corporate debt resulted in a positive non-cash adjustment to net income of $12.2 million. Amortization of debt issuance discount and costs resulted in a positive non-cash adjustment to net income of $7.0 million.

Investing Activities

For the nine months ended September 30, 2019, our net cash used in investing activities of $219.0 million consisted mainly of $482.5 million in cash used to originate held for investment loans, offset

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by $268.7 million in cash received in payments on held for investment loans. We also used cash to purchase $9.3 million of loans for investment.

For the nine months ended September 30, 2018, our net cash used in investing activities of $199.4 million consisted mainly of $443.3 million in cash used to originate held for investment loans, offset by $238.8 million in cash received in payments on held for investment loans.

For the year ended December 31, 2018, our net cash used in investing activities of $270.2 million consisted mainly of $595.7 million in cash used to originate held for investment loans, less $334.7 million in cash received in payments on held for investment loans. We also received cash of $6.2 million from proceeds of the sale of REO.

For the year ended December 31, 2017, our net cash used in investing activities of $274.8 million consisted mainly of $518.9 million in cash used to originate held for investment loans, less $240.9 million in cash received in payments on held for investment loans. We also received cash of $6.3 million from proceeds of the sale of loans and $2.5 million from proceeds on the sale of REO.

For the year ended December 31, 2016, our net cash used in investing activities of $181.1 million consisted mainly of $353.5 million in cash used to originate held for investment loans, less $170.0 million in cash received in payments on held for investment loans. We also received cash of $3.3 million from proceeds of the sale of loans and $1.5 million from proceeds on the sale of REO.

Financing Activities

For the nine months ended September 30, 2019, our net cash provided by financing activities of $291.6 million consisted mainly of $650.3 million and $444.1 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $517.2 million and $268.5 million on our warehouse repurchase facilities and securitizations issued, respectively. The 2019 Term Loans generated $153.0 million of cash, of which $127.6 million was used to redeem the 2014 Secured Notes, and $27.7 million was used to redeem the Class C preferred units as return of capital. We used cash of $14.8 million for debt issuance costs.

For the nine months ended September 30, 2018, our net cash provided by financing activities of $239.3 million consisted mainly of $444.7 million and $227.6 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $211.2 million and $218.7 million on our warehouse repurchase facilities and securitizations issued, respectively. We used cash of $3.1 million for debt issuance costs.

For the year ended December 31, 2018, our net cash provided by financing activities of $343.6 million consisted mainly of $658.5 million and $535.5 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $527.9 million and $314.7 million on our warehouse repurchase facilities and securitizations issued, respectively. We used cash of $7.8 million for debt issuance costs.

For the year ended December 31, 2017, our net cash provided by financing activities of $201.1 million consisted mainly of $420.5 million and $455.3 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $445.7 million and $214.4 million on our warehouse repurchase facilities and securitizations issued, respectively. We used cash of $7.8 million for debt issuance costs and $6.9 million for tax distributions.

For the year ended December 31, 2016, our net cash provided by financing activities of $190.8 million consisted mainly of $355.6 million and $490.5 million in cash from borrowings from our warehouse repurchase facilities and securitizations issued, respectively. This cash generated was partially offset by payments we made of $569.9 million and $141.5 million on our warehouse repurchase facilities and securitizations issued, respectively. We used cash of $9.2 million for debt issuance costs and $3.4 million for tax distributions.

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Contractual Obligations and Commitments

In 2014, we entered into a five-year, $100.0 million corporate debt agreement with the owners of the Class C preferred units, pursuant to which we issued at par senior secured notes that mature on December 16, 2019, the 2014 Senior Secured Notes. The 2014 Senior Secured Notes bear interest at either 10% annually paid in cash or 11% annually paid-in-kind on June 15 and December 15 of each year. All principal and paid-in-kind interests are due at maturity. In August 2019, we entered into a five-year $153.0 million corporate debt agreement with Owl Rock Capital Corporation. The 2019 Term Loans under this agreement bear interest a rate equal to one-month LIBOR plus 7.50% and mature in August 2024. A portion of the net proceeds from the 2019 Term Loans was used to redeem the 2014 Senior Secured Notes. As of September 30, 2019, December 31, 2018, 2017 and 2016, including paid-in-kind interest, the aggregate outstanding principal amount of the 2014 Senior Secured Notes was zero, $127.6 million, $127.6 million and $120.9 million, respectively. As of September 30, 2019, the outstanding principal amount of the 2019 Term Notes was $153.0 million. Another portion of the net proceeds from the 2019 Term Loans, together with cash on hand, was used to repurchase our outstanding Class C preferred units. The 2019 Term Loans mature in August 2024 and are subject to a 0.25% quarterly amortization beginning on the fifth full fiscal quarter after August 2019. Velocity Commercial Capital, LLC is the borrower of the 2019 Term Loans, which are secured by substantially all of the borrower’s non-warehoused assets, with a guarantee from Velocity Financial LLC that is secured by the equity interests of the borrower. The corporate debt agreement contains customary affirmative and negative covenants, including financial maintenance covenants and limitations on dividends by the borrower.

As of September 30, 2019, we maintained warehouse and repurchase facilities to finance our investor real estate loans and had approximately $349.9 million in outstanding borrowings with $150.1 million of available capacity under our warehouse and repurchase facilities.

The following table illustrates our contractual obligations existing as of September 30, 2019:

(in thousands)	Remainder of       2019		January 1, 2020 – December 31, 2021		January 1, 2022 – December 31, 2023		Thereafter		Total
Warehouse repurchase facilities	$	194,554	$	155,305	$	—	$	—	$	349,859	(1)
Notes payable (corporate debt) (2)		—		1,913		3,060		148,027		153,000
Leases payments under noncancelable operating leases		276		2,937		2,762		980		6,955
Total	$	194,830	$	160,155	$	5,822	$	149,007	$	509,814

(1) Amount represents gross warehouse and repurchase borrowing. Balance of $349.1 million in the consolidated statement of financial condition as of September 30, 2019 is net of $0.7 million debt issuance costs. In August 2019, the Citibank Repurchase Agreement was amended to be due in August 2020. In October 2019, the Barclays Repurchase Agreement was amended to be due in October 2020.

(2) In August 2019, we entered into a five-year $153.0 million corporate debt agreement and a portion of the proceeds of the 2019 Term Loans under this agreement were used to redeem the then outstanding corporate debt. The 2019 Term Loans mature in August 2024 and are subject to a 0.25% quarterly amortization beginning on the fifth full fiscal quarter after August 2019.

Off-Balance-Sheet Arrangements

At no time have we maintained any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance, or special-purpose or variable interest

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entities, established for the purpose of facilitating off-balance-sheet arrangements or other contractually narrow or limited purposes. Further, we have never guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. The primary market risks that we will be exposed to are real estate risk, interest rate risk, market value risk and credit risk.

Interest Rate Risk.    Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our operating results will depend, in part, on differences between the income from our investments and our financing costs.

Our loan portfolio consists mainly of a 30-year amortizing term loan product with a three-year fixed-rate period which floats at a spread to the prime rate thereafter subject to a floor equal to the starting fixed rate. Fluctuations in the prime rate can cause variability in our interest income, limited by the floor in a downside scenario. Our warehouse repurchase financing is based on a floating rate of interest calculated on a fixed spread over one-month LIBOR, as determined by the particular financing arrangement. Our existing securitizations are largely fixed-rate debt and less impacted by changes in interest rates; however, our future securitizations will be impacted by the general level of interest rates and risk spreads.

While we do not currently hedge our interest rate risk, we may attempt to reduce interest rate risk in the future on any outstanding debt and to minimize exposure to interest rate fluctuations thereon through the use of match funded financing structures. When appropriate, we may seek to match the maturities of our debt with the maturities of the assets that we finance and to match the interest rates on our leveraged investments with like kind debt (e.g., floating rate assets are financed with floating rate debt and fixed-rate assets are financed with fixed-rate debt), directly or through the use of interest rate swaps, caps or other financial instruments, or through a combination of these strategies. We expect this approach to help us minimize the risk that we have to refinance our liabilities before the maturities of our assets and to reduce the impact of changing interest rates on our earnings.

To assess the potential impact for the following twelve months on our net interest income from fluctuations in interest rates, we considered both an instantaneous 100 basis point increase and 100 basis point decrease in the one-month LIBOR and prime rates. The effect of the interest rate changes would apply to our interest rate sensitive assets and liabilities. Some of our interest income on our portfolio is based on the prime rate. A 100 basis point increase in the prime rate would increase our annual interest income approximately $11.1 million based on our portfolio balance as of September 30, 2019, while a 100 basis point decrease in the prime rate would decrease our annual interest income by approximately $9.5 million. Our interest expense on our warehouse repurchase financing is based on one-month LIBOR. A 100 basis point increase or decrease in LIBOR would increase or decrease, respectively, our annual interest expense by approximately $9.2 million based on our warehouse repurchase financing balance as of September 30, 2019.

In the event of a significant rising interest rate environment and/or economic downturn, defaults could increase and result in credit losses to us, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. Furthermore, such defaults could have an adverse effect on the spread between our interest-earning assets and interest-bearing liabilities.

Market Value Risk.    Traditional warehouse repurchase facilities have, in the past, established market values of the collateral pledged for financing. When the market value of the pledged collateral decreases, lenders have typically required additional collateral or a cash margin to support the existing borrowings. Our current warehouse repurchase facilities routinely establish a market value on the loans pledged under these facilities. We may be required to satisfy these requirements if the market value of our loans decreases significantly, which could have a material impact on our operations, cash and liquidity.

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Credit Risk.    We are subject to credit risk in connection with our loans. The credit risk related to these loans pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that loan credit quality is primarily determined by the value of the real estate securing the loan, the borrowers’ credit profiles and loan characteristics.

Prepayment Risk.    Our interest income and financial results are affected by changes in prepayment rates. As we receive prepayments of principal on our loans, we will receive prepayment premiums from borrowers if they are still in the early payment period which will increase our interest income. In general, an increase in prepayment rates will accelerate the amortization of deferred costs, thereby reducing the interest income earned on the loans. Conversely, deferred origination fees recognized on prepayment would increase interest income. Additionally, an increase in prepayment rates will accelerate the accretion of debt issuance costs for our securitizations, thereby increasing our interest expense.

Inflation Risk.    Virtually all of our assets and liabilities are and will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with U.S. GAAP and our activities and balance sheet shall be measured with reference to historical cost or fair market value without considering inflation.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires certain judgments and assumptions, based on information available at the time of preparation of the consolidated financial statements, in determining accounting estimates used in preparation of the consolidated financial statements. The following discussion addresses the accounting policies that we believe apply to us based on the nature of our operations. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments used to prepare the company’s financial statements are based upon reasonable assumptions given the information available at that time. The accounting policies and estimates that we believe are most critical to an investor’s understanding of our financial results and condition are discussed below. The summary below should be read in conjunction with the disclosure of our accounting policies and use of estimates in Note 2 to the consolidated financial statements included in this prospectus.

Allowance for Loan Losses

Loans Held for Investment and Non-Purchased Credit Impaired (PCI) Loans

The allowance for loan and lease losses, or ALLL, on loans held for investment and non-PCI loans is maintained at a level deemed adequate by management to provide for probable and inherent losses in the portfolio at the balance sheet date. The ALLL has a general reserve component for loans with no credit impairment and a specific reserve component for loans determined to be impaired.

The allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to the population of unimpaired loans to estimate the general reserves. The quantitative loss factors include loan type, age of the loan, borrower FICO score, past loan loss experience, historical default rates, and delinquencies. The qualitative loss factors consider, among other things, the loan portfolio composition and risk, current economic conditions that may affect the borrower’s ability to pay, and the underlying collateral value. While our management uses available information to estimate its required ALLL, future additions to the ALLL may be necessary based on changes in estimates resulting from economic and other conditions. The provision for loan losses and recoveries of previously recognized charge-offs are added to the ALLL, while charge-offs on loans are recorded as a reduction to ALLL.

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Loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreements. Impairment is measured on a loan-by-loan basis by comparing the estimated fair value of the underlying collateral, net of estimated selling costs (net realizable value) against the recorded investment of the loan. To the extent the recorded investment of the loan exceeds the estimated fair value, a specific reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral.

Deferred Income Tax Assets and Liabilities

Our deferred income tax assets and liabilities arise from differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We determine whether a deferred tax asset is realizable based on facts and circumstances, including our current and projected future tax position, the historical level of our taxable income, and estimates of our future taxable income. In most cases, the realization of deferred tax assets is based on our future profitability. If we were to experience either reduced profitability or operating losses in a future period, the realization of our deferred tax assets may no longer be considered more likely than not and, accordingly, we could be required to record a valuation allowance on our deferred tax assets by charging earnings.

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BUSINESS

Our Company

We are a vertically integrated real estate finance company founded in 2004. We primarily originate and manage investor loans secured by 1-4 unit residential rental and small commercial properties, which we refer to collectively as investor real estate loans. We originate loans nationwide across our extensive network of independent mortgage brokers which we have built and refined over the 15 years since our inception. Our objective is to be the preferred and one of the most recognized brands in our core market, particularly within our network of mortgage brokers.

We operate in a large and highly fragmented market with substantial demand for financing and limited supply of institutional financing alternatives. We have developed the highly-specialized skill set required to effectively compete in this market, which we believe has afforded us a durable business model capable of generating attractive risk-adjusted returns for our stockholders throughout various business cycles. We offer competitive pricing to our borrowers by pursuing low-cost financing strategies and by driving front-end process efficiencies through customized technology designed to control the cost of originating a loan. Furthermore, by originating loans through our efficient and scalable network of approved mortgage brokers, we are able to maintain a wide geographical presence and nimble operating infrastructure capable of reacting quickly to changing market environments.

Our growth strategy is predicated on continuing to serve and build loyalty within our network of mortgage brokers, while also expanding our network with new mortgage brokers through targeted marketing and improved brand awareness. We believe our reputation and 15-year history within our core market position us well to capture future growth opportunities.

Our History

We were founded by Christopher Farrar, Chief Executive Officer and President, and Jeffrey Taylor, Executive Vice President, Capital Markets, to serve the small investor market with a reliable and responsive real estate lending platform. From our inception in June 2004 through September 2007, we were primarily a small balance commercial mortgage loan originator focused on originating assets for sale to various financial institutions. Between 2004 and 2005, we were mostly engaged in originating loans for sale to local and regional banks. In May 2005, Credit-Based Asset Servicing and Securitization LLC, or C-BASS, purchased a minority interest in us and, in connection with that transaction, we entered into a forward loan sale agreement with C-BASS to originate loans eligible for securitizations. Our strategy of originating loans for sale and securitization allowed us to generate an attractive fee income stream and finance the development of our loan origination platform.

In late 2007, Snow Phipps made a significant equity investment in us. In connection with the Snow Phipps investment, we shifted our strategy from originating loans for sale to third parties to becoming a company focused on growing a loan portfolio on our balance sheet to earn a stable spread and we intend to pursue this as our primary strategy going forward. We believe that over the years and through our origination and underwriting process, we have developed a unique set of capabilities that allows us to build an attractive portfolio generating a recurring income stream that significantly enhances our value. We also believe that holding loans on our balance sheet enables us to better manage risk by tracking loan and borrower performance over time, providing us with information that helps us continually improve our underwriting standards. From our inception in 2004 through 2008, we emphasized our origination strategy, successfully originating 1,257 loans totaling $474.4 million. During the second half of 2008, as distressed sellers provided compelling opportunities to acquire largely performing small balance commercial real estate loans at attractive prices, we pivoted our business to focus on acquiring, rather than originating, loans as the risk-adjusted returns on acquisitions became more attractive than on originated loans. Between 2008 and 2012, we acquired 210 loans with total UPB of $123.0 million for $87.1 million.

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After the financial crisis, we saw compelling opportunities to begin originating investor real estate loans at scale again. Since we began originating loans again in 2013, our loan portfolio has grown from $155.8 million as of December 31, 2012 to $1.9 billion as of September 30, 2019, comprised of $1.9 billion of loan originations and $41.0 million of loan acquisitions.

Furthermore, in response to increased demand for rental properties following the financial crisis, we began originating investor loans secured by 1-4 unit residential rental properties, which we refer to as investor 1-4 loans. Since our first investor 1-4 loan origination in July 2013 through September 30, 2019, we have originated over 7,000 investor 1-4 loans totaling $1.9 billion. As of September 30, 2019, these investor 1-4 loans comprised 51.5% of our total loan portfolio, totaling $993.3 million in UPB. To finance the rapid growth of our portfolio, we obtained additional equity capital from an affiliate of a fund managed by Pacific Investment Management Company LLC in December 2016.

In 2011, we completed our first post-crisis small balance commercial real estate loan securitization, issuing $61.0 million of securities backed by $74.9 million of investor real estate loans, consisting of $34.9 million of originated loans and $40.0 million of acquired loans. Since then, we have completed eleven additional securitizations, comprised almost entirely of originated loans, raising approximately $2.5 billion in gross debt proceeds since 2011.

We believe the experience and time spent developing our platform through various business cycles has resulted in a durable business that is well positioned to profitably navigate future economic cycles and capitalize on evolving market opportunities.

Our Competitive Advantages

We believe that the following competitive advantages enhance our ability to execute our business strategy and position us well for continued growth:

Established Franchise with Strong Brand Recognition

We believe our reputation and deep history within the real estate lending community position us as a preferred lender for mortgage brokers. We have been originating and acquiring loans in our core market since our inception in 2004, making us a recognizable brand with a proven ability to execute. Additionally, we have successfully executed twelve securitizations of our investor real estate loans, raising over $2.5 billion in gross debt proceeds since 2011. We have a keen understanding of this securitization market, including complicated structural issues, investor expectations and rating agency requirements. We believe we have a strong reputation with investors in the securitization market, which enables us to maintain efficient access to debt capital that ultimately improves our ability to offer competitive pricing to borrowers.

Customized Technology and Proprietary Data Analytics

We have invested in and customized automated systems to support our use of data analytics which drives our lending process. We believe the investor real estate lending market requires a highly-specialized skill set and infrastructure. To effectively compete and execute on a sustainable long-term business strategy, lenders must control the cost to originate and manage loans without sacrificing credit quality. We believe our investment in technology and use of data analytics helps us achieve these critical objectives and positions our business for sustainable, long-term growth.

We apply the same asset-driven underwriting process to all of the loans in our portfolio, regardless of whether we originate or acquire these loans. Our credit and underwriting philosophy encompasses individual borrower and property due diligence, taking into consideration several factors. Our access to 15 years of proprietary data allows us to perform analytics that inform our lending decisions efficiently and effectively, which we believe is a strong competitive advantage.

Large In-Place Portfolio with Attractive, Long-Term Financing

We believe our in-place portfolio provides a significant and stable income stream for us to invest in future earnings growth. The majority of our loans are structured to provide for interest rate protection, by

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floating after an initial fixed-rate period, subject to a floor equal to the starting fixed rate. The loans are mainly financed with long-term, fixed-rate debt, resulting in a spread that could increase over time, but not decrease. As a result, our in-place portfolio generally benefits from rising interest rates. Excluding the interest expense paid on our corporate debt, which we expect to partially repay with a portion of the net proceeds from this offering, we generated $52.2 million in portfolio related net interest income, representing a 4.06% portfolio related net interest margin, during the nine months ended September 30, 2019. Including the interest expense paid on our corporate debt, we generated $41.6 million in total net interest income, representing a 3.24% net interest margin, during the nine months ended September 30, 2019.

Our In-House Asset Management Results in Successful Loss Mitigation

Direct management of individual loans is critical to avoiding or minimizing credit losses and we work with our third-party primary servicers with whom we have developed strong relationships to emphasize disciplined loan monitoring and early contact with delinquent borrowers to resolve delinquencies. We have a dedicated asset management team that, augmented with primary servicing from our loan servicers, focuses exclusively on resolving delinquent loans. Our hands-on approach enables us to generally preserve the value of our assets and helps us to minimize losses. We believe this expertise, combined with our outsourced servicing relationships, gives us a distinct competitive advantage.

Our Experienced Management Team

Led by co-founder and Chief Executive Officer Christopher Farrar, our management team averages more than 25 years of experience in the financial services and real estate lending industries, including extensive experience in commercial and residential lending, structured finance and capital markets. We have successfully navigated both positive and negative economic cycles and retained our core team of experienced professionals in appraisal, underwriting, processing and production, while bolstering our finance and asset management team with professionals possessing extensive experience in financial reporting and real estate management. We believe our in-depth knowledge of our core market provides a distinct competitive advantage.

Our Growth Strategy

The market for investor real estate loans is large and highly fragmented. We have built a dedicated and scalable national lending platform focused specifically on serving this market and believe our capabilities position us well to maintain our reputation as a preferred lender in this market. Our growth strategy is predicated on further penetrating our existing network of mortgage brokers and expanding our network with new mortgage brokers. A key element of our ability to capitalize on this is the growth and development of our team of account executives as well as targeted marketing initiatives. We will continue to supplement the extension of our broker network with the development of new products to support the evolving needs of borrowers in our core market. In addition to our core origination business, we plan to continue to evaluate and opportunistically acquire portfolios of loans that meet our investment criteria.

Further Penetrate Our Existing Mortgage Broker Network

We strive to be the preferred lender within our network of approved mortgage brokers. We have developed a strong reputation in the market for high quality execution and timely closing, which we believe are the most important qualities our mortgage brokers value in selecting a lender. There is significant opportunity for us to further penetrate the more than 3,000 mortgage brokers with whom we have done business over the last five years. Approximately 93% of loan originators originated five or fewer loans with us during the nine months ended September 30, 2019. We believe this presents a compelling opportunity for us to capture incremental volume from our existing broker network.

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Expand Our Network with New Mortgage Brokers

We believe that our targeted sales effort, combined with consistent high quality execution, positions us well to continue adding to the network of mortgage brokers that rely on us to serve their borrower clients. During the nine months ended September 30, 2019, we funded 2,131 loans sourced by approximately 970 different mortgage brokers, which we believe represents a small portion of the over 590,000 state-licensed mortgage originators in the United States as of December 31, 2018, according to the Nationwide Multistate Licensing System. The size of the mortgage broker market presents an attractive opportunity for us to capture significant growth with very small increases in the share of mortgage brokers that recognize our platform capabilities and utilize us as a preferred lender in our core market.

Develop New Products

Our primary product is a 30-year amortizing term loan with a three-year fixed-rate period which floats at a spread to the prime rate thereafter subject to a floor equal to the starting fixed rate. This product is used by borrowers to finance stabilized long-term real estate investments. We believe this product has strong receptivity in our market, as evidenced by our success in growing loan originations over time. Since our inception, we have continued to expand our product offering in response to developing market opportunities and the evolving financing needs of our broker network. For example, in 2013, in response to the increased demand for rental properties, we moved aggressively into the market for 1-4 unit residential rental loans, which comprised 46.8% of our held for investment loan portfolio as of September 30, 2019.

In March 2017, we began originating short-term, interest-only loans to be used for acquiring, repositioning or improving the quality of 1-4 unit residential investment properties. This product typically serves as an interim solution for borrowers and/or properties that do not meet the investment criteria of our primary 30-year product. The short-term, interest-only loan allows borrowers to address any qualifying issues with their credit and/or the underlying property before bridging into a longer-term loan. In June 2018, we added a second short-term, interest-only loan product which allows borrower draws for rehabbing residential rental property. Historically, we have aggregated and sold these short-term, interest-only loans at a premium to par to institutional investors, which has generated attractive income for us with limited capital while also allowing us to establish an underwriting track record and monitor the performance of these loans. Given our increased experience providing these loans, we are currently evaluating long-term financing alternatives for these loans and may elect to retain them in the future to be more consistent with our investment strategy of holding loans in our portfolio and earning a spread.

In June 2019, we began originating a 30-year fixed-rate amortizing term loan to complement our primary product as we believe there is meaningful demand for fixed-rate loans within our core market. More importantly, these loans provide our brokers with an alternative to the primary product enabling them to meet the specific needs of their customers.

Opportunistically Acquire Portfolios

We continually assess opportunities to acquire portfolios of loans that meet our investment criteria. Over the past 15 years, our management team has developed relationships with many financial institutions and intermediaries that have been active investor real estate loan originators or investors. We believe that our experience, reputation, and ability to effectively manage these loans makes us an attractive buyer for this asset class, and we are regularly asked to review pools of loans available for purchase. In our experience, portfolio acquisition opportunities have generally been more attractive and plentiful during market conditions when origination opportunities are less favorable. Accordingly, we believe our acquisition strategy not only augments our core origination business, but also provides a counter-cyclical benefit to our overall business.

Since 2008, we have reviewed over $10.3 billion of investor real estate loans, bid on approximately $523.8 million of loans that fell within our underwriting guidelines, and, through this process, selectively acquired 295 loans with total unpaid principal balance, or UPB of $167.0 million.

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Our Portfolio

Loans Held for Investment

Our typical loan is secured by a first lien on the underlying property with the added protection of a personal guarantee and, based on the loans in our portfolio as of September 30, 2019, has an average balance of approximately $323,000. As of September 30, 2019, our portfolio of loans held for investment totaled $1.8 billion of UPB on properties in 45 states and the District of Columbia. Of the 5,445 loans held for investment as of September 30, 2019, 97.7% of the portfolio, as measured by UPB, was attributable to our loan origination business, while the remaining 2.3% of the portfolio, or 91 loans, totaling $41.0 million in UPB, were related to acquisitions. During the year ended December 31, 2018 and the nine months ended September 30, 2019, we originated 1,708 and 1,366 loans to be held for investment totaling $587.2 million and $475.5 million, respectively.

Our investor real estate loans have longer-term maturities compared to other commercial real estate loans. As of September 30, 2019, 99.9% of our loans held for investment, as measured by UPB, were fully-amortizing. The principal amount of a fully-amortizing loan is repaid ratably over the term of the loan, as compared to a balloon loan where all, or a substantial portion of, the original loan amount is due in a single payment at the maturity date. We believe that fully-amortizing loans face a lower risk of default than balloon loans, as the final payment due under the balloon loan may require the borrower to refinance or sell the property.

We target investor real estate loans with loan-to-value ratios, or LTVs, between 60% and 75% at origination as we believe that borrower equity of 25% to 40% provides significant protection against credit losses. As of September 30, 2019, our loans held for investment had a weighted average LTV at origination of 65.2%. Additionally, as of September 30, 2019, borrowers personally guaranteed 99.9% of the loans in our held for investment portfolio and had a weighted average credit score at origination of 706, excluding the 1.1% of loans for which a credit score is not available.

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The following charts illustrate the composition of our loans held for investment as of September 30, 2019:

(*) Percentages may not sum to 100% due to rounding.

(1) Portfolio stratifications based on unpaid principal balance for loans held for investment as of September 30, 2019.

(2) Portfolio stratifications based on unpaid principal balance for loans held for investment as of September 30, 2019.

(3) The approximately 1% portion of our loans held for investment with an LTV greater than 75% consists primarily of acquired loans.

Loans Held for Sale

Although our primary focus is long-term maturity real estate loans, we are continually assessing market developments for attractive opportunities in which we can leverage our experience, network and personnel. In March 2017, we began originating short-term, interest-only loans to be used for acquiring, repositioning or improving the quality of 1-4 unit residential investment properties. This product typically serves as an interim solution for borrowers and/or properties that do not meet the investment criteria of our primary 30-year product. The short-term, interest-only loan allows borrowers to address any qualifying issues with their credit and/or the underlying property before bridging into a longer-term loan. In June 2018, we added a second short-term, interest-only loan product which allows borrower draws for rehabbing residential rental property. Historically, we have aggregated and sold these short-term, interest-only loans at a premium to par to institutional investors, which has generated attractive income for us with limited

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capital while also allowing us to establish an underwriting track record and monitor the performance of these loans. Given our increased experience providing these loans, we are currently evaluating long-term financing alternatives for these loans and may elect to retain them in the future to be more consistent with our broader investment strategy of holding loans in our portfolio and earning a spread.

As of September 30, 2019, our portfolio of loans held for sale consisted of 594 loans with an aggregate UPB of $171.5 million, and carried a weighted average original loan term of 12.7 months and a weighted average coupon of 10.0%. As of September 30, 2019, 100.0% of our held for sale portfolio, as measured by UPB, was attributable to our loan origination business.

In line with our overall investment strategy, we target loans held for sale with LTVs between 60% and 75% at origination as we believe that borrower equity of 25% to 40% provides significant protection against credit losses. As of September 30, 2019, our loans held for sale had a weighted average LTV at origination of 68.0%. Additionally, as of September 30, 2019, borrowers personally guaranteed 100% of the loans in our held for sale portfolio and had a weighted average credit score at origination of 660.

The following charts illustrate the composition of our loans held for sale as of September 30, 2019:

(*) Percentages may not sum to 100% due to rounding.

(1) Portfolio stratifications based on unpaid principal balance for loans held for sale as of September 30, 2019.

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(2) Represents LTV at origination for population of loans held for sale as of September 30, 2019.

Our Loan Characteristics

Our loans typically have the following characteristics:

Loan Size and Type

We originate and acquire loans with initial balances from $75,000 to $5.0 million secured by first mortgage liens on income producing and/or owner/user commercial properties. We make loans for business purposes only, which we believe limits our exposure to the regulatory constraints of consumer lending. We have a number of underwriting procedures we use to verify that new originations qualify as business purpose loans, including disclosures to new applicants, certifications from borrowers, data verifications sources, verification of real estate ownership, and other underwriting checks.

Property Types

Our loans are typically secured by the following property types:

Investor 1-4	1-4 unit residential properties that are rented or used for a business purpose
Mixed use	Residential apartments combined with office or retail space
Multifamily	Traditional apartment buildings, duplexes, condominiums and other properties with five or more units
Retail	Income producing property from which various types of retail products, merchandise or services are sold by businesses
Office	Commercial property occupied by professional or business offices
Warehouse	Commercial structures used to hold products and goods for a fee and typically located in industrial areas
Other	Self-storage units, mobile home parks, auto services, light industrial, hospitality establishments and other commercial enterprises

We do not make consumer loans or lend on raw land and we generally avoid special-purpose properties such as churches, assisted-living facilities and gas stations. As of September 30, 2019, our held for investment loan portfolio was concentrated in investor 1-4 properties, representing 46.8% of the outstanding principal balance. Mixed use properties represented 13.7% and multifamily properties represented 11.1% of the outstanding principal balance. No other property type represented more than 10.0% of our held for investment loan portfolio. As of September 30, 2019, our held for sale loan portfolio was entirely concentrated in investor 1-4 properties.

Loan-to-Value

We seek to originate and acquire investor real estate loans with substantial borrower equity in the underlying properties. We target a weighted average LTV range for the portfolio at time of origination of 60% to 75%. Pools of investor real estate loans that we have reviewed typically have LTVs at time of origination ranging from 50% to 80% and we intend to price new acquisitions such that the acquisition LTV would fall within our targeted range of 60% to 75%. As of September 30, 2019, our loans held for investment had a weighted average LTV at origination of 65.2% and loans held for sale had a weighted average LTV at origination of 68.0%. We measure the LTV of our originated loans using the loan amount and appraisal values at the time of origination. In instances where the LTV at origination is not available for an acquired loan, the LTV reflects our best estimate of value at the time of acquisition.

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Geography

We typically do not lend on any property located in a city with a population less than 25,000 and outside a 25-mile radius of a city with a population in excess of 100,000. We generally prefer to lend in larger metropolitan statistical areas, or MSAs. As of September 30, 2019, 92.3% of our held for investment loan portfolio was secured by real estate located in a top 100 MSA.

Credit Scores and Personal Guarantees

We emphasize credit scores in our underwriting process and have found them to correlate with borrower delinquency. In addition, all of our originated loans are secured by a personal guarantee from the primary principals of the related business and/or borrowing entity. For acquired loans, in cases where the credit score is not available, we will determine the adequate price reduction necessary to compensate us for the risks associated with a low or nonexistent credit score or the absence of a personal guarantee. As of September 30, 2019, our held for investment loan portfolio had a weighted average credit score at origination of 706, excluding the 1.1% of loans for which a credit score is not available, and our held for sale loan portfolio had a weighted average credit score at origination of 657. There is no minimum credit score that a potential borrower must have in order to obtain a loan from us.

Debt Service Coverage Ratio

We evaluate the debt service coverage ratio, or DSCR, for all loans secured by commercial real estate. We utilize DSCR to determine loan amounts by requiring certain minimum ratios based on the net operating income relative to the debt payments secured by the underlying real estate. For owner-user commercial properties, we require a minimum DSCR of 1.00x, for multifamily and mixed-use properties, we require a minimum DSCR of 1.20x, and for all other commercial properties, we require a minimum DSCR of 1.25x.

Term and Interest Rate

The typical loan in our held for investment portfolio provides a 30-year, fully-amortizing term. For our originated loans, interest rates are typically fixed for the first three or eight years, comprising 64.0% and 4.7%, respectively, of our loan originations during the nine months ended September 30, 2019, and then convert to adjustable rate mortgages. The note rates are floored at the initial rate and after the initial fixed-rate period, adjust every nine months with a margin (typically 4-5%) added to an index (typically the prime rate). These types of loans are often referred to as hybrid adjustable rate mortgages, or ARMs because they have a fixed and variable rate feature. We utilize standard loan documents and borrowers are not permitted to convert our ARMs to fixed-rate mortgages. Based on UPB as of September 30, 2019, approximately 91.1% of our loans held for investment portfolio were ARMs. The weighted average coupon on our held for investment portfolio was 8.6% as of September 30, 2019.

In June 2019, we began originating 30-year fixed-rate amortizing term loans to complement our primary product as we believe there is meaningful demand for fixed-rate loans within our core market. As of September 30, 2019, these loans represented 8.4% of our loans held for investment, as measured by UPB, and had a weighted average coupon of 8.3%.

The typical loan in our held for sale portfolio provides a fixed-rate, interest-only term. As of September 30, 2019, all of the loans in our held for sale portfolio had an initial loan term of 12.7 months with a weighted average coupon of 10.0%.

Prepayment Provisions

The investor real estate loans we originate generally contain prepayment penalty provisions. Prepayment penalties are common in the investor real estate loan market and help the owner maintain an expected yield for the loan. When loans are prepaid, the note holder loses the potential income that could

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have been earned from holding the loans through the contractual term, but offsets that lost income with the prepayment penalty paid by the borrower. In the case where a prepayment penalty is prohibited by state law, we adjust our initial rate accordingly to compensate for the risk of prepayment. As of September 30, 2019, 92.9% of the loans in our held for investment portfolio contained a prepayment penalty provision with a weighted average remaining prepayment penalty period of 28 months. We do not utilize prepayment penalty provisions for the short-term, interest-only loans in our held for sale portfolio.

Our Underwriting Guidelines

Our underwriting approach focuses on generating attractive returns while minimizing credit losses and is enhanced by automation through the extensive use of customized systems to power automation and drive our use of data analytics. We apply the same disciplined due diligence and underwriting process to all loans we review, regardless of whether they are originated or acquired. Our asset-driven underwriting philosophy encompasses property level due diligence, including lease and rent reviews, local market liquidity and trend assessment and a rigorous valuation process. In addition, we perform individual borrower diligence, including credit review, evaluation of experience and asset verification. We believe our extensive access to proprietary data gives us a differentiated perspective and underwriting ability.

We operate under a documented master credit policy, which outlines our standard credit requirements and underwriting guidelines. Our credit policy and underwriting guidelines were developed, and are continually reviewed, by our senior management team comprised of individuals with over 25 years of experience underwriting and managing real estate loans. We believe our credit policy and underwriting guidelines are key differentiators compared to our peers as they facilitate both speed and consistency of execution.

Our underwriting guidelines are primarily intended to assess the value of the property, to evaluate the adequacy of the property as collateral for the loan and to determine the final loan amount. In our risk evaluation process, the most important areas are:

• value of real estate;

• borrower’s credit history;

• experience of management;

• strength of local real estate market; and

• adequacy of financial data.

Primary consideration is given to the value of the real estate securing the loan. We generally expect the property to be the primary source of repayment for each loan and do not rely on the personal income from an individual and/or guarantor to make a credit decision. In addition, we evaluate the borrower’s credit history, underwrite the title report to ensure our loan is a first lien on the property, review relevant inspection reports and purchase contracts (if applicable), review the borrower’s disclosures and applications, assess any environmental concerns and evaluate the complete file for creditworthiness. In evaluating the credit quality of our borrowers, we utilize credit bureau risk scores, or a FICO score, a statistical ranking of likely future credit performance developed by Fair, Isaac & Company and the three national credit data repositories: Equifax, TransUnion and Experian. FICO scores are used to determine eligibility, pricing and maximum loan-to-value ratio. We may adjust the maximum loan-to-value ratio and/or pricing for a borrower whose credit score does not appear to accurately represent his/her creditworthiness by granting an exception to our guidelines. For contemplated loan acquisitions, we review the above information and utilize the borrower’s loan payment history to determine creditworthiness.

Loan Origination and Management Process

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Step 1: Sourcing

We originate investor real estate loans through our established network of mortgage brokers, mortgage bankers and financial institutions. As of September 30, 2019, we had approximately 3,000 approved broker relationships that are established and maintained by our team of 126 account executives located throughout our eight offices. We run background checks on all brokers that apply to be approved with us and require brokers to execute our standard agreement, including our zero-fraud requirement. Once a broker has been approved by our compliance department, our account executives work with them to source new loan applications. The brokers will collect preliminary borrower information and work with us to determine if the loan meets our underwriting guidelines.

Note: States colored according to legend based on origination volume over the twelve months ended September 30, 2019. Excludes Washington, DC, Hawaii and Alaska which, respectively, accounted for $19.2 million, $10.2 million and $0.0 million of LTM loan originations.

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Step 2: Screening

Loans are reviewed and pre-screened to determine whether they meet our underwriting guidelines. Brokers can submit applications on behalf of borrowers through our online application portal. We utilize this tool to gather relevant information to screen new applicants. Our proprietary software evaluates this information to determine if the loan meets our credit criteria and determines loan pricing based on the risk criteria. This 24/7 online technology allows us to process numerous applications and give fast answers to our brokers. For all loans, we review the credit history of the applicant, review the type and use of the property being financed, and review the condition of the property. We continually refine and update our credit criteria as we learn more about loan performance from our servicing history.

(1) Approximate percentages based on number of loan applications received during the nine months ended September 30, 2019.

Step 3: Appraisal

The valuation process commences once a loan application has passed the initial screening phase. We require a current real estate appraisal on all assets that will be secured by a newly originated fully-amortizing loan. For short term-loans, we require an appraisal or broker price opinion with an interior inspection. We maintain an internal list of licensed appraisers and constantly monitor their performance through our internal review process as well as asset management feedback. This process is designed to increase the quality of the appraisals we rely upon and foster long-term partnerships with our preferred appraisers. We typically utilize local appraisers versus national firms and do not allow the broker or borrower to order the appraisal. Our engagement letter specifically designates us as the customer and prohibits external influence from other parties. The type of report required is based on the nature and complexity of the property type. All appraisals for residential rental loans are rental-based appraisals and include an interior inspection of the property. All appraisals for commercial property loans are compliant with the Uniform Standards of Professional Appraisal Practice.

Step 4: Review

The valuation process culminates with a review completed by our real estate group to ensure that the appraisal is prepared in a manner that is consistent with our underwriting guidelines. Our professional,

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in-house licensed appraisers have years of experience evaluating the types of property we lend on and we rely on their expertise to manage risk. They utilize our historical data, as well as third-party data sources to identify market trends, comparable sales or rents and other relevant real estate data. Additionally, we often order property inspection reports to understand the physical condition of the property securing our loan. Our real estate group analyzes the property based on the appraisal and all other relevant data, then concludes their findings in an internal review report. For loans more than $2.0 million, a second site inspection and/or appraisal will be conducted. Commercial appraisals are re-underwritten by our on-staff Certified General Licensed Appraisers, whereby they determine an estimate of gross income, expenses, net operating income and appropriate cap rate. This estimate is used to determine reasonableness in the original appraisal and manage appraisal quality. For residential rental properties, an automated valuation model, or AVM, is obtained for each loan and evaluated by our licensed appraisal review staff. For acquired loans, we use an internal review process to verify recent sales and listing data and review of the original appraisal and other third-party data that is available to determine an estimate of the value of the underlying real estate.

Step 5: Approval

Our underwriters evaluate the borrower’s credit history, experience, liquidity and other criteria to develop a borrower profile that is measured against our underwriting guidelines. Additionally, they analyze title reports, credit reports, real estate holdings, disclosures and legal reviews to ensure that the loan conforms to our underwriting guidelines and the borrower is deemed credit worthy. As they compile an approval or denial, they rely on the review by our real estate group to evaluate the strength of the property and incorporate these findings into their final decision. Our staff has extensive experience underwriting investor real estate loans and has been well trained to evaluate applicants according to our credit philosophy.

When a borrower does not meet all of our credit guidelines, we can grant an underwriting exception requiring various levels of approval based on materiality and all exceptions are recorded and tracked. Underwriters have delegated approval authority at various levels below $750,000. Loans between $1.0 million and $2.0 million require approval from our Chief Credit Officer and all loans greater than $2.0 million require approval from our Chief Executive Officer Christopher Farrar or Chief Operating Officer Joseph Cowell.

Step 6: Servicing

Primary Servicing

We have developed a sophisticated loan monitoring process to efficiently manage our loan portfolio. In connection with this monitoring process we outsource primary loan servicing, which helps us maintain the benefits of scale. Primary servicing involves many automated processes, such as payment processing, monthly statement generation, tax and insurance processing and other standard administrative responsibilities. All loans in our portfolio remain on the primary servicer’s system for the life of the loan. Our primary servicer provides borrowers with multiple ways to pay their monthly payments, including check, ACH, wires and pay by phone. We currently have three primary servicers: Mr. Cooper (formerly known as Nationstar Mortgage), Ocwen Commercial Servicing, and Situs.

We utilize daily information transmissions received from our primary servicers to monitor our portfolio, analyze trends and identify potential problem loans as early as possible. The daily data feed flows into our data warehouse for use by a variety of departments. In addition, we have read-only access to our primary servicer’s servicing system, allowing us to see up to date contact with the borrowers. We have also developed a user friendly “loan lookup” application that allows our employees to easily look up individual loans in our portfolio.

Our primary servicer’s payment and contact information is provided to our borrowers at the time the loan is closed. Loan set up data and documentation is transmitted to our primary servicer on a weekly basis so that the loans are seamlessly set up on their system prior to the first payment being due.

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Our primary servicer also plays a significant role in the securitizations that we issue. They handle all investor reporting, report and remit all collections to the trustee on a monthly basis. In addition, they may have a responsibility to advance both principal and interest payments as well as tax and insurance expenses to the trust, in accordance with the securitization documents.

Asset Management

We have a dedicated in-house asset management team consisting of eight dedicated employees that focuses exclusively on resolving delinquencies, which require a more hands-on approach to work closely with borrowers and ultimately minimize credit losses. Our in-house team monitors loans when they become 60 or more days past due. Asset managers are assigned a portfolio of loans to manage until the loan is current or entirely resolved. The team makes direct contact with borrowers to assess and resolve issues and develops various loss mitigation strategies, including repayment plans and forbearance agreements. In the event the borrower is unable to pay the loan, our team will initiate foreclosure of the loan, using local counsel or a foreclosure trustee, depending on the state. While the loan is in foreclosure, we may also attempt to capture the rental income from the property by enacting the assignment of rents clause in the loan documents or obtaining a court appointed receiver to manage the property. Foreclosure timelines vary widely based on state law and our strategies incorporate those requirements in determining the best recovery strategy. We enforce our legal rights quickly and this is our most commonly used resolution method due to the significant amounts of equity protecting our loan position.

If the borrower does not cure the loan, we will prepare a bid for the foreclosure sale process. If we are the winning bidder, our team will oversee the management and disposition of real estate owned, or REO, properties. In this situation, we will hire a local realtor to list and sell the property. In addition, we may hire property management to manage the property and coordinate any necessary repairs. As of September 30, 2019, we were actively monitoring 464 assets in special servicing. Of these, 197 loans, or 42.5%, were more than 60 days past due but not in foreclosure and 248 loans, or 53.4%, were in some stage of foreclosure. In most foreclosure cases we expect the borrower to sell the property or refinance our loan due to the significant equity remaining in their property. Typically, borrowers incur a default rate of interest that is 4% greater than the note rate as loans make their way through the foreclosure process. During the nine months ended September 30, 2019, we recognized $2.8 million in default interest over and above the contractual interest collected.

Our Financing Strategy

We typically finance our new loan originations using warehouse repurchase facilities provided by Citibank and Barclays. As of September 30, 2019, these two agreements had an aggregated maximum borrowing capacity of $450.0 million, of which $200.0 million were committed amounts and $250.0 million were uncommitted amounts. In September 2018, we entered into a new secured revolving loan facility with Pacific Western Bank with a fully committed maximum borrowing capacity of $50.0 million. All of these agreements are revolving full recourse credit facilities secured by our investor real estate loans. Depending on the agreement, our collateral is subject either to mark-to-market valuation or a valuation determined by the lender, and we may be subject to margin calls if the value of our collateral decreases. These warehouse and repurchase facilities contain customary covenants, including financial covenants, that if breached could lead to acceleration of all amounts due under the facilities and termination of these facilities. As of September 30, 2019, and December 31, 2018, 2017 and 2016, we were in compliance with all such covenants. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional information about our warehouse repurchase facilities.

Once we have originated between approximately $175 million and $400 million in new loans, we securitize the loans through a real estate mortgage investment conduit, or REMIC, structure and issue the bonds to third parties through individual trust vehicles. All of our securitizations are issued as private placements pursuant to Rule 144A under the Securities Act and utilize a REMIC structure except for the 2011 transaction which was not a REMIC and issued one class of bonds treated as debt for tax purposes.

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These REMIC transactions create significant U.S. GAAP versus tax differences as the U.S. GAAP treatment is a debt financing, however the IRS requires sale treatment and requires us to recognize taxable income to the extent the fair market value exceeds our cost basis, the payment of which creates a deferred tax asset. We are the sole beneficial interest holder of each of the trusts, through our wholly-owned subsidiaries. Proceeds from the issuance of the securities are then used to pay down the balances on our warehouse repurchase facilities. As of September 30, 2019, we had executed eleven securitizations of our investor real estate loans, raising over $2.4 billion in gross debt proceeds. In addition, in October 2019, we completed our twelfth securitization of investor real estate loans, raising an additional $154.4 million in gross debt proceeds.

	At Issuance				Securities Retained as of
($ in thousands)	Mortgage Loans		Securities Issued		Issuance Date		September 30, 2019		December 31, 2018		Stated Maturity Date
2011-1 Trust	$	74,898	$	61,042	$	13,856	$	—	$	13,856		August 2040
2014-1 Trust		191,757		161,076		30,682		9,596		9,596		September 2044
2015-1 Trust		312,829		285,457		27,372		15,569		15,657		July 2045
2016-1 Trust		358,601		319,809		38,792		17,931		17,931		April 2046
2016-2 Trust		190,255		166,853		23,402		9,514		9,514		October 2046
2017-1 Trust		223,064		211,910		11,154		11,154		11,154		April 2047
2017-2 Trust		258,528		245,601		12,927		8,916		10,631		October 2047
2018-1 Trust		186,124		176,816		9,308		7,282		8,256		April 2048
2018-2 Trust		324,198		307,988		16,210		13,153		15,893		October 2048
2019-1 Trust		247,979		235,580		12,399		11,767		—		February 2049
2019-2 Trust		217,921		207,020		10,901		10,831		—		June 2049
Total	$	2,586,154	$	2,379,152	$	207,003	$	115,711	$	112,488

Depending on market conditions, we may increase leverage on our investments with an amount of debt we deem prudent, subject to applicable risk retention rules. Our decision to use leverage to finance our assets will be based on our assessment of a variety of factors, including, among others, the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in our portfolio, the availability of credit at favorable prices, the credit quality of our assets and the outlook for our borrowing costs relative to the interest income earned on our assets and, where applicable, regulatory requirements with respect to securitizations.

Going forward, our financing sources may include borrowings in the form of additional bank credit facilities (including term loans and revolving facilities), additional warehouse repurchase facilities, structured financing arrangements, future securitizations and public and private equity and debt issuances, in addition to transaction or asset-specific funding arrangements. We intend to use leverage primarily to finance our portfolio and not for speculating on changes in the level of interest rates. We are not required to employ specific debt levels, and we believe the appropriate leverage for the particular assets we may finance depends on the factors discussed above.

We expect to continue financing our loan portfolio with equity and our financing arrangements, including warehouse lines for short-term financing and securitizations for long-term financing. We do not, however, plan to structure any securitizations as sales or utilize off-balance-sheet vehicles. We believe using securitizations to finance our investor real estate loans fits well with our strategy of holding interest-earning assets over the long-term to earn a spread. This type of financing structure more closely matches the asset duration with the duration of the financing.

Risk Management

Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. We will closely monitor our investment portfolio and actively manage the credit, financing, interest rate and servicing risks associated with holding a portfolio of our target assets.

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Credit Risk Management

We retain the risk of potential credit losses on the assets in our portfolio, whether originated or acquired. We seek to manage this risk through our loan level pre-origination and pre-acquisition due diligence and underwriting processes. We employ the same asset-driven, disciplined credit risk management techniques and underwriting policies whether we originate or acquire investor real estate loans. Prior to originating or investing in any particular asset, our experienced underwriting team undertakes a rigorous asset-level due diligence process, involving intensive data collection, review and analysis, to ensure that we understand the state of the market and the risk-reward profile of the asset. For originated loans, we employ standard documentation requirements and require appraisals prepared by local independent third-party appraisers selected by us, which are internally reviewed and discounted in the underwriting process, as necessary, by our in-house licensed appraisers. Our approach to credit risk management combines underwriting assumptions with direct knowledge of local market conditions and loan performance results. We generally seek to originate investor real estate loans to borrowers that have strong credit scores, who personally guarantee the loans and have at least 25% equity in the properties securing the loans. We generally avoid lending on properties that are special-purpose in nature, and we prefer properties to be in or near metropolitan statistical areas. We also avoid lending to start-up companies and typically require businesses utilizing the property securing our loan to have been operating for at least two years. We have maintained our underwriting policies since 2004 and we review and revise these policies from time to time based on performance feedback and as market conditions change. Loan performance feedback shapes our credit policy and risk guidelines as we continually monitor our performance both at the portfolio and individual loan level.

Asset Management

We recognize the importance of active asset management in successful mortgage investing, and we have a dedicated team of professionals that manage credit, appraisal/valuation, legal/title, servicing and property liquidation risks. When underwriting loans, we evaluate the cash flow of the property, the value of the real estate underlying the loan, market conditions, comparable sales and recent trends. In addition, we evaluate the borrower and/or guarantor’s credit history, assets and net worth, business history, and operating experience to determine creditworthiness. In conjunction with our third-party loan servicers, we regularly analyze causes of delinquency, causes of default, results from liquidations of properties acquired through foreclosure and geographic trends, so we are continually managing risk and improving our overall investment process. We employ our special servicing techniques to mitigate credit losses in our portfolio. Our in-house asset management team works closely with our servicers to deliver high-touch servicing techniques, which include assisting borrowers with workouts, modifications and/or repayment plans to resolve delinquencies. The investor real estate asset class is unique in combining characteristics of commercial and residential real estate, and we believe our high-touch approach to servicing these loans is crucial to successful risk management and portfolio performance over the long-term.

Interest Rate Risk

Our interest rate risk arises from the mismatch of interest rate changes that may occur between our loans and the related financing sources. Most of our loans have an initial fixed period and then convert to ARMs. The most sensitive mismatch occurs while our newly originated fixed-rate loans reside on our warehouse repurchase facilities, which adjust monthly based on a spread to LIBOR. If short-term rates increase, our warehouse expense will increase while the interest rate we earn on the pledged loans will remain fixed and our interest spread will decrease. We constantly monitor changes in interest rates to manage this risk by changing the rates we charge on new originations during the aggregation period prior to executing securitizations.

After we have originated between approximately $175 million and $400 million in loans, we execute securitizations collateralized by these loans and repay the warehouse financings with the proceeds received from the issuances. As of September 30, 2019, 87.5% of our securitizations were fixed-rate bonds.

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We plan to reduce interest rate risks and to minimize exposure to interest rate fluctuations through the use of long-term, fixed-rate, match-funded financing structure. We expect this to allow us to minimize the risk of refinancing our liabilities before the maturities of our assets and to reduce the impact of changing interest rates on our earnings. We do not currently hedge our assets, but may choose to hedge interest rate risk at some point in the future through the use of interest rate swaps, caps or other financial instruments, or through a combination of these strategies.

Financial Management

We have certain financial covenants in our warehouse repurchase facilities and corporate-level debt that require us to maintain appropriate levels of cash and liquidity. We monitor various financial reports to ensure compliance with these financial covenants and requirements. We actively monitor cash and liquidity to ensure that changes in our portfolio will not cause us to fall below the minimum thresholds in our warehouse repurchase facilities and corporate-level debt. In addition, our management meets frequently to update our allowance for loan losses and our compliance with accounting guidelines to estimate expected losses.

Competition

The business of financing investor real estate loans is competitive. We compete with specialty finance companies, regional and community banks and thrifts, public and private entities, institutional investors, mortgage bankers, insurance companies, investment banking firms, and other financial institutions, and we expect that additional competitors may be organized or otherwise enter our core market in the future. We believe we compete favorably through diversified borrower access driven by our extensive network of mortgage brokers and by emphasizing a high level of real estate and financial expertise, customer service, and flexibility in structuring transactions, as well as by attracting and retaining experienced managerial and marketing personnel. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face. Some of our competitors may be better positioned to market their services and financing programs because of their ability to offer more favorable rates and terms and other services. Such rates may be impacted by the competitor’s size, cost of funds, and access to funding sources that are not available to us, such as GSE financing programs for 1-4 unit residential rental loans and certain multifamily loans. For additional information concerning these competitive risks, see “Risk Factors—We operate in a competitive market for loan origination and acquisition opportunities and competition may limit our ability to originate and acquire loans, which could adversely affect our ability to execute our business strategy.”

Government Regulation

Certain states in which we conduct business require approval, registration or licensing. We hold the following licenses in order to originate and acquire investor real estate loans: a Finance Lenders License issued by the California Department of Business Oversight in California, a Mortgage Lender Servicer License in Florida issued by the Florida Office of Financial Regulation, and a Mortgage Broker License in Nevada issued by the Nevada Department of Business and Industry Division of Mortgage Lending. In the other states where we conduct business, licensing is either not required or we operate under state-specific exemptions. Typically, the mortgage broker that originates the loan that we make, fund or acquire is licensed or exempt from licensing in the state where the loan is made. We also hold a federal Housing Administration, or FHA, Title II approval from the Department of Housing and Urban Development, which permits us to make certain government-insured loans.

We may be required to obtain licenses to originate investor real estate loans in the various additional jurisdictions in which we conduct our business or to acquire investor real estate loans. If we are required to obtain additional licenses to originate or acquire investor real estate loans, the process may be costly and could take several months. There is no assurance that we will obtain the licenses required or that we will not experience significant delays in seeking these licenses. Furthermore, we may be subject to various

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reporting and other requirements to maintain these licenses, and there is no assurance that we may satisfy those requirements. Our failure to maintain or obtain licenses may restrict our investment options and could harm our business. We may consummate this offering even if we have not yet obtained all required licenses. We intend to be licensed in those states where licenses are required for us to acquire investor real estate loans as soon as reasonably practicable after this offering.

Employees

As September 30, 2019, we had 259 employees. None of our employees are represented by a labor union.

Properties

Other than real estate owned in connection with our lending activities, we do not own any real property. Our corporate headquarters are located in leased space at 30699 Russell Ranch Road, Suite 295, Westlake Village, CA 91362.

Legal Proceedings

From time to time, in the ordinary course of business, we are involved in various judicial, regulatory or administrative claims, proceedings and investigations. These proceedings and actions may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future judicial, regulatory or administrative claims or proceedings. Although occasional adverse decisions or settlements may occur, our management does not believe that the final disposition of any currently pending or threatened matter will have a material adverse effect on our business, financial position, results of operations or cash flows.

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INDUSTRY OVERVIEW

National Housing Market Overview

This “National Housing Market Overview” section is derived from a market study that was prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC, or JBREC, based on the most recent data available as of September 2019. Founded in 2001, JBREC is an independent research provider and consulting firm focused on the housing industry. This “National Housing Market Overview” section contains forward-looking statements, which are subject to uncertainty. Forecasts prepared by JBREC are based on data (including third-party data), models and experience of various professionals, and are based on various assumptions, all of which are subject to change without notice. There is no assurance any of the forecasts will be achieved. We believe the data utilized by JBREC that is contained in this section is reliable, but we have not independently verified this information.

Industry Overview

Residential housing is the largest real estate asset class in the United States with a total value of more than $27.2 trillion, according to the Federal Reserve Flow of Funds report for the first quarter of 2019. Since 1965, according to the U.S. Census Bureau, approximately one-third of this asset class has been rented and single-family homes currently comprise 15.7 million units, or roughly one-third of the 45.7 million residential rental housing units. Total housing inventory consists of approximately 139.5 million units.

Single-family homes (i.e., one-unit residential properties) account for the majority of the one to four-unit renter occupied housing stock and represent the most liquid U.S. real estate asset class, with an average of 5.3 million existing single-family home sales per year from 2000-2018.

The following chart provides information about the inventory of U.S. housing as of June 2019 by unit.

U.S. Housing Inventory

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Rental Market

JBREC estimates that there were 45.7 million occupied rental units (including detached and attached units) in the United States as of June 30, 2019, of which 15.7 million, or 34%, were single-family and an additional eight million units, or nearly 18% were two to four-unit buildings. Historically, much of the ownership of one to four-unit rental properties in the U.S. has been concentrated among smaller, non-institutional investors who own one to two properties. Since 2012, the single-family rental segment has been the most active, with larger institutional investors and operators acquiring these homes at scale, helping to grow the overall housing market share of single-family rental homes. Despite this growth, large institutional owners still own a very small percentage of the total number of single-family rental homes. The four largest publicly traded, single-family rental REITs owned approximately 164,800 homes as of June 30, 2019, which constituted approximately 1.0% of the total 15.7 million single-family occupied rental homes. Although the precise number of homes owned by investors with 10 or more homes is unknown, JBREC believes that these investors own approximately 7.0% of the total single-family rental homes.

The 2008-2009 global financial crisis caused a unique situation for investors to materially increase the supply of single-family rental housing. The economy’s decline and dramatic drop in home prices led to the foreclosure of millions of homes throughout the United States. As described below, this increase in foreclosures coincided with a discernable increase in the stringency of mortgage underwriting standards. As a result, many of these homes were acquired by investors and placed into the single-family rental pool. The number of single-family rental homes increased 41% from 11.5 million as of June 30, 2006 to 15.7 million as of June 30, 2019. Of the 4.8 million increase in single-family rental homes, only 164,800 are owned by the four largest publicly traded REITs, so the vast majority are owned by investors with smaller portfolios of homes. Following the downturn, homeownership fell from an all-time high of 69.2% as of December 31, 2004 to 62.9% as of June 30, 2016. More recently, homeownership has increased to 64.1% as of June 30, 2019. In recent years, the growth rate of the supply of single-family rental homes has diminished, as the U.S. homeownership rate has begun to increase and the number of homes going through the foreclosure process has declined to just 30% of levels in 2010, which was the peak year for foreclosures during the housing downturn, according to the Mortgage Bankers Association.

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Housing Demand

Job growth is the most important factor for a healthy housing market. After significant losses from 2008 through 2010, the year-over-year recovery of jobs resumed in 2011 and has been steadily trending higher. JBREC forecasts positive, but moderating job growth through 2020. Followed by a decline of 0.4% jobs in 2021 and an increase of 0.5% jobs in 2022. As of August 31, 2019, year-over-year employment gains totaled 2.2 million jobs and total employment reached an all-time high of 151 million jobs. JBREC forecasts 1.5 million jobs will be created in 2019, growth of 0.4 million jobs in 2020, and loss of 0.7 million jobs in 2021 followed by 0.7 million jobs gained in 2022.

As the economy continues to drive job growth and the population ages, the Census Bureau reported a 1.2 million household increase YOY in 2Q19. This pace is similar to that experienced in other post-recessionary periods. An increasing portion of this net growth in households is from renter households, which should strengthen demand for one to four-unit rental properties. Demographic trends also will contribute to this future household growth. Demographic shifts are forecast to increase the 35-44-year-old cohort (a primary driver of household formation) by 5.9 million people from 2018-2025, according to the U.S. Census Bureau. This cohort’s rentership rate grew from 32% in 2007 to 41% in 2019.

The 2008-2009 global financial crisis and the increase in foreclosures that followed were the initial drivers of the decline in the homeownership rate. But a number of other factors have also contributed, and these trends are expected to continue. The propensity to rent has increased for every age group amongst a delaying of major life events, increasing student loan burdens, rising interest rates, and increasing underwriting criteria to obtain a mortgage. Some households merely prefer to rent due to the flexibility it provides. Consequently, the national rentership rate, which is the inverse of the homeownership rate, is currently at 35.9%, after reaching a high of 37.1% in the second quarter of 2016, the highest rate since 1973.

Since JBREC forecasts 2020 to be the eleventh consecutive year of economic growth, we expect that some sectors of the economy will cool. The historical average of economic recoveries is 5.9 years going

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back to 1950s, and the current recovery is the longest on record dating back that far with 10.2 years. JBREC anticipates the current expansion cycle to extend further to 11.5 years.

New Home Supply

JBREC forecasts moderating new residential construction activity through 2021, influenced largely by a forecasted decline in permits by 1% in 2019 and 6% 2021. With recent decreases in mortgage rates, housing affordability has been brought to its best level since 2016, but there has not been a material boost in housing demand. The low rates are creating only a minor boost as JBREC forecasts 2% higher new home sales and a 2% home price appreciation for 2019. The atypical housing response to low rates has been driven by many move-up buyers having already “moved up” this cycle, rates are falling partially due to a fear that the economy is slowing, and a lack of urgency from buyers who have become accustomed to lower rates around 4% the last 8 years. Even with the declines in mortgage rates, demand for single-family rental homes remains strong with projected rent growth of 4%.

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According to data compiled by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics, there are currently 1.7 jobs being created for each new homebuilding permit as of August 19, 2019. A balanced ratio in a stable market is one homebuilding permit issued for every 1.1 to 1.5 jobs created. After declining significantly during the national recession when employment growth was negative, the job growth to permits ratio has increased and remained above 1.5 every month since 2011, due to a rise in employment growth coupled with historically low homebuilding permit levels. Over time, the relative excess of job growth to homebuilding permits is expected to put upward pressure on rental rates, as well as new and existing home prices. Recently, steady permit growth and slower employment growth has brought the ratio closer to a balanced ratio. However, rising home prices have negatively impacted affordability for homebuyers in several markets. Generally, existing home price appreciation through 2020 will be tempered relative to the prior few years while household incomes continue to rise to partially offset rising home prices.

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After decreasing to 4.0 million existing home sales transactions in 2011 from a peak of nearly 7.1 million transactions six years prior, non-seasonally adjusted existing home sales were just under 5.3 million transactions through the twelve months ended June 30, 2019 according to the National Association of Realtors. A lack of inventory since 2014 has limited sales activity in the existing home market. JBREC expects the resale sales volume will fall to 4.9 million in 2020 due to affordability concerns. The number of sales that were for investment purposes are down -2% YOY ending almost two years of steady recovery from its peak in 2013, based on JBREC estimates using data from CoreLogic, a third-party data provider that aggregates home sales data from public filings. Rising non-investor activity had previously offset falling investor activity, but owner-occupied purchases are also down -2% YOY despite having 200,000 more purchases in the past twelve months.

JBREC’s projected job and household growth through 2020 should support sales of the anticipated new home supply, which is coming off historical lows. New single-family home sales transactions reached a trough in 2011, at 306,000 homes sold, according to the U.S. Census Bureau, and JBREC forecasts new home sales will be at 638,000 in 2019 then decrease to 572,000 sales in 2020.

Mortgage Market

Many potential home buyers continue to find it difficult to qualify for a mortgage. As a result of the 2008-2009 global financial crisis, more stringent underwriting standards were implemented by traditional bank lenders, including making fewer loans to borrowers with lower FICO scores and implementing additional documentation requirements. These increased standards have made it difficult for many potential home buyers to obtain traditional mortgage financing. For example, according to the Federal Reserve Bank of New York, just 4% of mortgage originations went to borrowers with credit scores of 620 and below in the first quarter of 2019. However, because lenders have increased the qualifications required for borrowers to obtain home mortgages, default levels are near historic lows while consumer confidence and sentiment are strong.

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Mortgage Originations by Credit Score (Share of Dollar Volume)

Thirty-year, fixed-rate mortgage interest rates had risen from a historically low level of 3.3% in late 2012 to 4.9% in late 2018 but have dropped down to 3.75% as of July 2019. JBREC forecasts a gradual increase in the 30-year, fixed-rate mortgage rate to an average of 4.5% for 2022. At this point, the recent mortgage interest rate drop has failed to produce a material boost in housing demand. If mortgage interest rates accelerate faster than forecasted, potential home buyers will be negatively impacted by increased homeownership costs and may instead choose to, or be forced to, rent.

Home values have historically been influenced more by the strength of the economy than by changes in mortgage interest rates. Except for hyperinflationary times, the demand created by a growing economy (increased employment, income growth, and increased consumer confidence) has generally offset the increased cost of housing caused by rising mortgage rates. Importantly, while rising interest rates increase the cost of homeownership, rising rates have not historically been linked to falling home prices, especially during periods of economic expansion and wage growth. However, new home sales growth has been slowing recently in an environment of continued price appreciation even in the wake of a drop in mortgage rates.

For the duration of the housing recovery to date, home prices have been rising faster than incomes causing increasing national home ownership affordability challenges. Affordability has been helped by the recent drop in mortgage rates and could see slight further improvements as resale and new home prices are forecasted to decrease in 2020 and 2021 before flattening in 2022. The slightly improved affordability is yet to yield an impactful influence on home sales. With many households having limited savings for a down payment, many home shoppers are continuing to find it challenging to purchase a home, which may maintain and shift demand for rental housing even as home prices contract in the projected housing hiccup in 2020/2021.

Barriers to Entry Limit New Supply

Minimal residential land entitlement processing and development occurred during the prolonged housing downturn (2007 through 2012), and the supply of finished, or even approved lots remains

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relatively limited in many markets. More recently, Federal, State and local regulations on entitlement and development activities have grown increasingly complex, which adds to the cost, time, and uncertainty of project entitlement in most regions. As such, a lag in the delivery of new finished residential lot supply is one contributing factor to the slow rate of growth in new home construction, particularly for more affordably priced homes.

The skilled labor and management pool for homebuilding and land development has been reduced significantly due to the diffusion of personnel into other industries during the protracted downturn. Prior workers have retired, changed to part-time or have transitioned to other industries. At the same time, fewer new job candidates are entering the local homebuilding and land development labor force, driving up labor-related costs and limiting new supply.

The lack of capital and loans may also be limiting lot development activity. The outstanding loan balances for land acquisition, construction, and development are relatively low compared to the previous cycle.

Financing of Single-Family Rental Homes

The number of single-family rental homes continues to increase even as the number of homes entering the foreclosure process has declined. Buyers of single-family rental homes have found additional opportunities to purchase non-foreclosure homes. Furthermore, there is an increased interest in build-for-rent homes, a potential source of supply to single-family rental investors. There were an estimated 963,400 non-owner occupied single-family homes purchased between October 2017 and September 2018 and at the time of purchase, mortgages were recorded on approximately 461,470, or 48%, of these transactions.

About this Housing Market Overview

This “Housing Market Overview” section was prepared in the third quarter of 2019 in connection with this offering by John Burns Real Estate Consulting, LLC. Founded in 2001, JBREC is an independent research provider and consulting firm focused on the housing industry. This “Housing Market Overview” section contains forward-looking statements which are subject to uncertainty.

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The estimates, forecasts and projections prepared by JBREC are based upon numerous assumptions and may not prove to be accurate. This “Housing Market Overview” section contains estimates, forecasts and projections that were prepared by JBREC, a real estate consulting firm. The estimates, forecasts and projections relate to, among other things, home value indices, payroll employment growth, median household income, housing permits and household formation. No assurance can be given that these estimates are, or that the forecasts and projections will prove to be, accurate. These estimates, forecasts and projections are based on data (including third-party data), significant assumptions, proprietary methodologies and the experience and judgment of JBREC. No assurance can be given regarding the accuracy or appropriateness of the assumptions and judgments made, or the methodologies used, by JBREC. The application of alternative assumptions, judgments or methodologies could result in materially less favorable estimates, forecasts and projections than those contained in this “Housing Market Overview” section. Other real estate experts have different views regarding these forecasts and projections that may be more positive or negative, including in terms of the timing, magnitude and direction of future changes.

The forecasts and projections are forward-looking statements and involve risks and uncertainties that may cause actual results to be materially different from the projections. JBREC has made these forecasts and projections based on studying the historical and current performance of the residential housing market and applying JBREC’s qualitative knowledge about the residential housing market. The future is difficult to predict, particularly given that the economy and housing markets can be cyclical, subject to changing consumer and market psychology, geo-political events and governmental policies related to mortgage regulations and interest rates. There will usually be differences between projected and actual outcomes, because events and circumstances frequently do not occur as expected, and the differences may be material. Accordingly, the forecasts and projections included in this “Housing Market Overview” section might not occur or might occur to a different extent or at a different time. For the foregoing reasons, JBREC cannot provide any assurance that the estimates, forecasts and projection, including third-party data, contained in this “Housing Market Overview” section are accurate, actual outcomes may vary significantly from those contained or implied by the forecasts and projections, and you should not place undue reliance on these estimates, forecasts and projections.

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Trends in Small Balance Lending

This “Trends in Small Balance Lending” section is derived from a market study that was prepared for us in connection with this offering by Boxwood Means, LLC, or Boxwood, based on the most recent data available as of September 2019. Founded in 2003, Boxwood is a leading provider of market research, and valuations and data analytics in the small commercial property and loan space. This “Trends in Small Balance Lending” section contains forward-looking statements, which are subject to uncertainty. Forecasts prepared by Boxwood are based on data (including third-party data), models and experience of various professionals, and are based on various assumptions, all of which are subject to change without notice. There is no assurance any of the forecasts will be achieved. We believe the data utilized by Boxwood that is contained in this section is reliable, but we have not independently verified this information.

1. Introduction

The U.S. commercial mortgage market is massive with a record $574.0 billion in loan originations across various investor groups during 2018, according to an annual survey conducted by the Mortgage Bankers Association. Robust “space” market fundamentals, peak asset values and an abundance of low-cost debt accompanying rising U.S. economic growth, among other factors, have sustained the momentum of loan closings nine years into the commercial real estate, or CRE, market’s expansion.

These same positive factors have also buoyed a sizable segment or subset of this debt space commonly referred to as the small-balance loan, or SBL, market, which is typically defined as closed commercial and multifamily loans under $5 million in value. SBL market participants mainly support the financing needs of small property investors and small business owner operators for various asset types in geographical markets large and small throughout the country, ranging from a 10-unit apartment building in Framingham, Massachusetts, a neighborhood strip center in Fort Collins, Colorado to an owner-occupied, light assembly plant in Fresno, California.

The research by Boxwood presented on the following pages describes the size and shape of the SBL market, some of the key factors driving its growth and the composition of participating lenders. Boxwood developed this research using the best available information and believes it to be available depiction of the SBL market.

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2. Market Size and Shape

Overall Size and Trend

As a result of the wide-ranging assortment of eligible primary and secondary property types, SBL origination volume is considerable in its own right. Closed loans exceeded $200 billion in each of the last six years ending 2018 and averaged approximately $222 billion per year according to Boxwood’s research. During this same period, Boxwood estimates that SBL originations peaked in 2016 at almost $240 billion and declined roughly 6% by 2018.

                                                   Source: Boxwood Means, LLC, Federal Reserve

Boxwood believes that favorable small-cap CRE fundamentals and investment trends have been major drivers of the SBL market’s recent prosperity. The consistent, moderate growth of the economy after the financial crisis has served as a catalyst for the nine-year recovery and expansion of the CRE market. In the “space” markets, positive net absorption across office, industrial and retail sectors accrued for 35 consecutive quarters dating back to the fourth quarter of 2010, according to Boxwood’s analysis of data from Costar, Inc.¹ With a consistent excess of demand over supply, the aggregate national vacancy rate plummeted to 4.2% by the close of second quarter of 2019, the lowest point since at least 2006.

¹  Boxwood employs national data from CoStar solely involving commercial properties under 50,000 square feet as a proxy for small-cap CRE space market statistics and trends.

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                                                         Source: Boxwood Means, LLC; CoStar, Inc.

As a result, rents have surged beyond nominal levels attained before the financial crisis, with annual growth rates among the property types that has varied between 4 and nearly 10 percent and top historical averages. Similarly, supply scarcity in the affordable rental housing sector pushed small-cap multifamily vacancies to the lowest point in the historical time series and multifamily rents to new highs.

These robust fundamentals, coupled with low interest rates, have increased investment sales and debt market growth. Boxwood’s research shows a breathtaking rise in small-cap CRE² deal volume during the market’s expansion that doubled the annual total to more than $125 billion in 2018 from five years earlier.

SBL originations have closely tracked these broader market conditions on both the upside and downside over time. For example, annual originations averaged just $143.3 billion during the previous five-year period (2008-2012) while experiencing a severe annual decline of 33.2% as the financial crisis waned in 2009.

However, with approximately $225 billion of closed loans during 2018, the market surpassed the $200 billion level for a sixth consecutive year as extant market forces galvanize small property investors.

Top Geographical Markets

Similar to other real estate finance sectors, SBL originations are centered in a majority of the most populous states in the country. According to Boxwood’s research, the top 10 states by SBL origination volume include (in rank order of population size) California, Texas, Florida, New York, Pennsylvania, Illinois and Georgia, as well as New Jersey, Washington and Colorado. Combined, these 10 states account for a disproportionate share of total U.S. volume, at 65% or approximately $145 billion in 2018. Over the six years ending 2018, origination volume in the top 10 states advanced by approximately 12% while volume in the balance of states increased by just under 10%. Boxwood believe that this variation in originations growth is largely attributable to the sizable difference in state-level economic activity associated with the number and size of large metropolitan areas in these top 10 states.

²  Boxwood tracks small-cap commercial and multifamily sales transactions under $5 million in value.

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                                                                          Source: Boxwood Means, LLC

Source: Boxwood Means, LLC	Source: Boxwood Means, LLC

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According to Boxwood’s research, California continues to be the largest state for SBL originations, accounting for approximately $43 billion, or 19% of total U.S. volume in 2018, nearly twice the volume in the next two most productive states, Texas and New York, with approximately $23 billion and $22 billion, respectively. However, leadership amongst these 10 states varies when taking relative rates of growth into consideration. From 2013 to 2018, eight of the top 10 states showed volume increases, led by double-digit gains in New York (29%), Georgia (21%) and Florida (15%) according to Boxwood’s research. Notably, the SBL volume growth in a number of these states coincided with above-average year-over-year growth in state gross domestic product during 2018, according to data from the Bureau of Economic Analysis.

                                                                              Source: Boxwood Means, LLC

Purchase and Refinance Activity

Boxwood believes that the majority of SBL volume derives from refinance activity due to the typical limited-duration structure of these loans, including initial loan terms that customarily range from as little as three to ten years and result in large balloon payments upon maturity. According to Boxwood’s research, refinance loans accounted for approximately $134 billion or nearly 60% of total volume during 2018 while purchase loans amounted to roughly $91 billion (40%). This dollar split between loan types has been fairly consistent over the past six years, though a doubling of small-cap property sales over the period to approximately $125 billion triggered comparatively faster growth in purchase dollars as well as purchase loan counts³.

³  While both purchase and refinance loans are sensitive to market cycles, refinancing activity tends to be relatively more stable throughout. For example, small-cap property sales dropped significantly during the financial crisis, and purchase loan activity followed suit. Refinance volume fell less steeply and, as a result, surpassed 70% of total annual originations during and immediately following the crisis.

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                                                                              Source: Boxwood Means, LLC

Going forward, Boxwood believes that rising interest rates will likely have some degree of adverse impact on CRE finance markets broadly, as increased borrowing costs limit borrower debt capacity. As a result, purchase loan activity can be expected to decelerate in the long term, though, in the short term, rising interest rates are likely to have an opposite and positive effect on refinance activity as property owners and investors attempt to lock in relatively low rates of financing.

Dollar Loan Buckets

Given the size and diversity of collateral in the SBL market, there is substantial borrower demand for a wide range of loan sizes. In addition, Boxwood believes that categorizing loans into buckets such as loans under $1 million and loans of $1 to $5 million is particularly relevant in the context of rising sales transaction volumes and small-cap CRE prices⁴.

According to Boxwood’s research, the majority of SBL originations, or nearly 70%, derive from the larger loan bucket, averaging volume of approximately $151 billion over the six-year period from 2013 to 2018 and cresting at almost $165 billion in 2016. For loans under $1 million, originations averaged approximately $70 billion per year and likewise peaked during 2016 at almost $75 billion. Given a robust small-cap CRE investment sales market that continued through 2018⁵ and the fact that some amount of loans naturally migrate to larger sizes as property prices increase, Boxwood believes that the dollar value of these bigger loans grew at a fast pace during the break-out years between 2013 and 2016 and then contracted modestly over the past two years ending 2018.

⁴  Boxwood’s Small Commercial Price Index (SCPI), which covers commercial (non-multifamily) sales transactions under $5 million across 125 U.S. metropolitan areas, had by the close of 2018 recovered 100% of a deficit incurred at the 2012 nadir. As of the May, 2019 reading, SCPI had climbed 4.1% above the previous cyclical peak.

⁵  Boxwood reported that small-cap property sales rose by 13% year-over-year to record volume of $127.1 billion in 2018.

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                                                                              Source: Boxwood Means, LLC

Despite the preponderance of loans in the $1 to $5 million category in dollar terms, Boxwood believes that a permanent and distinguishing characteristic of the SBL market is the outsized quantity of smaller commercial mortgages that are backed by small income-producing and owner-user properties in communities across the country. According to Boxwood’s research, the number of loans under $1 million far exceeds the amount originated in the larger category, averaging approximately 197 thousand per annum and representing over 70% of the total closed loans in the SBL market from 2013 to 2018.

                                                                              Source: Boxwood Means, LLC

Boxwood believes that the magnitude of these smaller loans underscores the vitality and breadth of the SBL market, and also highlights the importance that such loans potentially play in wealth creation for private investors as well as in driving growth for small business owners. It also speaks to the significant fragmentation of the SBL market and extensive opportunities that have attracted lenders to the space.

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3. Top Lenders and Market Share

Top Lenders

As suggested above, annual SBL originations have tracked small-cap CRE investment trends and improving conditions in the U.S. economy. As such, the number of lender firms operating in the SBL market has also fluctuated with market dynamics. Boxwood believes that commercial banks have traditionally been the leading source of debt financing in the SBL market but are increasingly vulnerable to the lending efforts of a wide variety of alternative or nonbank entities, including specialty finance companies, private lenders, debt funds and online marketplace lenders. These nonbanks have proliferated in line with the growing SBL market.

Over the six years ending 2018, Boxwood’s research indicates that the top 15 lenders⁶ were still dominated by large national and regional banks, namely JP Morgan Chase (6% overall market share) and Wells Fargo Bank (2%). Just two nonbanks, CBRE Capital Markets (ranked #3 with a 2% share) and Arbor Commercial Mortgage (#4 with a 2% share) were members of the leader board.

                                                                                                                                           Source: Boxwood Means, LLC

Market Share

Whereas the top 15 lenders commanded nearly 22% of the market in 2013, Boxwood’s research indicates that their aggregate market share narrowed to less than 18% in 2017 followed by a slight increase to 19% in 2018. Generally speaking, Boxwood believes that the market share of the top 15 lenders has been under pressure since 2012 when, following the financial crisis, the group’s share peaked at nearly 28%. Boxwood believes it unlikely that commercial banks have voluntarily relinquished their dominion over the SBL space. Instead, legacy systems, operational inefficiencies and regulatory constraints⁷ have driven banks to pull

⁶  This analysis tracked the loan production of the same 15 lenders over the six-year period without respect to the possibility that a top lender may have fallen out of this group based on a decline in market share.

⁷  Generally, banks face internal, operational challenges to maintaining efficient and profitable SBL production processes. Too frequently, a bank’s effort spent on origination, underwriting and review of a $1 million loan can rival the resources leveled at a credit facility valued at 10 times that amount or more. In addition, internal systems and workflow processes can be overly complex or antiquated, producing friction that prolongs the time to close loans. Externally, bank lending – especially construction financing – has been adversely affected by shifting regulations such as Tier 1 capital requirements and HVCRE (High Volatility Commercial Real Estate) rules.

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back from SBL lending or move “up market” to larger loan sizes as evidenced by the median loan size for the top 15 lenders increasing steadily to over $1 million from 2013 to 2018 according to Boxwood’s research. In addition, these factors opened the gates to competition from nonbanks, some of which have accelerated closing times with streamlined processes aided by technological and digital advancements that attract borrowers despite nonbanks’ typically higher interest rates and fees. As a result, Boxwood believes alternative lenders and other market forces are taking market share from the top national and regional banks.

                                                                              Source: Boxwood Means, LLC

4. Boxwood Conclusion

Based on the foregoing, Boxwood believes he SBL market is massive and has proven to be consistently fertile ground for lenders and an abundant source of capital for small investors and small business owners according to Boxwood’s research. It is not a market without nuance and cyclical fluctuation; nor is it impervious to structural change. Among other considerations, Boxwood believes this research suggests that the cyclical nature of the CRE market represents an intrinsic and recurring challenge to the staying power of many lenders in the SBL domain. Now in the digital era, Boxwood believes that it is imperative that principal lenders gain the scale, and risk management and innovation capacity to withstand the next downturn and compete long term.

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MANAGEMENT

Directors and Officers

The following table sets forth the names, ages and positions of our executive officers and individuals who are expected to serve as our directors following completion of this offering.

Name	Age		Position(s)
Christopher D. Farrar		53	Chief Executive Officer and Director
Mark R. Szczepaniak		61	Chief Financial Officer
Jeffrey T. Taylor		51	Executive Vice President, Capital Markets
Graham M. Comley		40	Chief Information Officer, Velocity Commercial Capital LLC
Joseph A. Cowell		40	Chief Operating Officer, Velocity Commercial Capital LLC
Daniel J. Ballen		37	Director
Alan H. Mantel		56	Director, Chairman of the Board
John P. Pitstick		46	Director Nominee
John A. Pless		43	Director
Joy L. Schaefer		60	Director Nominee

Biographical Information

Christopher D. Farrar has served as our Chief Executive Officer, and as a member of our board of directors, since 2004 and is a founding member of the Company. Mr. Farrar will remain a director upon the completion of this offering. Mr. Farrar brings extensive operating experience and history with the Company and management skills to our board of directors. Mr. Farrar has an extensive background in finance, lending, raising capital and business operations. Mr. Farrar co-founded the Company in June 2004. Prior to that time, Mr. Farrar served as a Vice President for Namco Capital Group, Inc., originating commercial real estate loans, and as Senior Vice President of United States Production at Weyerhaeuser Mortgage Company. Prior to his tenure at Weyerhaeuser Mortgage Company, Mr. Farrar formed and served as Chief Credit Officer for Worth Funding, a mortgage banking firm. Mr. Farrar received a Bachelor of Science in business administration from Pepperdine University and is a licensed California Real Estate Broker (inactive).

Jeffrey T. Taylor has served as our Executive Vice President, Capital Markets since 2004 and is a founding member of the Company. Mr. Taylor has more than 26 years of experience in the secondary mortgage market. Mr. Taylor co-founded the Company in June 2004. Prior to that time, Mr. Taylor worked for two different opportunity funds that purchased Resolution Trust Corporation and FDIC loan portfolios and as Vice President of Operations for 2dmkt.com, an Internet start-up that created a platform for trading commercial real estate loan portfolios on the Internet. Mr. Taylor also served as a Vice President with BayView Financial Trading Group L.P. where he managed the Northern California, Oregon and Washington markets for the commercial lending group and at Countrywide Securities Corporation where he served as a Transaction Manager. Mr. Taylor received a Bachelor of Arts from the University of California, Santa Cruz in economics and history and a Master of Real Estate Development from the University of Southern California.

Mark R. Szczepaniak has served as our Chief Financial Officer since May 2017. Mr. Szczepaniak has more than 30 years of industry experience in the real estate/financial services industry and has held various senior positions with both publicly and privately-held finance companies. Mr. Szczepaniak served as Managing Director of Finance at PennyMac Loan Services, LLC from November 2013 until joining us in 2017. From 2009 to 2012, Mr. Szczepaniak served as Chief Financial Officer of Prospect Mortgage. From 2004 to 2007, Mr. Szczepaniak served as Chief Financial Officer and Vice President of Finance of the Federal Home Loan Bank of Seattle and from 1996 to 2004 he served as Senior Vice President and Corporate Controller at the Federal Home Loan Bank of Chicago. Mr. Szczepaniak is a Certified Public Accountant, licensed in the state of California, and a Chartered Global Management Accountant. Mr. Szczepaniak received his Bachelor of Science in finance and accounting from St. Joseph’s College.

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Graham M. Comley has served as Chief Information Officer of our operating subsidiary, Velocity Commercial Capital LLC, since September 2016. He has held various senior and executive positions with both publicly and privately-held companies. From February 2015 to August 2016, Mr. Comley was Director of Advanced Analytics for the West Coast at West Monroe Partners, where he practiced consulting in numerous industries undergoing profound change. From September 2013 to January 2015, he served as Director of Strategic Services at TIBCO Inc., a software company providing business intelligence solutions. From 2010 to 2013, Mr. Comley served as Senior Vice President of Consulting at Extended Results, a business intelligence company which he helped position for acquisition by TIBCO Inc. in 2013. From 2009 to 2010, he served as Business Development Manager at P2 Solutions, a consulting company that provides technology services to clients. From 2001 to 2007 he served as Vice President of Operations at Deterministics, a restaurant labor management, productivity and engineering company. Mr. Comley is a Trustee Board Member for The Leukemia & Lymphoma Society’s Washington/Alaska Chapter. Mr. Comley received his Bachelor of Science in Metallurgical Engineering from the University of Washington.

Joseph A. Cowell has served as our Chief Operating Officer since April 1, 2016. Mr. Cowell has 15 years’ experience in real estate finance and mortgage lending operations. Mr. Cowell has held a variety of roles at Velocity Commercial Capital since joining in 2004. From 2012 to 2016, he served as Chief Credit Officer, Senior Vice President of Whole Loan Acquisitions, and Vice President of Production and Operations. Prior to joining Velocity, Mr. Cowell worked at BayView Financial Trading Group as a capital markets analyst and an account executive for a Bayview subsidiary company, Interbay Funding. Mr. Cowell received a Bachelor of Arts from Western Colorado State University in Business Administration, a Certificate in Real Estate from the University of California Los Angeles, and a Master of Science degree in Banking and Financial Services Management from Boston University.

Daniel J. Ballen has served as a member of our board of directors since December 2016 and will remain a director upon the completion of this offering. He has led numerous private equity investments in both the U.S. and Europe, and currently serves as a board member on a wide range of both private and public companies in the financial services and technology sectors. Mr. Ballen brings significant private equity and investment experience to our board of directors. Since June 2014, Mr. Ballen has served as a Portfolio Manager and Executive Vice President at Pacific Investment Management Company LLC, where he helps lead the corporate private equity investment strategy for the firm’s alternative investment complex. Prior to joining Pacific Investment Management Company LLC, Mr. Ballen was a member of the private equity investment teams at Pine Brook Partners from 2011 to April 2014 and at Bain Capital from 2007 to 2010, where he executed and managed private equity investments in the U.S. across a variety of sectors. Mr. Ballen started his career in the investment banking division of Bear, Stearns & Co., where he was a member of the U.S. financial institutions advisory team. Mr. Ballen received a bachelor’s degree from Emory University.

Alan H. Mantel has served as a member of our board of directors since 2007 and will remain a director and become Chairman of our board of directors upon the completion of this offering. With over 25 years on Wall Street, Mr. Mantel has experience across a wide array of investment banking disciplines including corporate finance, financial advisory services and structured finance. Mr. Mantel brings to our board of directors extensive experience in the financial services sector, including leveraged and structured finance, and background with and knowledge of accounting principles. Mr. Mantel is a Partner of Snow Phipps and has served in such capacity since its inception in 2005. Mr. Mantel served as Managing Director at Donaldson, Lufkin & Jenrette Inc. prior to its merger with Credit Suisse. Mr. Mantel served as Managing Director in the Leveraged Finance department at Credit Suisse from 2000 to 2004. Mr. Mantel was a Senior Accountant and Certified Public Accountant (inactive) at Ernst & Young LLP from 1985 to 1988. Mr. Mantel received a Bachelor of Science in accounting from the State University of New York at Albany and a Master of Business Administration in finance from the University of Chicago.

John P. Pitstick is expected to join our board of directors upon the Conversion prior to the closing of this offering. Mr. Pitstick has experience in accounting, taxes, capital markets, financial operations, internal controls, and SEC reporting/compliance matters. Mr. Pitstick brings over 20 years of combined experience

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as an executive of publicly traded and privately held companies along with experience at a major accounting firm to our board of directors. Mr. Pitstick served as Executive Vice President from 2005 to 2007 and then as Chief Financial Officer from 2007 to 2015 of publicly traded Conversant, Inc. Since September 2015, Mr. Pitstick has served as the Chief Financial Officer of privately held software company Seven Lakes Enterprises, Inc. From 1995 to 2004, Mr. Pitstick worked for Ernst & Young LLP serving a broad range of clients in the technology, biotech and financial services industries as a Certified Public Accountant and ultimately as a Senior Manager. Mr. Pitstick received a Bachelor of Science in accounting from the University of San Francisco.

John A. Pless has served as a member of our board of directors since 2007 and will remain a director upon the completion of this offering. Mr. Pless brings broad finance and corporate governance experience to our board of directors. Mr. Pless joined Snow Phipps at the inception of the firm in 2005 and became a Partner in 2012. Prior to that time, Mr. Pless served as Associate Director in the Financial Institutions Group at UBS Investment Bank, the investment banking arm of UBS AG, where he worked on a wide range of mergers and acquisitions and capital raising transactions for banks and specialty finance companies. Before joining UBS, Mr. Pless worked at Guggenheim Merchant Banking. Mr. Pless currently serves on the boards of BlackHawk, Cascade, EnviroFinance Group, HCTec, Ideal Tridon, Kele and Winchester Interconnect. Mr. Pless received a Bachelor of Arts in economics from Middlebury College.

Joy L. Schaefer is expected to join our board of directors upon the Conversion prior to the closing of this offering. Ms. Schaefer brings to our board a broad range of experience in a variety of asset classes including auto finance, residential mortgages, multi-family mortgages and home equity lending. Since August 2005, Ms. Schaefer has served as president of Golden Eagle Advisors, LLC, a consulting firm focused on organizational development and growth through strategic, operational and financial improvements. From 2005 until August 2018, Ms. Schaefer served as an operating partner of Snow Phipps. From 2002 until 2005, Ms. Schaefer served as president of JL Schaefer Consulting, a strategic, financial and operational consulting practice, advising privately held and family-owned businesses. In 2002, Ms. Schaefer served as president and chief operating officer of Ameriquest Mortgage, a privately held mortgage banking company. From 1990 until 2002, Ms. Schaefer served in various senior management positions within the Westcorp family of companies, including as president and chief operating officer of Westcorp, Inc., a publicly traded financial services holding company; vice chairman, chief executive officer, president and chief operating officer of WFS Financial, Inc., a publicly traded national automobile finance company; and chief operating officer, senior executive vice president, chief financial officer and treasurer of Western Financial Bank, Inc. Earlier in her career, Ms. Schaefer was an audit manager for Ernst & Young. Ms. Schaefer serves on the board of directors of American Assets Trust, Inc. Ms. Schaefer received a Bachelor of Science degree in Accounting from Illinois Wesleyan University.

There are no family relationships among any of our directors, prospective directors or executive officers.

Role of Board of Directors in Risk Oversight

The board of directors has extensive involvement in the oversight of risk management related to us and our business and accomplishes this oversight through the regular reporting by the Audit Committee. The Audit Committee represents the board of directors by periodically reviewing our accounting, reporting and financial practices, including the integrity of our financial statements, the surveillance of administrative and financial controls and our compliance with legal and regulatory requirements. Through its regular meetings with management, including the finance, legal, and internal audit functions, the Audit Committee reviews and discusses all significant areas of our business and summarizes for the board of directors all areas of risk and the appropriate mitigating factors. In addition, our board of directors receives periodic detailed operating performance reviews from management. As used in this prospectus, “board of directors” refers (1) to our board of managers prior to our conversion from a limited liability company to a corporation in connection with this offering, and (2) to our board of directors after such conversion.

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Composition of the Board of Directors after this Offering

We expect to have six directors upon the completion of this offering.

Our certificate of incorporation will provide that our board of directors will consist of such number of directors as may from time to time be fixed by our board of directors in accordance with our bylaws. Our bylaws will provide that the number of directors will not be less than the minimum number required under Delaware law or more than nine. The stockholders agreement that we intend to enter into in connection with this offering will provide that Snow Phipps will have the right to nominate up to two directors for so long as Snow Phipps and its affiliates together with their permitted transferees hold at least 15% of the number of shares of our common stock outstanding immediately following the consummation of this offering. Snow Phipps will have the right to nominate one director for so long as Snow Phipps and its affiliates together with their permitted transferees hold at least 7.5% of the number of shares of our common stock outstanding immediately following the consummation of this offering. TOBI will have the right to nominate one director for so long as TOBI and its affiliates together with their permitted transferees hold at least 7.5% of the number of shares of our common stock outstanding immediately following the consummation of this offering. Furthermore, Mr. Farrar will have the right to nominate one director until he ceases to beneficially own at least 50% of the number of shares of our common stock that he owns immediately following the consummation of this offering. Our stockholders agreement will provide that we may, at our discretion, require that one of Snow Phipps’ director nominees be “independent” as defined by the NYSE. In addition, our stockholders agreement will provide that for so long as they are entitled to nominate at least one member of our board, each of Snow Phipps and TOBI, as applicable, shall be entitled to have one of their director nominees appointed to each of the Company’s Compensation Committee and Nominating/Corporate Governance Committee, subject to qualification under applicable NYSE rules. For so long as Snow Phipps and its affiliates have the right to designate at least one director, we must take all action necessary to ensure the board of directors does not exceed seven members.

At each annual meeting of stockholders, directors will be elected to serve from the time of election and qualification until the next annual meeting.

Committees of the Board of Directors

Upon the completion of this offering, our board of directors has provided for the establishment of an Audit Committee, a Compensation Committee and a Nominating/Corporate Governance Committee, and our board of directors has adopted new charters for its committees that comply with current federal and NYSE rules relating to corporate governance matters.

Audit Committee

Upon the completion of this offering, the Audit Committee will be comprised of Mr. Mantel, Ms. Schaefer and Mr. Pitstick, each of whom is expected to be “financially literate” under the rules of the NYSE. Mr. Pitstick, Ms. Schaefer and Mr. Mantel are each expected to qualify as independent directors under the NYSE corporate governance standards, and Mr. Pitstick is expected to qualify as an independent director under the independent requirements of Rule 10A-3 of the Exchange Act. Mr. Pitstick will chair our Audit Committee and serve as our Audit Committee financial expert, as that term is defined by the Sarbanes-Oxley Act.

The purpose of the Audit Committee will be to assist our board of directors in overseeing and monitoring:

• our financial reporting, auditing and internal control activities, including the quality and integrity of our financial statements;

• our compliance with legal and regulatory requirements;

• our independent registered public accounting firm’s qualifications and independence; and

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• the performance of our internal audit team and our independent registered public accounting firm.

The Audit Committee will also be responsible for engaging our independent registered public accounting firm, reviewing with our independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by our independent registered public accounting firm, considering the range of audit and non-audit fees, reviewing the adequacy of our internal accounting controls and preparing the Audit Committee Report that is included in our annual proxy statement.

Compensation Committee

Upon the completion of this offering, the Compensation Committee will be comprised initially of Mr. Ballen, Mr. Mantel and Mr. Pitstick, each of whom is expected to be an independent director under the rules of the NYSE. Mr. Mantel will chair our Compensation Committee.

The Compensation Committee will be responsible for approving, administering and interpreting the compensation arrangements and benefit policies of our executive officers, including our executive officer incentive programs. It will review and make recommendations to our board of directors to ensure that our compensation and benefit policies are consistent with our compensation philosophy and corporate governance guidelines. The Compensation Committee will also be responsible for reviewing and approving all of our equity-based compensation plans, implementing, administering and interpreting all equity-based and similar compensation plans to the extent provided under the terms of such plans, including the power to amend such plans, and reviewing and approving awards of shares or options to our executive officers and employees pursuant to our equity-based plans.

Nominating/Corporate Governance Committee

Upon the completion of this offering, the Nominating/Corporate Governance Committee will be comprised of Mr. Ballen, Mr. Pless and Ms. Schaefer, each of whom is expected to be an independent director under the rules of the NYSE. Mr. Pless will chair our Nominating/Corporate Governance Committee.

The purpose of the Nominating/Corporate Governance Committee will be to take a leadership role in shaping the corporate governance policies of the Company, identify individuals qualified to be nominated for election to the board of directors by stockholders, nominate committee chairpersons and, in consultation with the committee chairpersons, nominate directors for membership on the committees of our board of directors. When nominating directors for election to the board of directors, the Nominating/ Corporate Governance Committee will consider such potential nominees’ individual qualifications, including strength of character, mature judgment, familiarity with our business and industry, independence of thought and ability to work collegially with others, as well as other factors the committee may deem appropriate, which may include ensuring that the board of directors, as a whole, is appropriately diverse and consists of individuals with various and relevant career experience, technical skills, industry knowledge and financial expertise. It will also oversee the evaluation of members of the board of directors and management. In addition, the Nominating/Corporate Governance Committee will develop and recommend applicable Corporate Governance Guidelines to our board of directors.

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This Compensation Discussion and Analysis provides an overview of our executive compensation philosophy, the overall objectives of our executive compensation program, and each material element of compensation for the fiscal year ended December 31, 2019 that we provided to each person who served as our principal executive officer or principal financial officer during 2019 and our three most highly compensated executive officers employed at the end of 2019 other than those persons, all of whom we refer to collectively as our Named Executive Officers.

Our Named Executive Officers for the fiscal year ended December 31, 2019 were as follows:

• Christopher D. Farrar, Chief Executive Officer;

• Mark R. Szczepaniak, Chief Financial Officer;

• Jeffrey T. Taylor, Executive Vice President, Capital Markets;

• Joseph Cowell, Chief Operating Officer; and

• Graham Comley, Chief Information Officer.

Prior to this offering, our board of directors has been responsible for establishing, implementing, and evaluating our employee compensation and benefit programs. Our board of directors annually evaluates the performance of our Chief Executive Officer and our other executive officers, establishes the annual salaries and cash bonus awards for our Chief Executive Officer and our other executive officers, and approves all equity awards. Our board of directors’ objective is to ensure that the total compensation paid to our Named Executive Officers as well as our other senior officers is fair, reasonable, and competitive. Generally, the types of compensation and benefits provided to our Named Executive Officers are similar to those provided to other senior members of our management team. Upon completion of this offering, the newly established Compensation Committee of our board of directors will be responsible for overseeing our compensation program.

Executive Compensation Objectives and Philosophy

The goal of our executive compensation program is to create long-term value for our investors while at the same time rewarding our executives for superior financial and operating performance and encouraging them to remain with us for long, productive careers. We believe the most effective way to achieve this objective is to design an executive compensation program rewarding the achievement of specific annual, long-term and strategic goals and aligning executives’ interests with those of our investors by further rewarding performance above established goals. We use this philosophy as the foundation for evaluating and improving the effectiveness of our executive pay program. The following are the core elements of our executive compensation philosophy:

• Market Competitive: Compensation levels and programs for executives, including our Named Executive Officers, should be competitive relative to the marketplace in which we operate. It is important for us to leverage an understanding of what constitutes competitive pay in our market and build unique strategies to attract the high caliber talent we require to manage and grow our Company;

• Performance-Based: Most executive compensation should be performance-based pay that is “at risk,” based on short-term and long-term goals, which reward both organizational and individual performance;

• Investor Aligned: Incentives should be structured to create a strong alignment between executives and investors on both a short-term and a long-term basis; and

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• Financially Efficient: Pay programs and features should attempt to minimize the impact on our earnings and maximize our tax benefits, all other things being equal.

By incorporating these elements, we believe our executive compensation program is responsive to our investors’ objectives and effective in attracting, motivating, and retaining the level of talent necessary to grow and manage our business successfully.

Process for Determining Compensation

In determining the compensation of the Chief Executive Officer, our board of directors annually follows a thorough and detailed process. At the end of each year, our board of directors reviews a self-assessment prepared by the Chief Executive Officer regarding his performance and our performance, and meets (with and without the Chief Executive Officer) to evaluate and discuss his performance and our performance. While our board of directors tries to ensure that a substantial portion of the Chief Executive Officer’s compensation is directly linked to his performance and the performance of our business, our board of directors also seeks to set his compensation in a manner that is competitive with compensation for similarly performing executive officers with similar responsibilities in companies we consider our peers.

In determining the compensation of each of our Named Executive Officers (other than the Chief Executive Officer), our board of directors seeks the input of the Chief Executive Officer. At the end of each year, the Chief Executive Officer reviews a self-assessment prepared by each Named Executive Officer and assesses our Named Executive Officer’s performance against the business unit (or area of responsibility) and individual goals and objectives. Our board of directors and the Chief Executive Officer then review the Chief Executive Officer’s assessments and, in that context, our board of directors approves the compensation for each Named Executive Officer.

Considerations in Setting 2019 Compensation

In approving 2019 compensation for our Named Executive Officers, our board of directors took under advisement the recommendation of the Chief Executive Officer relating to the total compensation package for our Named Executive Officers and, based on company-wide operating results and the extent to which individual performance objectives were met, our board of directors determined 2019 compensation for each of our Named Executive Officers. Our board of directors believes that the total 2019 compensation opportunity for our Named Executive Officers was competitive while at the same time being responsible to our investors because a significant percentage of total compensation in 2019 was allocated to variable compensation, paid only upon achievement of both individual and Company performance objectives.

The following is a summary of key considerations that affected the development of 2019 compensation decisions for our Named Executive Officers, and which our board of directors believes will continue to affect the compensation decisions of the Compensation Committee in future years:

Use of Market Data. We establish target compensation levels that are consistent with market practice and internal equity considerations (including position, responsibility and contribution) relative to base salaries, cash bonuses, and long-term equity compensation, as well as with the assessment of the appropriate pay mix for a particular position. In order to gauge the competitiveness of our compensation programs, we may also review compensation practices and pay opportunities from financial services and real estate lending industry survey data. We attempt to position ourselves to attract and retain qualified senior executives in the face of competitive pressures in relevant labor markets.

Emphasis on Performance. Our compensation program provides increased pay opportunity correlated with superior performance over the long term. When evaluating base salary, individual performance is the primary driver that determines our Named Executive Officer’s annual increase, if any. Historically, we have used discretionary cash bonuses to reward corporate and individual performance.

Importance of Company Results. In determining the amount of cash bonus for each Named Executive Officer, we may consider performance with respect to our success in implementing our short-term business

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strategies that yield long-term benefits, such as increasing or maintaining the amount of loans in our portfolio, credit quality and portfolio earnings. Our board of directors believes it is important to hold our Named Executive Officers accountable for overall company results.

Following the completion of this offering, we anticipate that the newly established Compensation Committee will adhere to the compensation philosophy described above. In addition, we anticipate that the Compensation Committee will retain an independent compensation consultant who will provide the Compensation Committee with input and guidance on all components of our executive compensation program and will advise the Compensation Committee with respect to market data for base salary, annual bonus and long-term equity compensation for similarly situated executives in our peer group.

Elements of 2019 Compensation Program

There are three key components of our executive compensation program for our Named Executive Officers:

• base salary;

• cash incentive bonus; and

• long-term equity incentive compensation.

In addition to these key compensation elements, our Named Executive Officers are provided certain other compensation, as described in “—Other Compensation.”

We believe that offering each of the components of our executive compensation program is necessary to remain competitive in attracting and retaining talented executives. Base salaries and discretionary cash bonuses are designed to reward executives for their performance and our performance. Furthermore, the cash incentive bonuses and long-term equity incentive compensation align the executive’s goals with our goals and those of our stockholders. The components of incentive compensation (the cash bonus and equity awards) are significantly “at risk,” as the cash bonuses and the intrinsic value of the equity awards may depend on the extent to which certain of our operating and financial goals are achieved. Collectively, these components are designed to reward and influence the executive’s individual performance and our short-term and long-term performance.

Base Salary

We pay our Named Executive Officers base salaries to compensate them for services rendered each year. Base salary is a regular, cash payment, the amount of which is based on position, experience, and performance after considering the following primary factors: internal review of the executive’s compensation, relative to both U.S. national market targets and other executives’ salaries, and our board of directors’ assessment of the executive’s individual prior performance. Salary levels are typically considered annually as part of our performance review process but can be adjusted in connection with a promotion or other change in job responsibility.

The base salary of Mr. Farrar was increased from $300,000 to $350,000, effective January 7, 2019, reflecting our board of directors’ assessment of his individual contributions and performance during the 2019 fiscal year, and to provide a competitive salary for his particular position and duties. None of our other Named Executive Officers received a base salary increase in the 2019 fiscal year. In addition, in January 2020 it is expected that the base salaries of each of Messrs. Farrar, Szczepaniak and Taylor will be increased to $450,000, $325,000 and $275,000, respectively.

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The following table summarizes the annual base salaries as of December 31, 2019 of our Named Executive Officers.

Name	2019 Salary ($)
Christopher D. Farrar		348,077
Mark R. Szczepaniak		275,000
Jeffrey T. Taylor		250,000
Joseph Cowell		215,000
Graham Comley		250,000

Cash Incentive Bonus

In addition to receiving base salaries, our Named Executive Officers are eligible to receive cash incentive bonuses.

We awarded discretionary cash bonuses to our Named Executive Officers for fiscal year 2019. Cash bonuses are designed to incentivize our Named Executive Officers at a variable level of compensation that is “at risk,” based on our performance and the performance of such individual. Bonuses have historically been awarded, if at all, at the discretion of the board of directors, with input from our Chief Executive Officer. We use discretionary bonuses to reward corporate and individual performance. In determining the amount of cash bonus for each Named Executive Officer, we may consider performance with respect to our success in implementing our short-term business strategies that yield long-term benefits, such as increasing or maintaining the amount of loans in our portfolio, credit quality and portfolio earnings and increasing distributions to our stockholders. The bonus amount is payable in a lump sum cash amount, and the payment with respect to any bonus amount is subject to the executive’s continued employment through the payment date.

Commencing in 2020, we expect our Compensation Committee to decide whether the cash bonus will continue to be paid on a discretionary basis or pursuant to a formal bonus program.

The following table provides the cash incentive bonus earned by each Named Executive Officer in fiscal year 2019. Each bonus will be paid in January 2020.

Name	2019 Cash Incentive Bonus ($)
Christopher D. Farrar		500,000
Mark R. Szczepaniak		137,500
Jeffrey T. Taylor		210,000
Joseph Cowell		200,000
Graham Comley		120,000

Long-Term Equity Incentive Compensation

In addition to base salary and cash bonus compensation, each of our Named Executive Officers is provided long-term equity incentive compensation. The use of long-term equity incentives creates a link between executive compensation and our long-term performance, thereby creating alignment between executive and investor interests.

2012 Equity Incentive Plan

The Velocity Financial, LLC 2012 Equity Incentive Plan became effective on July 23, 2012 (the “2012 Plan”). Under the 2012 Plan, we granted each Named Executive Officer awards of Class B units, which were non-voting profits interests in the Company that entitled each executive to participate in the appreciation

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in the Company’s value above the applicable monetary distribution thresholds set forth in the Class B unit award agreements and to share in our future profits. Equity awards granted to our Named Executive Officers under the 2012 Plan were determined based on market competitiveness, criticality of position and individual performance (both historical and expected future performance).

Purpose

The principal purpose of the 2012 Plan was to provide our employees, including our executive officers, as well as our directors and consultants, with incentives for continuing their service relationship with us, and to closely align their interests with those of our stockholders.

Administration

Our board of managers administered the 2012 Plan and had the sole discretion and authority to designate grantees of awards and make all decisions and determinations on matters relating to the 2012 Plan.

Awards Subject to 2012 Plan

The 2012 Plan provided for the grant of units to employees, officers, directors and consultants of the Company. As a condition to the issuance of a unit pursuant to the 2012 Plan, each grantee was required to enter into a unit award agreement, which provided the number of units issued to such grantee and the terms of such grant as determined by the board of directors. We reserved an aggregate of 16,071,791 units under the 2012 Plan (including the Class B units outstanding on the effective date of the 2012 Plan). As of December 31, 2019, no Class B units remained available for grant under the 2012 Plan.

Nontransferability and Distributions of Awards

Pursuant to the terms of the 2012 Plan, the Class B unit award agreements, and the limited liability company agreement of the Company, Class B units are not transferable and are only entitled to receive distributions in the event that distributions to Class A unitholders are in excess of the applicable distribution threshold set forth in the Unit Grant Agreement (as defined below).

Amendment and Termination

The 2012 Plan provided that the board of managers may terminate or amend the 2012 Plan in any respect. The termination or any modification or amendment of the 2012 Plan, could not affect a grantee’s rights regarding units previously issued to such grantee without such grantee’s consent.

The 2012 Plan will be terminated effective as of the Conversion and all Class B units issued thereunder will be converted into vested or unvested (as applicable) shares of our common stock upon such termination, as described below.

Class B Unit Awards

Each Named Executive Officer was issued his Class B units pursuant to the terms of our standard Class B unit award agreement under the 2012 Plan (the “Unit Grant Agreement”), as described below. On July 9, 2012, Mr. Farrar was granted 4,787,342 Class B units; Mr. Taylor was granted 1,367,812 Class B units; and Mr. Cowell was granted 150,000 Class B units (these awards replaced Class B units previously granted by Velocity Commercial Capital, LLC under the Velocity Commercial Capital, LLC 2007 Equity Incentive Plan). On May 19, 2017, Mr. Farrar was granted 1,986,872 Class B units; Mr. Szczepaniak was granted 2,000,000 Class B units; Mr. Taylor was granted 2,000,000 Class B units; Mr. Cowell was granted 750,000 Class B units; and Mr. Comley was granted 400,000 Class B units. None of our Named Executive Officers were granted any Class B unit awards in 2019.

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Vesting

Pursuant to the terms of the Unit Grant Agreement, the Class B units vest in equal annual installments on each of the first three anniversaries of the date of grant subject to continued service on each applicable vesting date. The Unit Grant Agreement further provides that upon the occurrence of an accelerated vesting event (as defined below), all otherwise unvested Class B units will vest immediately prior to the effective date of such accelerated vesting event.

Pursuant to the Unit Grant Agreement, “accelerated vesting event” means a transaction or transactions involving (i) a liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary; (ii) a change in control; or (iii) a sale, lease or other disposition of all or substantially all of the assets of the Company and its subsidiaries on a consolidated basis.

Pursuant to the Unit Grant Agreement, “change in control” means any transaction or transaction in which, after giving effect to such transaction or transactions, securities representing in excess of 50% of the voting power of the Company (calculated on a fully-diluted basis) are owned directly, or indirectly through one or more entities, by any person other than Snow Phipps and its affiliates.

The Class B units granted to the Named Executive Officers in 2012 are fully vested, and the Class B units granted to the Named Executive Officers in 2017 are two-thirds vested as of the date of this offering with the remaining one-third scheduled to vest in May 2020.

Effect of Certain Events on Awards

Pursuant to the Unit Grant Agreement, upon termination of employment without cause (as defined below) all unvested Class B units will continue to vest for a period of six months following such termination date; and upon termination for any other reason, all unvested Class B units will be immediately forfeited. In addition, upon termination of employment without cause, termination upon death or disability, or resignation by the executive, all vested Class B units (or Class B units that will vest within six months following termination) may be purchased by the Company for an aggregate purchase price equal to the fair market value of such Class B units as of the termination date. Upon termination of employment for cause or if the executive breaches a covenant provided in the Unit Grant Agreement, all vested Class B units will be immediately forfeited.

Pursuant to the 2012 Plan, “cause” means (i) grantee’s conviction of, or plea of guilty or no contest to, a felony or other offense involving moral turpitude; (ii) grantee’s material breach of the Unit Grant Agreement; (iii) the nonprescription use of any controlled substance or abuse of alcohol that interferes with grantee’s job performance; (iv) the refusal by grantee to perform lawful duties directed by the board of directors; (v) grantee’s fraudulent act, bad faith or willful misconduct in the performance of his or her duties to the Company or its affiliates; (vi) grantee’s material dishonesty in the performance of his duties to the Company or its affiliates; or (vii) grantee’s gross negligence in the performance of his or her duties to the Company or its affiliates.

Confidentiality and Non-Solicitation Covenants

Pursuant to the Unit Grant Agreement, each Named Executive Officer is subject to a confidentiality covenant that survives the termination of the Named Executive Officer’s employment and any termination of the Unit Grant Agreement. Upon breach or threatened breach of the confidentiality covenant, the Company is entitled to an injunction restraining the Named Executive Officer from engaging in any activity constituting such breach or threatened breach, and may pursue any other remedies available at law or in equity. Pursuant to the Unit Grant Agreement, each Named Executive Officer is also subject to a post-termination non-solicitation of employees covenant for a period that is the longer of (i) a period of twelve consecutive months after the Named Executive Officer’s employment terminates, and (ii) a period during which the Company is paying any amounts under the Unit Grant Agreement or providing benefits to the Named Executive Officer under any employment agreement or consulting agreement.

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Conversion of Class B Units into Shares

In connection with this offering, all outstanding vested and unvested Class B units, including those held by our Named Executive Officers, will be converted in the Conversion into, if vested, fully vested shares of our common stock or, if unvested, restricted shares of our common stock granted under the Velocity Financial, Inc. 2020 Omnibus Incentive Plan, described below (the “2020 Plan”), on the basis of an exchange ratio that takes into account the number of Class B units held, the applicable threshold value applicable to such Class B units and the value of the distributions that the holder would have been entitled to receive had the Company been liquidated on the date of such conversion in accordance with the terms of the distribution “waterfall” set forth in the Velocity Financial LLC limited liability company agreement. The unvested restricted shares of our common stock the Named Executive Officers receive will continue to vest in accordance with the same vesting schedule applicable to the Class B units from which such shares were converted and accordingly will fully vest on May 19, 2020. The following table sets forth the assumed number and value of vested shares of our common stock and unvested restricted shares of our common stock that each of our Named Executive Officers will receive upon conversion of their vested and unvested Class B units, in each case based on an assumed initial public offering price of $15.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus.

	Common Stock Received Upon Conversion of Vested Class B Units				Unvested Restricted Shares Received Upon Conversion of Unvested Class B Units
Name	(#)		($)		(#)		($)
Christopher D. Farrar		59,370		890,550		6,434		96,510
Jeffrey T. Taylor		26,238		393,570		6,476		97,140
Mark R. Szczepaniak		12,951		194,265		6,476		97,140
Graham M. Comley		2,590		38,850		1,295		19,425
Joseph A. Cowell		6,313		94,695		2,429		36,435

2020 Omnibus Incentive Plan

Prior to the completion of this offering, our board of directors will adopt, and we expect our stockholders to approve, the Velocity Financial, Inc. 2020 Omnibus Incentive Plan. Equity awards under the 2020 Plan will be designed to reward our Named Executive Officers for long-term stockholder value creation. In determining equity awards, we anticipate that our Compensation Committee will take into account the Company’s overall financial performance as well as its performance versus competitor firms. The awards expected to be made under the 2020 Plan concurrent with the closing of this offering will be granted to recognize such individuals’ efforts on our behalf in connection with our formation and this offering, to ensure their alignment with our stockholder’s interests, and to provide a retention element to their compensation.

Purpose    The purpose of the 2020 Plan is to provide a means through which to attract and retain key personnel and to provide a means whereby our directors, officers, employees, consultants and advisors can acquire and maintain an equity interest in us, or be paid incentive compensation, including incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and aligning their interests with those of our stockholders.

Administration    The 2020 Plan will be administered by the newly established Compensation Committee of our board of directors or such other committee of our board of directors to which it has properly delegated power, or if no such committee or subcommittee exists, our board of directors. The Compensation Committee is authorized to interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the 2020 Plan and any instrument or agreement relating to, or any award granted under, the 2020 Plan; establish, amend, suspend, or waive any rules and regulations and appoint such agents as the Compensation Committee deems appropriate for the proper administration of the 2020 Plan; adopt sub-plans; and to make any other determination and take any other action that the Compensation

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Committee deems necessary or desirable for the administration of the 2020 Plan. Except to the extent prohibited by applicable law or the applicable rules and regulations of any securities exchange or inter-dealer quotation system on which our securities are listed or traded, the Compensation Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it in accordance with the terms of the 2020 Plan. Unless otherwise expressly provided in the 2020 Plan, all designations, determinations, interpretations, and other decisions under or with respect to the 2020 Plan or any award or any documents evidencing awards granted pursuant to the 2020 Plan are within the sole discretion of the Compensation Committee, may be made at any time and are final, conclusive and binding upon all persons or entities, including, without limitation, us, any participant, any holder or beneficiary of any award, and any of our stockholders. The Compensation Committee may make grants of awards to eligible persons pursuant to terms and conditions set forth in the applicable award agreement, including subjecting such awards to performance criteria listed in the 2020 Plan.

Awards Subject to 2020 Plan    The 2020 Plan provides that the total number of shares of common stock that may be issued under the 2020 Plan is the sum of 1,520,000 and the number of restricted shares of common stock issued in the Conversion in respect of all outstanding unvested Class B units (which would be 25,889, assuming an initial public offering price of $15.00, which is the mid-point of the price range set forth on the front cover of this prospectus) which is referred to as the Absolute Share Limit. No more than the number of shares of common stock equal to the Absolute Share Limit may be issued in the aggregate pursuant to the exercise of incentive stock options. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during the fiscal year, may not exceed $1,000,000 in total value. Except for substitute awards (as described below), in the event any award expires or is cancelled, forfeited or terminated without issuance to the participant of the full number of shares to which the award related, the unissued shares of common stock may be granted again under the 2020 Plan. Awards may, in the sole discretion of the Compensation Committee, be granted in assumption of, or in substitution for, outstanding awards previously granted by an entity directly or indirectly acquired by us or with which we combine, referred to as substitute awards, and such substitute awards will not be counted against the Absolute Share Limit, except that substitute awards intended to qualify as “incentive stock options” will count against the limit on incentive stock options described above. No award may be granted under the 2020 Plan after the tenth anniversary of the effective date (as defined therein), but awards granted before then may extend beyond that date.

Options    The Compensation Committee may grant non-qualified stock options and incentive stock options, under the 2020 Plan, with terms and conditions determined by the Compensation Committee that are not inconsistent with the 2020 Plan. All stock options granted under the 2020 Plan are required to have a per share exercise price that is not less than 100% of the fair market value of our common stock underlying such stock options on the date such stock options are granted (other than in the case of options that are substitute awards). All stock options that are intended to qualify as incentive stock options must be granted pursuant to an award agreement expressly stating that the options are intended to qualify as incentive stock options and will be subject to the terms and conditions that comply with the rules as may be prescribed by Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). The maximum term for stock options granted under the 2020 Plan will be ten years from the initial date of grant, or with respect to any stock options intended to qualify as incentive stock options, such shorter period as prescribed by Section 422 of the Code. However, if a non-qualified stock option would expire at a time when trading of shares of our common stock is prohibited by our insider trading policy (or “blackout period” imposed by us), the term will automatically be extended to the 30^th day following the end of such period. The purchase price for the shares as to which a stock option is exercised may be paid to us, to the extent permitted by law, (i) in cash or its equivalent at the time the stock option is exercised; (ii) in shares having a fair market value equal to the aggregate exercise price for the shares being purchased and satisfying any requirements that may be imposed by the Compensation Committee (so long as such shares have been held by the participant for at least six months or such other period established by the Compensation Committee to avoid adverse accounting treatment); or (iii) by such other method as the Compensation Committee may permit in its sole discretion, including, without limitation,

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(A) in other property having a fair market value on the date of exercise equal to the purchase price, (B) if there is a public market for the shares at such time, through the delivery of irrevocable instructions to a broker to sell the shares being acquired upon the exercise of the stock option and to deliver to us the amount of the proceeds of such sale equal to the aggregate exercise price for the shares being purchased or (C) through a “net exercise” procedure effected by withholding the minimum number of shares needed to pay the exercise price. Any fractional shares of common stock will be settled in cash.

Stock Appreciation Rights    The Compensation Committee may grant stock appreciation rights under the 2020 Plan, with terms and conditions determined by the Compensation Committee that are not inconsistent with the 2020 Plan. The Compensation Committee may award stock appreciation rights in tandem with options or independent of any option. Generally, each stock appreciation right will entitle the participant upon exercise to an amount (in cash, shares or a combination of cash and shares, as determined by the Compensation Committee) equal to the product of (i) the excess of (A) the fair market value on the exercise date of one share of common stock, over (B) the strike price per share, times (ii) the number of shares of common stock covered by the stock appreciation right. The strike price per share of a stock appreciation right will be determined by the Compensation Committee at the time of grant but in no event may such amount be less than 100% of the fair market value of a share of common stock on the date the stock appreciation right is granted (other than in the case of stock appreciation rights granted in substitution of previously granted awards).

Restricted Shares and Restricted Stock Units    The Compensation Committee may grant restricted shares of our common stock or restricted stock units, representing the right to receive, upon vesting and the expiration of any applicable restricted period, one share of common stock for each restricted stock unit, or, in the sole discretion of the Compensation Committee, the cash value thereof (or any combination thereof). As to restricted shares of our common stock, subject to the other provisions of the 2020 Plan, the holder will generally have the rights and privileges of a stockholder as to such restricted shares of common stock, including, without limitation, the right to vote such restricted shares of common stock. Participants have no rights or privileges as a stockholder with respect to restricted stock units.

Other Equity-Based Awards and Cash-Based Awards    The Compensation Committee may grant other equity-based or cash-based awards under the 2020 Plan, with terms and conditions determined by the Compensation Committee that are not inconsistent with the 2020 Plan.

Effect of Certain Events on 2020 Plan and Award    In the event of (i) any dividend (other than regular cash dividends) or other distribution (whether in the form of cash, shares of common stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, split-off, spin-off, combination, repurchase or exchange of shares of common stock or other securities, issuance of warrants or other rights to acquire shares of common stock or other securities, or other similar corporate transaction or event that affects the shares of common stock (including a change in control, as defined in the 2020 Plan), or (ii) unusual or nonrecurring events affecting the Company, including changes in applicable rules, rulings, regulations or other requirements, that the Compensation Committee determines, in its sole discretion, could result in substantial dilution or enlargement of the rights intended to be granted to, or available for, participants (any event in (i) or (ii), being referred to as an Adjustment Event), the Compensation Committee will, in respect of any such Adjustment Event, make such proportionate substitution or adjustment, if any, as it deems equitable, to any or all of: (A) the Absolute Share Limit, or any other limit applicable under the 2020 Plan with respect to the number of awards which may be granted thereunder, (B) the number of shares of common stock or other securities of the Company (or number and kind of other securities or other property) which may be issued in respect of awards or with respect to which awards may be granted under the 2020 Plan or any sub-plan and (C) the terms of any outstanding award, including, without limitation, (1) the number of shares of common stock or other securities of the Company (or number and kind of other securities or other property) subject to outstanding awards or to which outstanding awards relate, (2) the exercise price or strike price with respect to any award, or (3) any applicable performance measures; it being understood that, in the case of any “equity restructuring,” the Compensation Committee will make an equitable or proportionate adjustment to outstanding awards to reflect such equity restructuring.

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In connection with any change in control, the Compensation Committee may, in its sole discretion, provide for any one or more of the following: (i) a substitution or assumption of awards, or to the extent the surviving entity does not substitute or assume the awards, the acceleration of vesting of, the exercisability of, or lapse of restrictions on awards and (ii) cancellation of any one or more outstanding awards and payment to the holders of such awards that are vested as of such cancellation (including any awards that would vest as a result of the occurrence of such event but for such cancellation) the value of such awards, if any, as determined by the Compensation Committee (which value, if applicable, may be based upon the price per share of common stock received or to be received by other holders of our common stock in such event), including, in the case of stock options and stock appreciation rights, a cash payment equal to the excess, if any, of the fair market value of the shares of common stock subject to the option or stock appreciation right over the aggregate exercise price or strike price thereof.

Nontransferability of Awards    Each award will not be transferable or assignable by a participant other than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance will be void and unenforceable against us or any of our subsidiaries. However, the Compensation Committee may, in its sole discretion, permit awards (other than incentive stock options) to be transferred, including transfers to a participant’s family members, any trust established solely for the benefit of a participant or such participant’s family members, any partnership or limited liability company of which a participant, or such participant and such participant’s family members, are the sole member(s), and a beneficiary to whom donations are eligible to be treated as “charitable contributions” for tax purposes.

Amendment and Termination    Our board of directors may amend, alter, suspend, discontinue, or terminate the 2020 Plan or any portion thereof at any time; but no such amendment, alteration, suspension, discontinuance or termination may be made without stockholder approval if (i) such approval is necessary to comply with any regulatory requirement applicable to the 2020 Plan or for changes in U.S. GAAP to new accounting standards; (ii) it would materially increase the number of securities which may be issued under the 2020 Plan (except for adjustments in connection with certain corporate events); or (iii) it would materially modify the requirements for participation in the 2020 Plan; and any such amendment, alteration, suspension, discontinuance or termination that would materially and adversely affect the rights of any participant or any holder or beneficiary of any award will not to that extent be effective without such individual’s consent.

The Compensation Committee may, to the extent consistent with the terms of any applicable award agreement, waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any award granted or the associated award agreement, prospectively or retroactively (including after a participant’s termination). However, except as otherwise permitted in the 2020 Plan, any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and adversely affect the rights of any participant with respect to such award will not to that extent be effective without such individual’s consent. In addition, without stockholder approval, except as otherwise permitted in the 2020 Plan, (i) no amendment or modification may reduce the exercise price of any option or the strike price of any stock appreciation right; (ii) the Compensation Committee may not cancel any outstanding option or stock appreciation right and replace it with a new option or stock appreciation right (with a lower exercise price or strike price, as the case may be) or other award or cash payment that is greater than the value of the cancelled option or stock appreciation right; and (3) the Compensation Committee may not take any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities exchange or inter-dealer quotation system on which our securities are listed or quoted.

Dividends and Dividend Equivalents    The Compensation Committee in its sole discretion may provide part of an award with dividends or dividend equivalents, on such terms and conditions as may be determined by the Compensation Committee in its sole discretion. Unless otherwise provided in the award agreement, any dividend payable in respect of any share of restricted stock that remains subject to vesting conditions at the time of payment of such dividend will be retained by the Company and remain subject to the same vesting conditions as the share of restricted stock to which the dividend relates.

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Clawback/Repayment    All awards are subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with (i) any clawback, forfeiture or other similar policy adopted by our board of directors or the Compensation Committee and as in effect from time to time and (ii) applicable law. To the extent that a participant receives any amount in excess of the amount that the participant should otherwise have received under the terms of the award for any reason (including, without limitation, by reason of a financial restatement, mistake in calculations or other administrative error), the participant will be required to repay any such excess amount to the Company.

IPO Option Awards    In connection with this offering, we expect to grant the following number of nonqualified options to purchase shares of our common stock to our Named Executive Officers, as shown in the table below. The options will be granted pursuant to our 2020 Plan and have a per share exercise price equal to the initial public offering price in this offering. Each option will vest as to one-third of the shares subject to such option on each anniversary of the grant date, subject to continued employment on each applicable vesting date. Upon termination of employment without cause or resignation for good reason during the 12 month period following a change in control, any then-unvested shares subject to the option will vest in full.

Name	Number of Options Granted
Christopher D. Farrar		375,000
Mark R. Szczepaniak		100,000
Jeffrey T. Taylor		100,000
Joseph Cowell		75,000
Graham Comley		20,000

Other Compensation

Health Benefits

We offer group health plan coverage, which is fully insured, to employees and pay 80% of the insurance premiums of our employees and 50% of the insurance premiums on their covered dependents. During 2019, we paid 100% of the health insurance premiums for our two founding Named Executive Officers and each of their covered dependents (dollar amounts below represent the amount of premiums we paid on behalf of those Named Executive Officers in excess of the amount of premiums paid on behalf of employees generally, which excess amounts we treated as taxable wages for each executive):

Christopher D. Farrar	$	10,175
Jeffrey T. Taylor	$	10,345

Retirement Benefits

We maintain a defined contribution pension plan (the “401(k) Plan”) for all full-time employees, including our Named Executive Officers, with at least three months of service. The 401(k) Plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Code. The 401(k) Plan provides that each participant may contribute up to 90% of such participant’s compensation pursuant to certain restrictions. The 401(k) Plan allows for discretionary employer matching contributions, and we made discretionary contributions for the year ended December 31, 2019.

Employment Agreements with Named Executive Officers

Below is a written description of the employment offer letters of each of Messrs. Szczepaniak and Comley. None of our other Named Executive Officers have offer letters or employment agreements with us. Each Named Executive Officer’s employment is “at will” and may be terminated at any time.

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Offer Letter of Mr. Szczepaniak

We entered into an offer letter with Mr. Szczepaniak dated April 2017, setting forth the terms of his employment. Pursuant to the letter, Mr. Szczepaniak was entitled to an initial annual base salary of $275,000, and was also eligible to earn an annual discretionary bonus of up to 50% of his annual base salary.

Offer Letter of Mr. Comley

We have entered into an offer letter with Mr. Comley dated July 2016, setting forth the terms of his employment. Pursuant to the letter, Mr. Comley was entitled to an initial annual base salary of $200,000, and was also eligible to earn an annual cash bonus with a target of $50,000.

Tax and Accounting Implications

The board of directors operates its compensation programs with the good faith intention of complying with Section 409A of the Code. We account for equity-based payments with respect to our long-term equity incentive award programs in accordance with the requirements of FASB Accounting Standards Codification Topic 718, Compensation—Stock Compensation, or FASB ASC Topic 718.

Summary Compensation Table

The following table summarizes the total compensation earned by our Named Executive Officers in fiscal year 2019. We have omitted from this table the columns for Change in Pension Value and Nonqualified Deferred Compensation Earnings, because no Named Executive Officer received such types of compensation during fiscal year 2019. We have omitted from this table the column for Stock Awards, because no equity awards were granted to any Named Executive Officers during fiscal year 2019.

Summary Compensation Table

Name and Principal Position	Year		Salary ($)(1)		Bonus ($)(2)		All Other Compensation ($)(3)		Total ($)
Christopher D. Farrar Chief Executive Officer		2019 2018		348,077 300,000		500,000 400,000		15,775 14,952		863,852 714,952
Mark R. Szczepaniak Chief Financial Officer		2019 2018		275,000 275,000		137,500 137,500		5,600 5,500		418,100 418,000
Jeffrey T. Taylor Executive Vice President, Capital Markets		2019 2018		250,000 250,000		210,000 175,000		15,945 14,952		475,945 439,952
Joseph Cowell Chief Operating Officer		2019 2018		215,000 215,000		200,000 150,000		5,600 5,500		420,600 370,500
Graham Comley Chief Information Officer		2019 2018		250,000 250,000		120,000 100,000		5,600 5,500		375,600 355,500

(1) The amounts reported in the “Salary” column represent the base salary earned by each Named Executive Officer during the fiscal year covered.

(2) The amounts reported in the “Bonus” column represent bonuses awarded for the fiscal year covered at the discretion of our board of directors.

(3) The amounts reported in the “All Other Compensation” column for fiscal year 2019 represent the following with respect to each Named Executive Officer:

• Mr. Farrar: matching contribution amount of $5,600 under the 401(k) Plan; reimbursement for medical insurance premiums in the amount of $10,175.

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• Mr. Szczepaniak: matching contribution amount of $5,600 under the 401(k) Plan.

• Mr. Taylor: matching contribution amount of $5,600 under the 401(k) Plan; reimbursement for medical insurance premiums in the amount of $10,345.

• Mr. Cowell: matching contribution amount of $5,600 under the 401(k) Plan.

• Mr. Comley: matching contribution amount of $5,600 under the 401(k) Plan.

Grants of Plan-Based Awards in 2019

None of our Named Executive Officers were granted any equity awards in 2019.

Outstanding Equity Awards at 2019 Year End

The following table provides certain information regarding outstanding equity awards held by our Named Executive Officers as of December 31, 2019.

Outstanding Equity Awards at Fiscal Year End

	Class B Unit Awards
Name	Grant Date		Number of Units that have Not Vested (#)(1)		Market Value of Units that Have Not Vested ($)(2)
Christopher D. Farrar		5/19/2017		662,291		96,510
Mark R. Szczepaniak		5/19/2017		666,667		97,140
Jeffrey T. Taylor		5/19/2017		666,667		97,140
Joseph Cowell		5/19/2017		250,000		36,435
Graham Comley		5/19/2017		133,333		19,425

(1) The numbers in this column represent unvested time-vesting Class B units granted in 2017 under the 2012 Plan to each Named Executive Officer. Each Named Executive Officer was issued the Class B units pursuant to the terms of the Unit Grant Agreement, as described in “—Long-Term Equity Incentive Compensation—Class B Unit Awards.” The Class B units vest in equal annual installments on each of the first three anniversaries of the date of grant subject to continued service on each applicable vesting date. On May 19, 2017, Mr. Farrar was granted 1,986,872 Class B units; Mr. Szczepaniak was granted 2,000,000 Class B units; Mr. Taylor was granted 2,000,000 Class B units; Mr. Cowell was granted 750,000 Class B units; and Mr. Comley was granted 400,000 Class B units. None of the Named Executive Officers were granted any equity awards in 2018 or in 2019.

(2) The fair market value of a Class B unit on December 31, 2019 was determined as the value of the shares of common stock that would be issued in respect of such Class B units, had the Conversion occurred at December 31, 2019, assuming a value of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus.

Class B Units Vested During Fiscal Year 2019

The following table provides information regarding the amounts received by our Named Executive Officers upon the vesting of Class B units during fiscal year 2019.

CLASS B UNITS VESTED

Name	Number of Units Acquired on Vesting (#)(1)		Value Received on Vesting ($)(2)
Christopher D. Farrar		662,291		0
Mark R. Szczepaniak		666,667		0
Jeffrey T. Taylor		666,667		0
Joseph Cowell		250,000		0
Graham Comley		133,333		0

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(1) The numbers in this column represent time-vesting Class B units granted in 2017 under the 2012 Plan to each Named Executive Officer which vested in 2019. Each Named Executive Officer was issued the Class B units pursuant to the Unit Grant Agreement, as described in “—Long-Term Equity Incentive Compensation—Class B Unit Awards.” The Class B units vest in equal annual installments on each of the first three anniversaries of the date of grant subject to continued service on each applicable vesting date. On May 19, 2017, Mr. Farrar was granted 1,986,872 Class B units; Mr. Szczepaniak was granted 2,000,000 Class B units; Mr. Taylor was granted 2,000,000 Class B units; Mr. Cowell was granted 750,000 Class B units; and Mr. Comley was granted 400,000 Class B units.

(2) The fair market value of a Class B unit on each applicable vesting date in 2019 was $0, based on the most recently completed valuation of the Company’s Class B units by our board of directors in accordance with our equity grant policy.

Potential Payments Upon Termination or Change in Control

Accelerated Vesting of Class B Units upon Change in Control

In 2017, each of Messrs. Farrar, Szczepaniak, Taylor, Cowell, and Comley were granted Class B units in the Company, pursuant to the Unit Grant Agreement under the 2012 Plan. Pursuant to the terms of the Unit Grant Agreement, these Class B units vest in equal annual installments on each of the first three anniversaries of the date of grant subject to continued service on each applicable vesting date. The Unit Grant Agreement further provides that upon the occurrence of an accelerated vesting event, which includes a change in control, all otherwise unvested Class B units will vest immediately prior to the effective date of such accelerated vesting event. No value is associated with the accelerated vesting of unvested Class B units held by each executive upon a change in control because the estimated fair value per Class B unit as of December 31, 2019 was $0.

Director Compensation

During 2019, we did not grant any equity awards or pay any other compensation to our non-employee directors. Our Chief Executive Officer does not receive any additional compensation for his service on our board of directors. None of our non-employee directors held any unvested equity awards on December 31, 2019.

Director Compensation Program

Following the completion of this offering, our non-employee directors (other than those affiliated with Snow Phipps or TOBI) will be eligible to receive cash compensation for service on our board of directors and committees of our board of directors as follows:

Board or Board Committee	Membership	Annual Retainer		Meeting Fee (per Board or Committee meeting)
Board of Directors	Member	$	20,000	$	1,000
Audit Committee	Chairperson	$	60,000	$	1,000
	Member	$	50,000	$	1,000
Compensation Committee	Chairperson	$	60,000	$	1,000
	Member	$	50,000	$	1,000
Nominating / Corporate Governance Committee	Chairperson	$	60,000	$	1,000
	Member	$	50,000	$	1,000

All members of our board of directors will also be reimbursed for their reasonable out-of-pocket travel and other expenses incurred in attending meetings of our board of directors and its committees.

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In connection with this offering, we expect to grant nonqualified options to purchase 12,500 shares of our common stock to each of our non-employee directors (other than those affiliated with Snow Phipps or TOBI). The options will be granted pursuant to our 2020 Plan and have a per share exercise price equal to the initial public offering price in this offering. Each option will vest as to one-third of the shares subject to such option on each anniversary of the grant date, subject to continued service on each applicable vesting date. All unvested options will become fully vested in the event of a “change in control” (as such term is defined in the 2020 Plan). While it is anticipated that non-employee directors (other than those affiliated with Snow Phipps or TOBI) will receive annual equity grants, the form and amount of such grants is expected to be determined following the completion of this offering.

Conflicts of Interest

Our certificate of incorporation will provide that our directors who are also employees or affiliates of Snow Phipps or TOBI may engage in similar activities or lines of business as us. Our certificate of incorporation will provide that no Snow Phipps or TOBI employees or affiliates, including those persons who are also our directors, have any obligation to refrain from (1) engaging directly or indirectly in the same or similar business activities or lines of business as us or developing or marketing any products or services that compete, directly or indirectly, with us, (2) investing or owning any interest in, or developing a business relationship with, any person or entity engaged in the same or similar business activities or lines of business as, or otherwise in competition with, us or (3) doing business with any of our clients or customers. In addition, our certificate of incorporation will provide that we have waived any interest or expectancy in any business or other opportunity that becomes known to a director of ours who is also a Snow Phipps or TOBI employee or affiliate unless the opportunity becomes known to that individual solely in his or her capacity as our director.

Director Independence

Pursuant to the corporate governance listing standards of the NYSE a director employed by us cannot be deemed to be an “independent director,” and each other director will qualify as “independent” only if our board of directors affirmatively determines that he has no material relationship with us, either directly or as a partner, stockholder or officer of an organization that has a relationship with us. Ownership of a significant amount of our stock, by itself, does not constitute a material relationship.

Our board of directors is expected to determine that none of the members of our board of directors other than Mr. Farrar has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of the members of our board of directors other than Mr. Farrar is “independent” as that term is defined under the rules of the NYSE.

Code of Business Conduct and Ethics

Prior to the consummation of this offering, we will adopt a Code of Business Conduct and Ethics (the “Code of Ethics”) applicable to all employees, executive officers and directors that addresses legal and ethical issues that may be encountered in carrying out their duties and responsibilities, including the requirement to report any conduct they believe to be a violation of the Code of Ethics. The Code of Ethics will be available on the Corporate Governance page of our website, www.velocitymortgage.com. The information available on or through our website is not part of this prospectus. If we ever were to amend or waive any provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or any person performing similar functions, we intend to satisfy our disclosure obligations with respect to any such waiver or amendment by posting such information on our internet website set forth above rather than by filing a Form 8-K.

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PRINCIPAL STOCKHOLDERS

The following table and accompanying footnotes set forth information with respect to the beneficial ownership of the common stock of Velocity Financial, Inc. by:

• each person known by us to own beneficially 5% or more of our outstanding shares of common stock;

• each of our directors and director nominees;

• each of our named executive officers; and

• our directors, director nominees and executive officers as a group.

The number of shares and percentages of beneficial ownership prior to this offering set forth below are based on shares issued and outstanding as of the date of this prospectus, after giving effect to the Conversion. The number of shares and percentages of beneficial ownership after this offering set forth below are based on the number of shares of our common stock to be issued and outstanding immediately after the consummation of this offering and after giving effect to the Conversion, assuming a value of $15.00 per share, which is the mid-point of the price range set forth on the front cover of this prospectus.

Beneficial ownership for the purposes of the following table is determined in accordance with the rules and regulations of the SEC. A person is a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of the security, or “investment power,” which includes the power to dispose of or to direct the disposition of the security or has the right to acquire such powers within 60 days.

Unless otherwise noted in the footnotes to the following table, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to their beneficially owned common stock. Except as otherwise indicated in the footnotes below, the address of each beneficial owner is c/o Velocity Financial, Inc., 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362.

	Shares Beneficially Owned Before Offering		Percentage of Shares Beneficially Owned
Name of Beneficial Owner			Before Offering			After Offering
5% Stockholders
Snow Phipps(1)		7,080,029		60.3	%		37.3	%
TOBI III SPE I LLC(2)		4,312,433		36.7			22.7
Directors, Director Nominees and Executive Officers:
Christopher D. Farrar(3)		208,693		1.8			1.1
Jeffrey T. Taylor		35,138		*			*
Mark R. Szczepaniak		19,427		*			*
Graham M. Comley		3,885		*			*
Joseph A. Cowell		8,742		*			*
Daniel J. Ballen(4)		—		—			—
Alan H. Mantel(5)		—		—			—
John A. Pless(5)		—		—			—
John P. Pitstick		—		—			—
Joy L. Schaefer		24,075		*			*
All executive officers, directors and director nominees as a group (10 persons)		299,960		2.6	%		1.6	%

* Indicates beneficial ownership of less than 1%.

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(1) Includes 6,427,025 shares issuable upon Conversion of Class A units held by Snow Phipps Group AIV, L.P., 61,737 shares issuable upon conversion of Class A units held by Snow Phipps Group (B), L.P., 207,730 shares issuable upon conversion of Class A units held by Snow Phipps Group AIV (Offshore), L.P., 334,670 shares issuable upon conversion of Class A units held by Snow Phipps Group (RPV), L.P. and 48,867 shares issuable upon conversion of Class A units held by SPG Co-Investment, L.P. SPG GP, LLC (the “General Partner”) is the general partner of Snow Phipps Group AIV, L.P., Snow Phipps Group (B), L.P., Snow Phipps Group AIV (Offshore), L.P., Snow Phipps Group (RPV), L.P. and SPG Co-Investment, L.P. (collectively, the “Fund Entities”). As the general partner of the Fund Entities, the General Partner may be deemed to have beneficial ownership of the securities over which any of the Fund Entities has voting or dispositive power. Ian K. Snow, as the managing member of the General Partner, has the power to vote or direct the vote of, and to dispose or to direct the disposition of the securities that are held by the Fund Entities. The address of Mr. Snow, the General Partner and the Fund Entities is c/o Snow Phipps Group, LLC, 667 Madison Avenue, 18th Floor, New York, New York 10065.

(2) Represents shares issuable upon conversion of Class D units held by TOBI III SPE I LLC (“TOBI III”). TOBI III is a Delaware limited liability company that was formed solely for the purpose of investing in the Company. TOBI III is a wholly owned subsidiary of LVS III Holding LP (“LVS”). PIMCO GP XVII, LLC (“PIMCO GP”), a Delaware limited liability company, is the sole general partner of LVS. Pacific Investment Management Company LLC, a Delaware limited liability company, is the sole managing member of PIMCO GP and has the power to make voting and investment decisions regarding the shares held by TOBI III. The address of the principal business office of TOBI III, LVS, PIMCO GP and Pacific Investment Management Company LLC is 650 Newport Center Drive, Newport Beach, California 92660.

(3) Includes shares beneficially owned by Christopher D. Farrar and the Farrar Family Trust dated February 16, 2001, of which Christopher D. Farrar is a trustee.

(4) The address for Mr. Ballen is c/o Pacific Investment Management Company LLC, 1633 Broadway, New York, New York 10019.

(5) The address for Mr. Mantel and Mr. Pless is 667 Madison Avenue, 18th Floor, New York, New York 10065.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Stockholders Agreement

We intend to enter into a stockholders agreement with Snow Phipps and TOBI prior to the completion of this offering. Pursuant to the terms of this stockholders agreement Snow Phipps will have the right to nominate up to two directors for so long as Snow Phipps and its affiliates together with their permitted transferees hold at least 15% of the number of shares of our common stock outstanding immediately following the consummation of this offering. Snow Phipps will have the right to nominate one director for so long as Snow Phipps and its affiliates together with their permitted transferees hold at least 7.5% of the number of shares of our common stock outstanding immediately following the consummation of this offering. TOBI will have the right to nominate one director for so long as TOBI and its affiliates together with their permitted transferees hold at least 7.5% of the number of shares of our common stock outstanding immediately following the consummation of this offering. Furthermore, Mr. Farrar will have the right to nominate one director until he ceases to beneficially own at least 50% of the number of shares of our common stock that he owns immediately following the consummation of this offering. Our stockholders agreement will provide that we may, at our discretion, require that one of Snow Phipps’ director nominees be “independent” as defined by the NYSE. In addition, our stockholders agreement will provide that for so long as they are entitled to nominate at least one member of our board, each of Snow Phipps and TOBI, as applicable, shall be entitled to have one of their director nominees appointed to each of the Company’s Compensation Committee and Nominating/Corporate Governance Committee, subject to qualification under applicable NYSE rules. For so long as Snow Phipps and its affiliates have the right to designate at least one director, we must take all action necessary to ensure the board of directors does not exceed seven members.

A form of our stockholder agreement as it will be in effect upon the completion of this offering, is filed as an exhibit to the registration statement of which this prospectus forms a part, and the description herein is qualified by reference thereto.

Registration Rights Agreement

In connection with this offering, we intend to enter into a registration rights agreement with our existing members pursuant to which we will grant them the right, subject to certain limitations, to require us to register under the Securities Act shares of common stock held by them for resale and to execute piggyback rights to sell shares held by them in certain registered offerings initiated by us.

A form of our registration rights agreement as it will be in effect upon the completion of this offering, is filed as an exhibit to the registration statement of which this prospectus forms a part, and the description herein is qualified by reference thereto.

Other Transactions

In August 2019, we entered into a five-year $153.0 million corporate debt agreement with Owl Rock Capital Corporation. The 2019 Term Loans under this agreement bear interest at a rate equal to one-month LIBOR plus 7.50% and mature in August 2024. A portion of the net proceeds from the 2019 Term Loans was used to redeem the 2014 Senior Secured Notes for an aggregate amount of approximately $130.1 million, equal to the principal and accrued interest. Another portion of the net proceeds from the 2019 Term Loans, together with cash on hand, was used to repurchase our outstanding Class C preferred units from the holders of the Class C preferred units for an aggregate purchase price equal to the Class C liquidation preference of approximately $27.7 million.

In the ordinary course of business, we sell held for sale loans to various financial institutions. From time to time, an affiliate of TOBI has purchased such loans from us through an arm’s length bidding process.

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Corporate Opportunities

Our certificate of incorporation will provide that our directors who are also employees or affiliates of Snow Phipps or TOBI may engage in similar activities or lines of business as us. Our certificate of incorporation will provide that no Snow Phipps or TOBI employees or affiliates, including those persons who are also our directors, have any obligation to refrain from (1) engaging directly or indirectly in the same or similar business activities or lines of business as us or developing or marketing any products or services that compete, directly or indirectly, with us, (2) investing or owning any interest in, or developing a business relationship with, any person or entity engaged in the same or similar business activities or lines of business as, or otherwise in competition with, us or (3) doing business with any of our clients or customers. In addition, our certificate of incorporation provides that we have waived any interest or expectancy in any business or other opportunity that becomes known to a director of ours who is also a Snow Phipps or TOBI employee or affiliate unless the opportunity becomes known to that individual solely in his or her capacity as our director.

Indemnification of Directors and Officers

We intend to enter into indemnification agreements with each of our directors and executive officers in connection with this offering. These agreements will require us to indemnify these individuals to the fullest extent permitted under the DGCL against expenses, losses and liabilities that may arise in connection with actual or threatened proceedings in which they are involved by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.

Our bylaws will provide that we will indemnify our directors and officers to the fullest extent permitted by the DGCL. In addition, our certificate of incorporation will provide that our directors will not be liable for monetary damages for breach of fiduciary duty to the fullest extent permitted by the DGCL.

Statement of Policy Regarding Transactions with Related Persons

At the time of this offering, our board of directors will adopt a written statement of policy regarding transactions with related persons, which we refer to as our “related person policy.” Our related person policy will require that a “related person” (as defined as in paragraph (a) of Item 404 of Regulation S-K) must promptly disclose to our chief financial officer any “related person transaction” (defined as any transaction that is anticipated would be reportable by us under Item 404(a) of Regulation S-K in which we were or are to be a participant and the amount involved exceeds $120,000 and in which any related person had or will have a direct or indirect material interest) and all material facts with respect thereto. The chief financial officer will then promptly communicate that information to our board of directors. No related person transaction entered into following this offering will be executed without the approval or ratification of our board of directors or a duly authorized committee of our board of directors. It will be our policy that directors interested in a related person transaction will recuse themselves from any vote on a related person transaction in which they have an interest.

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DESCRIPTION OF CAPITAL STOCK

Our purpose is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the DGCL. Upon the closing of this offering, our authorized capital stock will consist of 100 million shares of common stock, par value $0.01 per share, and 25 million shares of preferred stock, all of which preferred stock will be undesignated. The following description of our capital stock and provisions of our certificate of incorporation and bylaws are summaries and are qualified by reference to the certificate of incorporation and the bylaws that will be in effect upon the closing of this offering. We have filed copies of these documents with the SEC as exhibits to our registration statement of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.

Common Stock

As of September 30, 2019, after giving effect to the Conversion, we had outstanding 11,749,988 shares of common stock, which were held of record by 22 stockholders.

Holders of our common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors. The holders of our common stock do not have cumulative voting rights in the election of directors.

Upon our liquidation, dissolution or winding up and after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our common stock will be entitled to receive pro rata our remaining assets available for distribution. Holders of our common stock do not have preemptive, subscription, redemption or conversion rights. The common stock will not be subject to further calls or assessment by us. There will be no redemption or sinking fund provisions applicable to the common stock. All shares of our common stock that will be outstanding at the time of the completion of this offering will be fully paid and non-assessable. The rights, powers, preferences and privileges of holders of our common stock will be subject to those of the holders of any shares of our preferred stock we may authorize and issue in the future.

Preferred Stock

Our certificate of incorporation will authorize our board of directors to establish one or more series of preferred stock (including convertible preferred stock). Unless required by law or by the NYSE rules, the authorized shares of preferred stock will be available for issuance without further action by you, and holders of our common stock will not be entitled to vote on any amendment to our amended restated certificate of incorporation that relates solely to the terms of any outstanding shares of preferred stock, if the holders of such shares of preferred stock are entitled to vote thereon. Our board of directors is authorized to determine, with respect to any series of preferred stock, the powers (including voting powers), preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, including, without limitation:

• the designation of the series;

• the number of shares of the series, which our board of directors may, except where otherwise provided in the preferred stock designation, increase (but not above the total number of authorized shares of the class) or decrease (but not below the number of shares then outstanding);

• whether dividends, if any, will be cumulative or non-cumulative and the dividend rate of the series;

• the dates at which dividends, if any, will be payable;

• redemption rights and price or prices, if any, for shares of the series;

• the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;

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• the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of our company;

• whether the shares of the series will be convertible into shares of any other class or series of the stock of our company, or any other security of our company or any other entity, and, if so, the specification of the other class or series or other security, the conversion price or prices or rate or rates, any rate adjustments, the date or dates as of which the shares will be convertible and all other terms and conditions upon which the Conversion may be made;

• restrictions on the issuance of shares of the same series or of any other class or series; and

• the voting rights, if any, of the holders of the series.

We could issue a series of preferred stock that could, depending on the terms of the series, impede or discourage an acquisition attempt or other transaction that some, or a majority, of the holders of our common stock might believe to be in their best interests or in which the holders of our common stock might receive a premium for their common stock over the market price of the common stock. Additionally, the issuance of preferred stock may adversely affect the holders of our common stock, including, without limitation, by restricting dividends on the common stock, diluting the voting power of the common stock or subordinating the liquidation rights of the common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the market price of our common stock.

Dividends

The DGCL permits a corporation to declare and pay dividends out of “surplus” or, if there is no “surplus,” out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. “Surplus” is defined as the excess of the net assets of the corporation over the amount determined to be the capital of the corporation by the board of directors. The capital of the corporation is typically calculated to be (and cannot be less than) the aggregate par value of all issued shares of capital stock. Net assets equals the fair value of the total assets minus total liabilities. The DGCL also provides that dividends may not be paid out of net profits if, after the payment of the dividend, remaining capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.

Declaration and payment of any dividend will be subject to the discretion of our board of directors. The time and amount of such dividends, if any, will be dependent upon our financial condition, operations, compliance with applicable law, cash requirements and availability, debt repayment obligations, capital expenditure needs and restrictions in our debt instruments, contractual restrictions, business prospects, industry trends, the provisions of Delaware law affecting the payment of distributions to stockholders and any other factors our board of directors may consider relevant.

We do not expect to declare or pay any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends on our common stock is limited by the covenants of our warehouse repurchase facilities and other credit facilities and may be further restricted by the terms of any future debt or preferred securities. See “Dividend Policy.”

Annual Stockholder Meetings

Our certificate of incorporation and our bylaws will provide that annual stockholder meetings will be held at a date, time and place, if any, as exclusively selected by our board of directors. To the extent permitted under applicable law, we may conduct meetings by remote communications, including by webcast.

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Effects of Our Certificate of Incorporation and Bylaws and Certain Provisions of Delaware Law

Our certificate of incorporation and bylaws will, and the DGCL does contain provisions, which are summarized in the following paragraphs, that are intended to enhance the likelihood of continuity and stability in the composition of our board of directors. These provisions are intended to avoid costly takeover battles, reduce our vulnerability to a hostile change of control and enhance the ability of our board of directors to maximize stockholder value in connection with any unsolicited offer to acquire us. However, these provisions may have the effect of delaying, deterring or preventing a merger or acquisition of our company by means of a tender offer, a proxy contest or other takeover attempt that a stockholder might consider in its best interest, including attempts that might result in a premium over the prevailing market price for the shares of common stock held by stockholders.

Authorized but Unissued Capital Stock

Delaware law does not require stockholder approval for any issuance of authorized shares. However, the listing requirements of the NYSE, which would apply if and so long as our common stock remains listed on the NYSE, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of common stock. Additional shares that may be used in the future may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions.

Our board of directors may generally issue preferred shares on terms calculated to discourage, delay or prevent a change of control of our company or the removal of our management. Moreover, our authorized but unissued shares of preferred stock will be available for future issuances without stockholder approval and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, to facilitate acquisitions and employee benefit plans.

One of the effects of the existence of unissued and unreserved common stock or preferred stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.

Business Combinations

We will opt out of Section 203 of the DGCL; however, our certificate of incorporation will contain similar provisions providing that we may not engage in certain “business combinations” with any “interested stockholder” for a three-year period following the time that the stockholder became an interested stockholder, unless:

• prior to such time, our board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

• upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or

• at or subsequent to that time, the business combination is approved by our board of directors and by the affirmative vote of holders of at least 66-2/3% of our outstanding voting stock that is not owned by the interested stockholder.

Generally, a “business combination” includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is a person who, together with that person’s affiliates and associates, owns, or within the previous three years owned, 15% or more of our outstanding voting stock. For purposes of this section only, “voting stock” has the meaning given to it in Section 203 of the DGCL.

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Under certain circumstances, this provision will make it more difficult for a person who would be an “interested stockholder” to effect various business combinations with our company for a three-year period. This provision may encourage companies interested in acquiring our company to negotiate in advance with our board of directors because the stockholder approval requirement would be avoided if our board of directors approves either the business combination or the transaction which results in the stockholder becoming an interested stockholder. These provisions also may have the effect of preventing changes in our board of directors and may make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

Our certificate of incorporation will provide that Snow Phipps, and any of their respective direct or indirect transferees (other than in certain market transfers and gifts) and any group as to which such persons are a party, do not constitute “interested stockholders” for purposes of this provision.

Removal of Directors; Vacancies

Our certificate of incorporation will provide that, other than directors elected by holders of our preferred stock, if any, directors may be removed with or without cause upon the affirmative vote of a majority in voting power of all outstanding shares of stock entitled to vote thereon, voting together as a single class. In addition, our certificate of incorporation will also provide that, subject to the rights granted to one or more series of preferred stock then outstanding, any newly created directorship on the board of directors that results from an increase in the number of directors and any vacancies on our board of directors will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum, by a sole remaining director or by the stockholders. The board of directors may increase the number of directors, including by amending the bylaws if necessary.

No Cumulative Voting

Under Delaware law, the right to vote cumulatively does not exist unless the certificate of incorporation specifically authorizes cumulative voting. Our certificate of incorporation will not authorize cumulative voting. Therefore, stockholders holding a majority in voting power of the shares of our stock entitled to vote generally in the election of directors will be able to elect all our directors.

Special Stockholder Meetings

Our certificate of incorporation will provide that, except as otherwise required by law, special meetings of our stockholders may be called at any time only by or at the direction of the board of directors, the chairman of the board of directors, our chief executive officer or our president. Our bylaws will prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers, or changes in control or management of our company.

Requirements for Advance Notification of Director Nominations and Stockholder Proposals

Our bylaws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors or pursuant to our stockholders agreement. In order for any matter to be properly brought before a meeting of our stockholders, a stockholder will have to comply with advance notice requirements and provide us with certain information. Generally, to be timely, a stockholder’s notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the immediately preceding annual meeting of stockholders. Our bylaws will also specify requirements as to the form and content of a stockholder’s notice. Our bylaws will allow the chairman of the meeting at a meeting of the stockholders to adopt rules and regulations for the conduct of meetings, which may have the effect of precluding the conduct of certain business at a meeting if the rules and regulations are not followed. These provisions may also deter, delay or discourage a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to influence or obtain control of our company.

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Stockholder Action by Written Consent

Pursuant to Section 228 of the DGCL, any action required to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of our stock entitled to vote thereon were present and voted, unless our certificate of incorporation provides otherwise. Our certificate of incorporation will preclude stockholder action by written consent.

Amendments to Our Certificate of Incorporation and Bylaws

Our certificate of incorporation and bylaws will provide that the board of directors is expressly authorized to make, alter, amend, change, add to, rescind or repeal, in whole or in part, our bylaws without a stockholder vote in any matter not inconsistent with Delaware law or our certificate of incorporation. In addition, any amendment, alteration, or repeal of our bylaws by our stockholders will require the affirmative vote of a majority in voting power of the outstanding shares of our stock present in person or represented by proxy at the meeting of stockholders and entitled to vote on such alteration, amendment, rescission or repeal.

The DGCL provides, and our certificate of incorporation will provide, generally that the affirmative vote of a majority of the outstanding shares entitled to vote thereon, voting together as a single class, is required to amend a corporation’s certificate of incorporation, unless the certificate of incorporation requires a greater percentage.

The combination of the lack of cumulative voting, the “interested stockholder” provisions in our certificate of incorporation and other provisions described above will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Because our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management.

These provisions may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management or our company, such as a merger, reorganization or tender offer. These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types of transactions that may involve an actual or threatened acquisition of our company. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions are also intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in management of our company.

Dissenters’ Rights of Appraisal and Payment

Under the DGCL, with certain exceptions, our stockholders will have appraisal rights in connection with a merger or consolidation of us. Pursuant to the DGCL, stockholders who properly request and perfect appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares as determined by the Delaware Court of Chancery.

Stockholders’ Derivative Actions

Under the DGCL, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action is a holder of our shares at the time of the transaction to which the action relates or such stockholder’s stock thereafter devolved by operation of law.

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Exclusive Forum

Our certificate of incorporation will provide that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (1) derivative action or proceeding brought on behalf of our company, (2) action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of our company to our company or our company’s stockholders, creditors or other constituents, (3) action asserting a claim against our company or any director or officer of our company arising pursuant to any provision of the DGCL or our certificate of incorporation or our bylaws, or (4) action asserting a claim against our company or any director or officer of our company governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Our certificate of incorporation will further provide that, to the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the United States federal securities laws.

Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of our company shall be deemed to have notice of and consented to the forum provisions in our certificate of incorporation. However, the enforceability of similar forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be unenforceable.

Conflicts of Interest

Delaware law permits corporations to adopt provisions renouncing any interest or expectancy in certain opportunities that are presented to the corporation or its officers, directors or stockholders. Our certificate of incorporation will, to the maximum extent permitted from time to time by Delaware law, renounce any interest or expectancy that we have in, or right to be offered an opportunity to participate in, specified business opportunities that are from time to time presented to our officers, directors or stockholders or their respective affiliates, other than those officers, directors, stockholders or affiliates who are our or our subsidiaries’ employees. Our certificate of incorporation will provide that, to the fullest extent permitted by law, none of Snow Phipps or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates will have any duty to refrain from (1) engaging in a corporate opportunity in the same or similar business activities or lines of business in which we or our affiliates now engage or propose to engage or (2) otherwise competing with us or our affiliates. In addition, to the fullest extent permitted by law, in the event that Snow Phipps or any non-employee director acquires knowledge of a potential transaction or other business opportunity which may be a corporate opportunity for itself or himself or its or his affiliates or for us or our affiliates, such person will have no duty to communicate or offer such transaction or business opportunity to us or any of our affiliates and they may take any such opportunity for themselves or offer it to another person or entity. Our certificate of incorporation will not renounce our interest in any business opportunity that is expressly offered to a non-employee director solely in his or her capacity as a director or officer of our company. To the fullest extent permitted by law, no business opportunity will be deemed to be a potential corporate opportunity for us unless we would be permitted, to undertake the opportunity under our certificate of incorporation, we have sufficient financial resources to undertake the opportunity and the opportunity would be in line with our business.

Limitations on Liability and Indemnification of Officers and Directors

The DGCL authorizes corporations to limit or eliminate the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties, subject to certain exceptions. Our certificate of incorporation will include a provision that eliminates the personal liability of directors for monetary damages for any breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL. The effect

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of these provisions is to eliminate the rights of us and our stockholders, through stockholders’ derivative suits on our behalf, to recover monetary damages from a director for breach of fiduciary duty as a director, including breaches resulting from grossly negligent behavior. However, exculpation does not apply to any director if the director has acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper benefit from his or her actions as a director.

Our bylaws will provide that we must indemnify and advance expenses to our directors and officers to the fullest extent authorized by the DGCL. We also are expressly authorized to carry directors’ and officers’ liability insurance providing indemnification for our directors, officers and certain employees for some liabilities. We believe that these indemnification and advancement provisions and insurance are useful to attract and retain qualified directors and executive officers.

The limitation of liability, indemnification and advancement provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. These provisions also may have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. In addition, any investment in our common stock may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.

We intend to enter into indemnification agreements with each of our directors and executive officers upon completion of this offering. These agreements require us to indemnify these individuals to the fullest extent permitted under the Delaware general corporation law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified.

There is currently no pending material litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.

Listing

Our common stock has been approved for listing, subject to official notice of issuance on the NYSE, under the symbol “VEL”.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that sales of shares or the availability of shares for sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of our common stock. See “Risk Factors—Risks Related to this Offering.”

Upon the completion of this offering and after giving effect to the Conversion, we will have 18,999,988 shares of common stock outstanding, or 20,087,488 shares if the underwriters exercise their over-allotment option to purchase additional shares from us in full. Of these shares, the 7,250,000 shares (or 8,337,500 shares if the underwriters exercise their option to purchase additional shares in full) we are selling in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement. The remaining 11,749,988 shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act and will further be subject to restrictions on transfer under the lock-up agreements described in “Underwriting.” Following the expiration of these restrictions, these shares will become eligible for public sale if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below. As defined in Rule 144, an “affiliate” of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with the issuer. Restricted securities may be sold in the public market only if registered under the securities laws or if they qualify for an exemption from registration under Rule 144, as described below.

Rule 144

In general, under Rule 144, a person (or persons whose shares are aggregated) who is not an affiliate of ours and has not been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the restricted securities proposed to be sold for at least one year, including the holding period of any prior owner other than an affiliate, is entitled to sell his or her securities without registration and without complying with the manner of sale, current public information, volume limitation or notice provisions of Rule 144. In addition, under Rule 144, once we have been subject to the reporting requirements of the Exchange Act for at least 90 days, a person (or persons whose securities are aggregated) who is not an affiliate of ours and has not been one of our affiliates at any time during the three months preceding a sale, may sell his or her securities without registration after only a six-month holding period, subject only to the continued availability of current public information about us. Any sales by affiliates under Rule 144, even after the applicable holding periods described above, are subject to requirements and or limitations with respect to volume, manner of sale, notice and the availability of current public information about us.

Rule 701

In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement in a transaction that was completed in reliance on Rule 701 and complied with the requirements of Rule 701 will be eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144.

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Lock-Up Periods

We have agreed with the underwriters not to issue, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of our common stock or preferred stock or other capital stock, or any securities convertible into or exercisable or exchangeable for common stock or other capital stock, or announce our intention to do any of the foregoing, for a period of 180 days following the date of this prospectus, subject to certain extensions and exceptions described in “Underwriting.”

Upon the completion of this offering, on a pro forma basis after giving effect to the Conversion and this offering, our directors and executive officers, Snow Phipps, TOBI and certain of their executive officers, directors and affiliates collectively will hold approximately 62% of our outstanding common stock, or 58% of our outstanding common stock if the underwriters exercise in full their over-allotment option. Each of these individuals and entities has agreed that for a period of 180 days after the date of this prospectus they will not, without the prior written consent of Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and JMP Securities LLC, (1) issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of the common stock or preferred stock or other capital stock, or any securities convertible into or exercisable or exchangeable for common stock or other capital stock, nor publicly disclose the intention to make any offer, sale or disposition, (2) in the case of us, file or cause the filing of any registration statement under the Securities Act with the SEC with respect to any common stock or other capital stock or any securities convertible into or exercisable or exchangeable for any common stock or other capital stock (other than any registration statement filed pursuant to Rule 462(b) under the Securities Act to register securities to be sold to the underwriters pursuant to the underwriting agreement), nor publicly disclose the intention to make any filing or (3) enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequence of ownership of any common stock or other capital stock or any securities convertible into or exercisable or exchangeable for common stock or other capital stock, subject to certain exceptions. This lock-up period may be extended in the circumstances as described in “Underwriting.”

Registration Rights

Upon the completion of this offering, holders of substantially all of the shares of our common stock issued to our existing members in the Conversion will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement” for a description of the Registration Rights Agreement.

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CERTAIN UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a summary of certain United States federal income and estate tax consequences of the purchase, ownership and disposition of our common stock as of the date hereof. Except where noted, this summary deals only with common stock that is held as a capital asset by a non-U.S. holder (as defined below).

A “non-U.S. holder” means a beneficial owner of our common stock (other than an entity treated as a partnership for United States federal income tax purposes) that is not, for United States federal income tax purposes, any of the following:

• an individual citizen or resident of the United States;

• a corporation (or any other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;

• an estate the income of which is subject to United States federal income taxation regardless of its source; or

• a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

This summary is based upon provisions of the Code, and regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income and estate tax consequences different from those summarized below. This summary does not address all aspects of United States federal income and estate taxes and does not deal with foreign, state, local or other tax considerations that may be relevant to non-U.S. holders in light of their particular circumstances. In addition, it does not represent a detailed description of the United States federal income and estate tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws (including if you are a United States expatriate, foreign pension fund, “controlled foreign corporation,” “passive foreign investment company” or a partnership or other pass-through entity for United States federal income tax purposes). We cannot assure you that a change in law will not alter significantly the tax considerations that we describe in this summary.

If a partnership (or other entity treated as a partnership for United States federal income tax purposes) holds our common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common stock, you should consult your tax advisors.

If you are considering the purchase of our common stock, you should consult your own tax advisors concerning the particular United States federal income and estate tax consequences to you of the purchase, ownership and disposition of our common stock, as well as the consequences to you arising under other United States federal tax laws and the laws of any other taxing jurisdiction.

Dividends

In the event that we make a distribution of cash or other property (other than certain pro rata distributions of our stock) in respect of our common stock, the distribution generally will be treated as a dividend for United States federal income tax purposes to the extent it is paid from our current or accumulated earnings and profits, as determined under United States federal income tax principles. Any portion of a distribution that exceeds our current and accumulated earnings and profits generally will be treated first as a tax-free return of capital, causing a reduction in the adjusted tax basis of a non-U.S. holder’s common stock, and to the extent the amount of the distribution exceeds a non-U.S. holder’s

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adjusted tax basis in our common stock, the excess will be treated as gain from the disposition of our common stock (the tax treatment of which is discussed below under “—Gain on Disposition of Common Stock”).

Dividends paid to a non-U.S. holder generally will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, dividends that are effectively connected with the conduct of a trade or business by the non-U.S. holder within the United States (and, if required by an applicable income tax treaty, are attributable to a United States permanent establishment) are not subject to the withholding tax, provided certain certification and disclosure requirements are satisfied. Instead, such dividends are subject to United States federal income tax on a net income basis in the same manner as if the non-U.S. holder were a United States person as defined under the Code. Any such effectively connected dividends received by a foreign corporation may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

A non-U.S. holder who wishes to claim the benefit of an applicable treaty rate and avoid backup withholding, as discussed below, for dividends will be required (a) to provide the applicable withholding agent with a properly executed Internal Revenue Service (“IRS”) Form W-BEN or Form W-8BEN-E (or other applicable form) certifying under penalty of perjury that such holder is not a United States person as defined under the Code and is eligible for treaty benefits or (b) if our common stock is held through certain foreign intermediaries, to satisfy the relevant certification requirements of applicable United States Treasury regulations. Special certification and other requirements apply to certain non-U.S. holders that are pass-through entities rather than corporations or individuals.

A non-U.S. holder eligible for a reduced rate of United States federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

Gain on Disposition of Common Stock

Subject to the discussion of backup withholding below, any gain realized by a non-U.S. holder on the sale or other disposition of our common stock generally will not be subject to United States federal income tax unless:

• the gain is effectively connected with a trade or business of the non-U.S. holder in the United States (and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment of the non-U.S. holder);

• the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of that disposition, and certain other conditions are met; or

• we are or have been a “United States real property holding corporation” for United States federal income tax purposes and certain other conditions are met.

A non-U.S. holder described in the first bullet point immediately above will be subject to tax on the gain derived from the sale or other disposition in the same manner as if the non-U.S. holder were a United States person as defined under the Code. In addition, if any non-U.S. holder described in the first bullet point immediately above is a foreign corporation, the gain realized by such non-U.S. holder may be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. An individual non-U.S. holder described in the second bullet point immediately above will be subject to a 30% (or such lower rate as may be specified by an applicable income tax treaty) tax on the gain derived from the sale or other disposition, which gain may be offset by United States source capital losses even though the individual is not considered a resident of the United States.

Generally, a corporation is a “United States real property holding corporation” if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its

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worldwide real property interests and its other assets used or held for use in a trade or business (all as determined for United States federal income tax purposes). We believe we are not and do not anticipate becoming a “United States real property holding corporation” for United States federal income tax purposes. If we are or become a “United States real property holding corporation,” however, so long as our common stock is regularly traded on an established securities market during the calendar year in which the sale or other disposition occurs, only a non-U.S. holder who holds or held (at any time during the shorter of the five year period preceding the date of disposition or the holder’s holding period) more than 5% of our common stock will be subject to United States federal income tax on the sale or other disposition of our common stock.

Federal Estate Tax

Common stock held by an individual non-U.S. holder at the time of death will be included in such holder’s gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Information Reporting and Backup Withholding

Distributions paid to a non-U.S. holder and the amount of any tax withheld with respect to such distributions generally will be reported to the IRS. Copies of the information returns reporting such distributions and any withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty.

A non-U.S. holder will not be subject to backup withholding on dividends received if such holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that such holder is a United States person as defined under the Code), or such holder otherwise establishes an exemption.

Information reporting and, depending on the circumstances, backup withholding will apply to the proceeds of a sale or other disposition of our common stock made within the United States or conducted through certain United States-related financial intermediaries, unless the beneficial owner certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code), or such owner otherwise establishes an exemption

Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a non-U.S. holder’s United States federal income tax liability provided the required information is timely furnished to the IRS.

Additional Withholding Requirements

Under Sections 1471 through 1474 of the Code (such Sections commonly referred to as “FATCA”), a 30% United States federal withholding tax may apply to any dividends paid on our common stock to (i) a “foreign financial institution” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) its compliance (or deemed compliance) with FATCA (which may alternatively be in the form of compliance with an intergovernmental agreement with the United States) in a manner which avoids withholding, or (ii) a “non-financial foreign entity” (as specifically defined in the Code) which does not provide sufficient documentation, typically on IRS Form W-8BEN-E, evidencing either (x) an exemption from FATCA, or (y) adequate information regarding certain substantial United States beneficial owners of such entity (if any). If a dividend payment is both subject to withholding under FATCA and subject to the withholding tax discussed above under “— Dividends,” the withholding under FATCA may be credited against, and therefore reduce, such other withholding tax. You should consult your own tax advisors regarding these requirements and whether they may be relevant to your ownership and disposition of our common stock.

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UNDERWRITING

We are offering the shares of common stock described in this prospectus through a number of underwriters. We intend to enter into an underwriting agreement with the underwriters with respect to the shares of common stock offered hereby, for which Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and JMP Securities LLC are acting as the representatives. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally and not jointly agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

Underwriter	Number of Shares
Wells Fargo Securities, LLC
Citigroup Global Markets Inc.
JMP Securities LLC
Raymond James & Associates, Inc.
Total		7,250,000

The underwriting agreement provides that the obligations of the underwriters to purchase the shares of common stock included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are committed to purchase all of the shares of common stock offered by us if they purchase any shares (other than those covered by the option to purchase additional shares described below). The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

The underwriters propose to offer the common stock directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriters. Sales of shares made outside of the United States may be made by affiliates of the underwriters.

We have granted a 30-day over-allotment option to the underwriters to purchase up to a total of 1,087,500 additional shares of our common stock from us at the public offering price per share less the underwriting discounts and commissions per share, as set forth on the cover page of this prospectus. If the underwriters exercise this over-allotment option in whole or in part, then the underwriters will be severally committed, subject to the conditions described in the underwriting agreement, to purchase the additional shares of our common stock in proportion to their respective commitments set forth in the prior table.

The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $1.05 per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.

	Public Offering Price per Share	Total Without Over-Allotment Option	Total With Full Exercise of Over- Allotment Option
Public offering price	$	$	$
Underwriting discounts and commissions to be paid by us	$	$	$
Proceeds, before expenses, to us	$	$	$

We estimate that the total expenses of this offering payable by us, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately $5.1 million. We have agreed to reimburse the underwriters for legal expenses incurred in connection with FINRA and blue sky matters, in an amount up to $40,000, as set forth in the underwriting agreement.

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A prospectus in electronic format may be made available on the websites maintained by one or more underwriters participating in the offering. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative to underwriters that may make Internet distributions on the same basis as other allocations.

We and each of our directors, director nominees, executive officers and other existing stockholders have agreed, subject to specified exceptions, that, without the prior written consent of Wells Fargo Securities, LLC, Citigroup Global Markets Inc. and JMP Securities LLC, we and they will not, during the period beginning on and including the date of this prospectus through and including the date that is the 180th day after the date of the underwriting agreement, directly or indirectly:

i. issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of the common stock or preferred stock or other capital stock, or any securities convertible into or exercisable or exchangeable for common stock or other capital stock, whether currently owned or hereafter acquired, nor publicly disclose the intention to make any offer, sale or disposition;

ii. in the case of us, file or cause the filing of any registration statement under the Securities Act with the SEC with respect to any common stock or other capital stock or any securities convertible into or exercisable or exchangeable for any common stock or other capital stock (other than any registration statement filed pursuant to Rule 462(b) under the Securities Act to register securities to be sold to the underwriters pursuant to the underwriting agreement), nor publicly disclose the intention to make any filing; or

iii. enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequence of ownership of any common stock or other capital stock or any securities convertible into or exercisable or exchangeable for common stock or other capital stock,

whether any transaction described in clause (i) or (ii) above is to be settled by delivery of common stock, other capital stock, other securities convertible into or exercisable or exchangeable for common stock or other capital stock, in cash or otherwise, or publicly announce any intention to do any of the foregoing. Shares of common stock purchased by any of our directors or executive officers in this offering would also be subject to the foregoing restrictions on transfer, as well as restrictions on disposition imposed by applicable law.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act or to contribute payments the underwriters may be required to make in respect of these liabilities.

Determination of Offering Price

Prior to this offering, there has been no public market for our common stock. The initial public offering price per share of our common stock will be determined by negotiations between us and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:

• the information set forth in this prospectus and otherwise available to the representatives;

• the general condition of the securities markets at the time of this offering;

• prevailing market conditions;

• the present stage of our development;

• the market capitalizations and stages of development of other companies that we and the underwriters believe to be comparable to our business;

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• estimates of our business potential; and

• other factors deemed relevant by the underwriters and us.

We offer no assurances that the initial public offering price will correspond to the price at which the common shares will trade in the public market subsequent to the offering or that an active trading market for the common shares will develop and continue after the offering.

Stabilization, Short Positions

In connection with this offering, the underwriters may purchase and sell shares of our common stock in the open market. These transactions may include short sales, purchases to cover short positions, which may include purchases pursuant to the over-allotment option to purchase additional shares, syndicate covering transactions and stabilizing transactions. Short sales involve syndicate sales of shares in excess of the number of shares to be purchased by the underwriters in this offering, which creates a syndicate short position. “Covered” short sales are sales of shares made in an amount up to the number of shares represented by the underwriters’ over-allotment option. In determining the source of shares to close out the covered syndicate short position, the underwriters may consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Transactions to close out the covered syndicate short position involve either purchases of the shares in the open market after the distribution has been completed or the exercise of the over-allotment option. The underwriters may also make “naked” short sales of shares in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of bids for or purchases of shares in the open market while this offering is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when the representative repurchases shares originally sold by that syndicate member in order to cover syndicate short positions or make stabilizing purchases.

Any of these activities may have the effect of preventing or retarding a decline in the market price of our shares of common stock. They may also cause the price of our shares of common stock to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The underwriters may conduct these transactions on the New York Stock Exchange or in the over-the-counter market, or otherwise. If the underwriters commence any of these transactions, they may discontinue them at any time.

Relationships

The underwriters are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. The underwriters and their respective affiliates may, from time to time, engage in transactions with and perform services for us in the ordinary course of their business for which they may receive customary fees and reimbursement of expenses.

An affiliate of Citigroup Global Markets Inc., an underwriter in this offering, is a lender under a warehouse repurchase facility with us. This lender will receive typical compensation for the provision of such facility.

In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (which may include bank loans and/or credit default swaps) for their own account and for the accounts of their customers and may at any time hold long and

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short positions in such securities and instruments. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

Selling Restrictions

Notice to Prospective Investors in Canada

The shares of our common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares of our common stock must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (“NI 33-105”), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

Notice to Prospective Investors in Switzerland

This prospectus may only be freely circulated and common stock may be offered, distributed or sold exclusively to regulated financial intermediaries such as banks, securities dealers, fund management companies, asset managers of collective investment schemes and central banks, as well as to regulated insurance companies (“Qualified Investors” as defined in the Swiss Federal Act on Collective Investment Schemes, or CISA) in accordance with CISA and its implementing ordinance. This prospectus, other offering materials and/or interests may be offered, distributed or sold (as applicable) solely to such Qualified Investors in Switzerland.

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LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Simpson Thacher & Bartlett LLP, Palo Alto, California. Certain legal matters relating to this offering will be passed upon for the underwriters by Clifford Chance US LLP, New York, New York.

EXPERTS

The consolidated financial statements of Velocity Financial, LLC and subsidiaries as of December 31, 2018 and December 31, 2017 and for each of the years in the three-year period ended December 31, 2018, have been included herein in reliance upon the report of KPMG LLP, an independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

Unless otherwise indicated, all statistical and economic market data and industry forecasts and projections included in this prospectus in the sections entitled “Summary—Our Market Opportunity—1-4 Unit Residential Rental Properties” and “Industry Overview—National Housing Market Overview” are derived from a market study prepared for us in connection with this offering by John Burns Real Estate Consulting, LLC (which we refer to as “JBREC”), an independent research provider and consulting firm, and are included in this prospectus in reliance on JBREC’s authority as an expert on such matters.

Unless otherwise indicated, all statistical and economic market data and industry forecasts and projections included in this prospectus in the sections entitled “Summary—Our Market Opportunity—Small Commercial Properties” and “Industry Overview—Trends in Small Balance Lending” are derived from a market study prepared for us in connection with this offering by Boxwood Means, LLC (which we refer to as “Boxwood”), an independent research provider and consulting firm, and are included in this prospectus in reliance on Boxwood’s authority as an expert on such matters.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered by this prospectus. This prospectus is a part of the registration statement and does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, you should refer to the registration statement and its exhibits and schedules.

Prior to the completion of this offering, we will become subject to the informational requirements of the Exchange Act and will be required to file annual, quarterly and special reports and other information with the SEC. Our filings with the SEC will be available to the public on the SEC’s website at http://www.sec.gov. Those filings will also be available to the public on, or accessible through, our website under the heading “Investor Relations” at www.velocitymortgage.com. The information we file with the SEC or contained on or accessible through our corporate website or any other website that we may maintain is not part of this prospectus or the registration statement of which this prospectus is a part.

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INDEX TO FINANCIAL STATEMENTS

Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Financial Condition as of December  31, 2018 and 2017	F-3
Consolidated Statements of Income for the years ended December  31, 2018, 2017 and 2016	F-4
Consolidated Statements of Members’ Equity for the years ended December 31, 2018, 2017 and 2016	F-5
Consolidated Statements of Cash Flows for the years ended December  31, 2018, 2017 and 2016	F-6
Notes to Consolidated Financial Statements	F-7

Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Financial Condition as of September 30, 2019 and December 31, 2018	F-37
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018 (Unaudited)	F-38
Condensed Consolidated Statements of Members’ Equity for the nine months ended September 30, 2019 and 2018 (Unaudited)	F-39
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (Unaudited)	F-40
Notes to Condensed Consolidated Financial Statements (Unaudited)	F-41

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Managers

Velocity Financial, LLC:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial condition of Velocity Financial, LLC and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, members’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2011.

Los Angeles, California

March 29, 2019, except as to Note 21 - Mortgage Loans on Real Estate, which is as of October 2, 2019

F-2

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

December 31, 2018 and 2017

(In thousands)

	December 31,
	2018		2017
Assets
Cash and cash equivalents	$	15,008	$	15,422
Restricted cash		1,669		305
Loans held for sale, net		78,446		5,651
Loans held for investment, net		1,567,408		1,299,041
Loans held for investment, at fair value		3,463		4,632
Total loans, net		1,649,317		1,309,324
Accrued interest receivables		10,096		7,678
Receivables due from servicers		40,473		25,306
Other receivables		974		1,287
Real estate owned, net		7,167		5,322
Property and equipment, net		5,535		5,766
Net deferred tax asset		2,986		—
Other assets		4,760		1,435
Total assets	$	1,737,985	$	1,371,845
Liabilities and Members’ Equity
Accounts payable and accrued expenses	$	26,629	$	22,029
Secured financing, net		127,040		126,486
Securitizations, net		1,202,202		982,393
Warehouse repurchase facilities, net		215,931		85,303
Total liabilities		1,571,802		1,216,211
Commitments and contingencies Class C preferred units		26,465		24,691
Members’ equity		139,718		130,943
Total liabilities and members’ equity	$	1,737,985	$	1,371,845

See accompanying notes to consolidated financial statements.

F-3

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2018, 2017 and 2016

(In thousands)

	Year Ended December 31,
	2018		2017		2016
Interest income	$	124,722	$	97,830	$	78,418
Interest expense — portfolio related		62,597		47,638		37,406
Net interest income — portfolio related		62,125		50,192		41,012
Interest expense — corporate debt		13,322		13,654		13,419
Net interest income		48,803		36,538		27,593
Provision for loan losses		201		421		1,455
Net interest income after provision for loan losses		48,602		36,117		26,138
Other operating income
Gain on disposition of loans		1,200		984		196
Unrealized gain on fair value loans		241		39		152
Other income		1,366		985		362
Total other operating income		2,807		2,008		710
Operating expenses
Compensation and employee benefits		15,105		11,904		10,085
Rent and occupancy		1,320		1,115		801
Loan servicing		6,009		4,907		3,657
Professional fees		3,040		1,661		2,637
Real estate owned, net		1,373		603		451
Other operating expenses		5,313		3,946		2,420
Total operating expenses		32,160		24,136		20,051
Income before income taxes		19,249		13,989		6,797
Income tax expense		8,700		—		—
Net income	$	10,549	$	13,989	$	6,797

See accompanying notes to consolidated financial statements.

F-4

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

For the years ended December 31, 2018, 2017 and 2016

(In thousands)

	Total Members’ Equity
Balance — December 31, 2015	$	86,433
Issuance of preferred D units		60,000
Deal costs — preferred D units		(1,412	)
Tax payments, Class A		(2,712	)
Tax payments, Class C		(725	)
Transfer of preferred C units to mezzanine		(23,036	)
Net income		6,797
Balance — December 31, 2016	$	125,345
Issuance of preferred D units		194
Deal costs — preferred D units		(34	)
Tax payments, Class C		(1,600	)
Tax payments, Class D		(5,296	)
Liquidation preference return, Class C		(1,655	)
Net income		13,989
Balance — December 31, 2017	$	130,943
Liquidation preference return, Class C		(1,774	)
Net income		10,549
Balance — December 31, 2018	$	139,718

See accompanying notes to consolidated financial statements.

F-5

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2018, 2017 and 2016

(In thousands)

	Year Ended December 31,
	2018			2017			2016
Cash flows from operating activities:
Net income	$	10,549		$	13,989		$	6,797
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,434			1,191			514
Provision for loan losses		201			421			1,455
Provision for held for sale loan losses		—			68			—
Origination of loans held for sale		(148,825	)		(42,868	)		—
Proceeds from sales of loans held for sale		72,893			46,296			—
Repayments on loans held for sale		3,541			(907	)		—
Net accretion of discount on purchased loans and deferred loan origination costs		3,519			1,624			681
Interest paid in kind on secured financing		—			6,652			12,194
Provision for (reversal of) uncollectible borrower advances		56			(11	)		122
Gain on sale of loans		(709	)		(806	)		(196	)
Real estate acquired through foreclosure in excess of recorded investment		(491	)		(178	)		—
Amortization of debt issuance discount and costs		7,360			7,193			7,002
Loss on disposal of property & equipment		100			—			—
Change in valuation of real estate owned		888			211			183
Change in valuation of fair value loans		(241	)		(39	)		(152	)
Change in valuation of held for sale loans		174			103			—
(Gain) loss on sale of real estate owned		(640	)		(133	)		18
Net deferred tax benefit		(2,986	)		—			—
(Increase) decrease in operating assets and liabilities:
Accrued interest and other receivables		(16,248	)		(3,690	)		(1,588	)
Other assets		(3,325	)		(686	)		(238	)
Accounts payable and accrued expenses		265			9,214			2,975
Net cash (used in) provided by operating activities		(72,485	)		37,644			29,767
Cash flows from investing activities:
Purchase of loans held for investment		(16,868	)		(992	)		—
Origination of loans held for investment		(595,746	)		(518,888	)		(353,495	)
Proceeds from sales of loans		—			6,280			3,304
Payoffs of loans held for investment and loans at fair value		334,679			240,855			169,987
Proceeds from sale of real estate owned		6,185			2,507			1,503
Capitalized real estate owned improvements		(398	)		—			—
Change in advances		(1,080	)		(1,943	)		(205	)
Change in impounds and deposits		4,335			484			728
Purchase of property and equipment		(1,303	)		(3,082	)		(2,916	)
Net cash used in investing activities		(270,196	)		(274,779	)		(181,094	)
Cash flows from financing activities:
Warehouse repurchase facilities advances		658,536			420,476			355,628
Warehouse repurchase facilities repayments		(527,883	)		(445,743	)		(569,868	)
Proceeds from secured financing		—			—			10,000
Proceeds of securitizations, net		535,506			455,309			490,542
Repayment of securitizations		(314,682	)		(214,426	)		(141,490	)
Debt issuance cost		(7,846	)		(7,761	)		(9,179	)
Issuance of Class D Preferred units, net		—			160			58,588
Tax distributions		—			(6,897	)		(3,437	)
Net cash provided by financing activities		343,631			201,118			190,784
Net increase (decrease) in cash, cash equivalents, and restricted cash		950			(36,017	)		39,457
Cash, cash equivalents, and restricted cash at beginning of year		15,727			51,744			12,287
Cash, cash equivalents, and restricted cash at end of year	$	16,677		$	15,727		$	51,744
Supplemental cash flow information:
Cash paid during the year for interest	$	66,457		$	46,253		$	30,911
Cash paid during the year for income taxes		13,217			127			21
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to loans held for sale		—			(8,276	)		—
Transfer of loans held for investment to real estate owned		7,389			6,275			2,407
Interest paid in kind on secured financing		—			6,652			12,194
(Premium) discount on issuance of securitizations		(1,222	)		2,202			2,190

See accompanying notes to consolidated financial statements.

F-6

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018 and 2017

Note 1 — Organization and Description of Business

Velocity Financial, LLC (VF or the Company) is a Delaware limited liability company (LLC) formed on July 9, 2012 for the purpose of acquiring all membership units in Velocity Commercial Capital, LLC (VCC). The ownership of VF at date of formation was the same as VCC’s ownership at such date. In 2015, VCC began doing business as Velocity Mortgage Capital (VMC).

VCC, a California LLC formed on June 2, 2004, is a mortgage lender that originates and acquires small balance investor real estate loans, providing capital to the investor real estate loan market. The Company is licensed as a California Finance Lender and, as such, is required to maintain a minimum net worth of $250 thousand. The Company does not believe there is any potential risk of not being able to meet this regulatory requirement. The Company uses its equity capital and borrowed funds to originate and invest in investor real estate loans and seeks to generate income based on the difference between the yield on its investor real estate loan portfolio and the cost of its borrowings. The Company does not engage in any other significant line of business or offer any other products or services, nor does it originate or acquire investments outside of the United States of America.

The Company, through its wholly owned subsidiaries, is the sole beneficial owner of the Velocity Commercial Capital Loan Trust 2011-1 (the 2011-1 Trust), a Delaware statutory trust formed on April 5, 2011; Velocity Commercial Capital Loan Trust 2014-1 (the 2014-1 Trust), a New York common law trust formed on September 26, 2014; Velocity Commercial Capital Loan Trust 2015-1 (the 2015-1 Trust), a New York common law trust formed on July 10, 2015; Velocity Commercial Capital Loan Trust 2016-1 (the 2016-1 Trust), a New York common law trust formed on April 29, 2016; Velocity Commercial Capital Loan Trust 2016-2 (the 2016-2 Trust), a New York common law trust formed on November 7, 2016, Velocity Commercial Capital Loan Trust 2017-1 (the 2017-1 Trust), a New York common law trust formed on May 11, 2017; Velocity Commercial Capital Loan Trust 2017-2 (the 2017-2 Trust), a New York common law trust formed on November 21, 2017; Velocity Commercial Capital Loan Trust 2018-1 (the 2018-1 Trust), a New York common law trust formed on April 12, 2018, and Velocity Commercial Capital Loan Trust 2018-2 (the 2018-2 Trust), a New York common law trust formed on October 15, 2018, collectively known as the Trusts. The Trusts are bankruptcy remote, variable interest entities (VIE) formed for the purpose of providing secured borrowings to the Company and are consolidated with the accounts of the Company.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

The consolidated financial statements of the Company have been prepared on the accrual basis of accounting and in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP).

(a) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of consolidated income and expenses during the reporting period. Significant estimates subject to change include determination of the allowance for loans losses, determination of asset fair values, and other valuations using expected future cash flows. Actual results could differ from those estimates.

(b) Principles of Consolidation

The principles of consolidation require management to determine and reassess the requirement to consolidate VIEs each reporting period, and therefore, the determination may change based on new facts

F-7

and circumstances pertaining to each VIE. This could result in a material impact to the Company’s consolidated financial statements in subsequent reporting periods.

The Company consolidates the assets, liabilities, and remainder interests of the Trusts as management determined that VCC is the primary beneficiary of these entities. The Company’s ongoing asset management responsibilities provide the Company with the power to direct the activities that most significantly impact the VIE’s economic performance, and the remainder interests provide the Company with the right to receive benefits and the obligation to absorb losses, limited to its investment in the remainder interest of the Trusts.

The following table presents a summary of the assets and liabilities of the Trusts as of December 31, 2018 and 2017. Intercompany balances have been eliminated for purposes of this presentation (in thousands):

	2018		2017
Restricted cash	$	305	$	305
Loans held for investment, net		1,328,619		1,134,550
Accrued interest and other receivables		44,840		29,042
Real estate owned, net		1,132		3,639
Other assets		4		10
Total assets	$	1,374,900	$	1,167,546
Accounts payable and accrued expenses	$	17,087	$	10,250
Securities issued		1,202,202		982,393
Total liabilities	$	1,219,289	$	992,643

The consolidated financial statements as of December 31, 2018 and 2017 include only those assets, liabilities, and results of operations related to the business of the Company, its subsidiaries, and VIEs, and do not include any assets, liabilities, revenues, and expenses attributable to limited liability members’ individual activities. The liability of each member in an LLC is limited to the amounts reflected in their respective member accounts.

(c) Cash and Cash Equivalents

Cash and cash equivalents include funds held by depository institutions and short-term investments with original maturities of less than three months. The Company maintains cash in deposit accounts in federally insured banks, which, at times, may be in excess of federally insured limits.

(d) Restricted Cash

Restricted cash represents the required specified reserve by the 2011-1 Trust agreement to pay the notes on each payment date if collections on mortgage loans are insufficient to make payments on the notes, and cash held by the Company for potential future advances due certain borrowers.

(e) Loans Held for Investment

Originated loans and purchased loans are classified as held-for-investment when management has the intent and ability to hold such loans for the foreseeable future or until maturity. Loans held for investment are carried at their outstanding principal balance, adjusted for net deferred loan origination costs and fees and allowance for loan losses. Interest income is accrued on the unpaid principal balance (UPB) at their respective stated interest rates. Generally, loans are placed on nonaccrual status when they become 90 days past due. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates. When a loan is placed on nonaccrual status, the accrued and unpaid interest is reversed as a reduction of interest income and accrued interest receivable. Interest income is

F-8

subsequently recognized only to the extent cash payments are received or when the loan has been placed back in accrual status. Loans are restored to accrual status when (1) the loan becomes current and none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (2) if the loan has been formally restructured in a manner that reasonably assures repayment and performance according to its modified terms. Under these terms, the Company requires that the borrower continue to make the full restructured principal and interest payments for six consecutive months before restoring the loan to accrual status.

For originated loans, net deferred loan origination costs are amortized to interest income using the level yield method.

(f) Loans Held for Sale

Loans are classified as held for sale when management has the intent to sell them. These are generally short-term, interest-only loans. They are carried at lower of cost or estimated fair value. On occasion, as part of the Company’s management strategy of the loans held in its portfolio, the Company will transfer loans from held for investment to held for sale. Upon transfer, any associated allowance for loan and lease loss is charged off and the carrying value of the loan is adjusted to the lower of cost or estimated fair value. The net deferred fees and costs associated with loans held for sale are deferred (not accreted or amortized to interest income) until the related loans are sold.

The Company recognizes transfers of loans as sales when it surrenders control over the loans. Control over transferred loans is deemed to be surrendered when (1) the loans have been isolated from the Company, (2) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred loans, and (3) the Company does not maintain effective control over the transferred loans through either (a) an agreement that entitles and obligates the Company to repurchase or redeem them before their maturity or (b) the ability to unilaterally cause the holder to return the specific loans. Gains or losses on the sale of these loans are included in “Gain on disposition of loans” in the consolidated statements of income.

Interest income on loans held for sale is recognized over the life of the loans using their contractual interest rates. Income recognition is suspended and the unpaid interest receivable is reversed against interest income when loans become 90 days delinquent, or when, in management’s opinion, a full recovery of interest and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current.

(g) Purchased Credit Impaired Loans

Purchased credit impaired (PCI) loans are accounted for in accordance with ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly, SOP 03-3). A purchased loan is deemed to be credit impaired when there is evidence of credit deterioration since its origination and it is probable at the acquisition date that the company will be unable to collect all contractually required payments.

Management estimates the timing and extent of expected future cash flows and establishes an accretable yield and a nonaccretable difference. The accretable yield represents the difference between cash flows expected to be collected from the loans and the initial investment in the loans. The nonaccretable difference represents the excess of the contractual cash flows over the expected future cash flows and is not recognized as an adjustment of yield, loss accrual, or valuation allowance. Subsequent increases in estimated cash flows are recognized prospectively through an adjustment of the yield, while decreases in expected cash flows, due to deterioration of credit quality, are recognized as impairment.

(h) Loans Held for Investment at Fair Value

VCC has elected to account for certain purchased distressed loans held for investment at fair value using FASB ASC Topic 825, Financial Instruments (ASC 825). These loans do not have an observable

F-9

market price or other significant observable market inputs (Level 1 or 2) and, therefore, are accounted for as Level 3 assets. In situations where quoted prices or observable inputs are unavailable (e.g., when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used, which reflect the Company’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available in the circumstances. The Company uses a discounted cash flow technique to estimate the fair value of these loans. This technique incorporates forecasting of expected cash flows discounted at an appropriate market discount rate that is intended to reflect the lack of liquidity in the market. The valuation method used to estimate fair value may produce a fair value measurement that may not be indicative of the ultimate realizable value. Furthermore, while management believes its valuation methods are appropriate and consistent with those used by other market participants, the use of different methods or assumptions to estimate the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Those estimated values may differ significantly from the values that would have been used had a readily available market for such loans existed, or had such loans been liquidated, and those differences could be material to the consolidated financial statements.

(i) Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and performing troubled debt restructured loans. Income from impaired loans is recognized on an accrual basis unless the loan is on nonaccrual status. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by comparing the fair value of the underlying collateral, net of estimated selling costs (net realizable value) against the recorded investment of the loan. The net realizable values of the underlying collateral are estimated by management using third-party broker price opinions or appraisals obtained when loans are deemed impaired.

(j) Allowance for Loan and Lease Losses

(i) Loans Held for Investment and Non-PCI Loans

The allowance for loan and lease losses (ALLL) on loans held for investment and non-PCI loans is maintained at a level deemed adequate by management to provide for probable and inherent losses in the portfolio at the balance sheet date. The ALLL has a general reserve component for loans with no credit impairment and a specific reserve component for loans determined to be impaired.

The allowance methodology for the general reserve component includes both quantitative and qualitative loss factors which are applied to the population of unimpaired loans to estimate the general reserves. The quantitative loss factors include loan type, age of the loan, borrower FICO score, past loan loss experience, historical default rates, and delinquencies. The qualitative loss factors consider, among other things, the loan portfolio composition and risk, current economic conditions that may affect the borrower’s ability to pay, and the underlying collateral value. While management uses available information to estimate its required ALLL, future additions to the ALLL may be necessary based on changes in estimates resulting from economic and other conditions. The provision for loan losses and recoveries of previously recognized charge-offs are added to the ALLL, while charge-offs on loans are recorded as a reduction to ALLL.

F-10

Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest according to the contractual terms of the loan agreements. Impairment is measured on a loan-by-loan basis by comparing the estimated fair value of the underlying collateral, net of estimated selling costs (net realizable value) against the recorded investment of the loan. To the extent the recorded investment of the loan exceeds the estimated fair value, a specific reserve or charge-off is recorded depending upon either the certainty of the estimate of loss or the fair value of the loan’s collateral.

(ii) Purchased Credit Impaired Loans

The allowance for loan losses on PCI loans is determined using expected cash flow models for each portfolio acquired. An allowance for loan losses on PCI loans is established in any period where the Company determines it is probable the discounted expected future cash flows have decreased due to deterioration of credit.

(k) Troubled Debt Restructurings

Troubled debt restructurings (TDRs) are renegotiated loans where borrower concessions have been granted, such as reduction of the UPB or interest rate and for which the borrower is experiencing financial difficulty. Insignificant concessions, such as short-term forbearances, do not constitute a TDR. Accrued but unpaid interest and advances are added to the outstanding principal balance with a corresponding allowance established. Loans classified as TDRs are reported as impaired loans.

(l) Accrued Interest and Other Receivables

Accrued interest and other receivables represent accrued and uncollected interest on loans in accrual status; principal and interest payments received, but unremitted by the servicer; and receivables from borrowers for escrow and other advances, net of an allowance for uncollectible borrower advances.

(m) Real Estate Owned, Net (REO)

Properties acquired through foreclosure, deed in lieu of foreclosure, or from third parties that meet all of the following criteria are classified as real estate owned: (i) management has the intent to sell the property; (ii) the property is available for immediate sale in its present condition, or management intends on making necessary repairs to render the property saleable, subject only to terms that are usual and customary; and (iii) it is unlikely that any significant changes to the plan will be made or that the plan will be withdrawn.

Real estate owned is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, establishing a new cost basis. If the recorded loan balance at the time of transfer exceeds the estimated fair value of the property less estimated costs to sell, the charge is recorded to the allowance for loan losses. If the estimated fair value of the property less estimated costs to sell exceeds the recorded loan balance at the time of transfer, the write-up is first recorded as a recapture to the allowance for loan losses to the extent of any previous charge and then to gain on the REO. Any subsequent write-downs in the fair value of the REO after the transfer date are charged to real estate owned, net in the consolidated statements of income and recognized through a valuation allowance. Subsequent increases in the fair value of the REO less selling costs reduce the valuation allowance, but not below zero, and are credited to real estate owned, net.

(n) Property and Equipment, Net

Property and equipment is recorded at cost, less accumulated depreciation, computed principally by the straight-line method based on the estimated useful lives of the specific assets, which range from three to seven years. Software is amortized over the estimated useful lives of the specific assets, which range from three to ten years using the straight-line method. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.

F-11

(o) Reclassifications

Certain prior period amounts have been reclassified to conform to the current period’s presentation format. The Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” effective January 1, 2018. Upon adoption, the Company applied the retrospective transition method to each period presented. As a result, the Company changed the presentation of its cash, cash equivalents, and restricted cash on its consolidated statements of cash flows.

(p) Off Balance Sheet Credit Exposure

The Company has no off-balance-sheet assets or liabilities and, therefore, no off-balance-sheet credit exposure.

(q) Income Taxes

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The calculation of the Company’s income tax provision and related tax accruals requires the use of estimates and judgments. Accrued income tax liabilities (assets) represent the estimated amounts due to (receivable from) the various taxing jurisdictions where the Company has established a business presence. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. Any interest or penalties assessed by the taxing authorities is classified in the financial statements as income tax expense. To the extent a deferred tax asset is no longer expected more likely than not to be realized, a valuation allowance is established. Deferred tax assets and liabilities, net of valuation allowances, if any, are grouped together and reported net on the consolidated statements of financial condition.

(r) Unit-Based Compensation

In July 2012, the Company adopted its equity incentive plan (note 13) to allow the grant of profits interest units to its officers, directors, and employees. The cost of these awards is measured at grant date, based on the fair value of the award, and is recognized as an expense over the related service period.

(s) Accounting Standards Adopted in 2018

Effective January 1, 2018, the Company adopted ASU 2014-09, “Revenue Recognition (Topic 606): Revenue from Contracts with Customers.” ASU 2014-09 supersedes Topic 605, “Revenue Recognition” and requires an entity to recognize revenue at an amount that reflects the consideration to which it expects to be entitled to in exchange for the transfer of promised goods or services to customers. ASU 2014-09 replaces most existing revenue recognition guidance under U.S. GAAP. Substantially all of the Company’s revenue is interest income on loans, which is specifically outside the scope of ASU 2014-09. The Company adopted ASU 2014-09 using the modified retrospective method, which resulted in no adjustment to retained earnings and no material impact on the Company’s consolidated financial statements. In addition, the new guidance does not materially impact the Company’s accounting operations and policies.

Effective January 1, 2018, the Company adopted ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Upon adoption, the Company applied the retrospective transition method to each period presented. ASU 2016-15 addressed eight issues related to the statement of cash flows, including beneficial interests received in securitization transactions. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

F-12

Effective January 1, 2018, the Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” ASU 2016-18 requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Upon adoption, the Company applied the retrospective transition method to each period presented. As a result, the Company changed the presentation of its cash, cash equivalents, and restricted cash on its consolidated statements of cash flows. A reconciliation of cash, cash equivalents, and restricted cash reported on the consolidated statements of financial condition and the consolidated statements of cash flow is shown in Note 3 Restricted Cash.

(t) Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which, among other things, requires lessees to recognize most leases on-balance sheet, which will result in an increase in their reported assets and liabilities. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors. ASU 2016-02 supersedes Accounting Standards Codification (ASC) Topic 840, Leases, and is effective on January 1, 2019 for the Company. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides companies the option to continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of adopting ASU 2016-02. Companies that elect this transition option recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842) Narrow-Scope Improvements for Lessors, which include amendments related to 1) sale taxes and other similar taxes collected from lessees; 2) lessor costs paid directly by a lessee; and 3) the recognition of variable payments for contracts with lease and nonlease components.

The Company will adopt this standard effective January 1, 2019 using the optional transition method to not adjust comparative period financial information. The Company has elected the following practical expedients: (1) as a lessee it will not separate lease and non-lease components when determining the amount of right of use assets; (2) it has elected the package of transition practical expedients including (a) not to reassess whether any expired or existing contracts are or contains leases, (b) maintain existing lease classification, and (c) it will not reassess initial direct costs for leases existing at January 1, 2019; (3) it will not record short term leases on the balance sheet; and (4) it has elected to present sales tax on a “net” basis for those transactions in which we are the lessor. The primary impact of the new standard to the Company relates to leased office space which are accounted for as operating leases. Adoption of the new standard on January 1, 2019 resulted in the recording of lease right-of-use assets of approximately $2.8 million and lease right-of-use liabilities of approximately $2.6 million with the difference due to the offset of previously accrued deferred rent based on the lease population as of January 1, 2019. The standard will not materially impact the Company’s consolidated statements of income and has no impact on cash flows. Effective January 1, 2019, the Company implemented new processes and procedures for lease accounting. Given the limited changes to lessor accounting, the Company does not expect the adoption of ASU 2018-20 to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize credit losses and impairment of financial assets recorded at amortized cost. Currently, the credit loss and impairment model for loans and leases is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. Under the new current expected credit loss (“CECL”) model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. This standard also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan

F-13

and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with earlier adoption permitted. The Company plans to adopt this standard on January 1, 2020. Entities are required to use a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified-retrospective approach). This new standard will be significant to the policies, processes, and methodology used to determine credit losses, however the Company has not yet determined the quantitative effect ASU 2016-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to Disclosure Requirements for Fair Value Measurements, which changes the fair value measurement disclosure requirements of ASC 820. ASU 2018-13 must be applied prospectively and is effective for the Company on January 1, 2020. Early adoption is permitted. The Company will early adopt any removed or modified disclosures effective January 1, 2019 but will defer adoption of the additional disclosures until the effective date as permitted in the transition guidance in ASU 2018-13. The Company does not expect ASU 2018-13 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for the Company on January 1, 2020 and the Company expects to adopt this ASU on January 1, 2020. The adoption of ASU 2018-15 will not have a material impact on the Company’s consolidated financial statements.

Note 3 — Restricted Cash

The 2011-1 securitization agreement requires the Company to set aside cash to cover potential shortfall. The Company is also required to hold cash for potential future advances due certain borrowers. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated statement of financial condition that sum to the total of the same such amounts shown in the consolidated statements of cash flows for the year ended December 31, 2018 and 2017.

	2018		2017
Cash and cash equivalents	$	15,008	$	15,422
Restricted cash		1,669		305
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	16,677	$	15,727

Note 4 — Loans Held for Sale, Net

The unpaid principal balance of loans held for sale as of December 31, 2018 and 2017 was $79.3 million and $5.7 million, respectively, and the net deferred loan origination costs was $716 thousand and $50 thousand.

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Note 5 — Loans Held for Investment and Loans Held for Investment at Fair Value

The following tables summarize loans held for investment as of December 31, 2018 and 2017 (in thousands):

	December 31, 2018
	Loans held for investment, net			Loans held for investment, at fair value			Total loans held for investment
Unpaid principal balance	$	1,547,817		$	4,049		$	1,551,866
Discount on acquired loans		(541	)		—			(541	)
Valuation adjustments on FVO loans		—			(586	)		(586	)
Deferred loan origination costs		21,812			—			21,812
		1,569,088			3,463			1,572,551
Allowance for loan losses		(1,680	)		—			(1,680	)
	$	1,567,408		$	3,463		$	1,570,871

	December 31, 2017
	Loans held for investment, net			Loans held for investment, at fair value			Total
Unpaid principal balance	$	1,284,266		$	5,473		$	1,289,739
Discount on acquired loans		(911	)		—			(911	)
Valuation adjustments on FVO loans		—			(841	)		(841	)
Deferred loan origination costs		17,572			—			17,572
		1,300,927			4,632			1,305,559
Allowance for loan losses		(1,886	)		—			(1,886	)
	$	1,299,041		$	4,632		$	1,303,673

As of December 31, 2018 and 2017, the gross unpaid principal balance of loans held for investment pledged as collateral for the Company’s warehouse repurchase agreements, and securitizations issued were as follows (in thousands):

	2018		2017
Citibank warehouse repurchase agreement	$	114,112	$	49,075
Barclays warehouse repurchase agreement		85,448		58,280
Total pledged loans		199,560		107,355
2011-1 Trust		17,226		20,751
2014-1 Trust		45,770		72,989
2015-1 Trust		100,414		162,867
2016-1 Trust		173,494		247,883
2016-2 Trust		120,937		158,859
2017-1 Trust		155,861		202,965
2017-2 Trust		214,111		254,397
2018-1 Trust		168,615		—
2018-2 Trust		314,860		—
Total	$	1,311,288	$	1,228,066

The Company accounts for PCI loans using the expected cash flows method. Under the expected cash flows method, management estimates the fair value of PCI loans at acquisition by (a) calculating the contractual amount and timing of undiscounted principal and interest payments (the undiscounted

F-15

contractual cash flows) and (b) estimating the amount and timing of undiscounted expected principal and interest payments (the undiscounted expected cash flows). The undiscounted expected cash flows are determined using a projected cash flow model that utilizes the outstanding principal balance, weighted average interest rate and weighted average remaining term of the PCI loan portfolio, and assumptions surrounding the amount and timing of loans that are projected to voluntarily prepay (the prepayment rate), the amount and timing of loans that are projected to involuntarily prepay (the default rate), and the amount of principal loss projected to be incurred upon the liquidation of defaulted loans (the loss severity rate). The undiscounted contractual cash flows are determined using a projected cash flow model that utilizes the outstanding principal balance, weighted average interest rate and weighted average remaining term of the PCI loan portfolio, and the prepayment rate used to determine the undiscounted expected cash flows. The following table provides weighted average assumptions as of December 31, 2018 and 2017:

	2018			2017
Weighted average prepayment rate		22.00	%		23.00	%
Weighted average default rate		1.00			1.00
Weighted average loss severity rate		10.00			10.00

The excess of total contractual cash flows over the cash flows expected to be collected at acquisition is the nonaccretable difference. The nonaccretable difference represents an estimate of the loss exposure in PCI loans, which is subject to change over time based on the performance of the PCI loans. The excess of expected cash flows at acquisition over the initial investment in the loan is referred to as the accretable yield and is recorded as interest income over the estimated life of the loan using the level-yield method. The carrying value of PCI loans is reduced by payments received and increased by the portion of the accretable yield recognized as interest income. Increases in expected cash flows over those originally estimated increase the accretable yield and are recognized as interest income prospectively. Decreases in expected cash flows due to deteriorated credit quality compared to those originally estimated decrease the accretable yield and are recognized by recording a provision for loan losses and establishing an allowance for loan losses. Loans accounted for under the expected cash flows method are generally considered accruing and performing loans as the loans accrete interest income over the life of the portfolio.

The following table summarizes the accretable yield on PCI loans accounted for under ASC subtopic 310-30 as of December 31, 2018 and December 31, 2017, and the related activity for the periods then ended (in thousands):

	2018			2017
Beginning balance	$	4,666		$	11,293
Accretion		(1,242	)		(1,550	)
Disposals		(118	)		(359	)
Change due to expected cash flows		442			(4,718	)
Ending balance	$	3,748		$	4,666

As of December 31, 2018 and 2017, the outstanding balance of PCI loans was $11.6 million and $13.9 million, respectively. The carrying amount of PCI loans, included in loans held for investment, net in the consolidated statements of financial condition, was $11.1 million and $13.0 million as of December 31, 2018 and 2017, respectively. An allowance for PCI loan losses was not required at December 31, 2018 and 2017.

(a) Nonaccrual Loans

The following table presents certain information about the Company’s loans held for investment and loans that were considered impaired and on nonaccrual status as of December 31, 2018 and 2017. Loans accounted for under ASC subtopic 310-30 are not included in impaired loans as the loans are accounted for as a single asset and are not subject to review for specific allowance requirements. Other than loans

F-16

accounted for under ASC subtopic 310-30, there were no loans accruing interest that were greater than 90 days past due as of December 31, 2018 or 2017.

	2018			2017
Nonaccrual loans:
Recorded investment	$	93,653		$	75,860
Percentage of the originated loans held for investment		5.9	%		5.8	%
Impaired loans:
Unpaid principal balance	$	92,410		$	74,750
Recorded investment		93,841			75,860
Recorded investment of impaired loans requiring a specific allowance		6,283			5,202
Specific allowance		636			735
Specific allowance as a percentage of recorded investment of impaired loans requiring a specific allowance		10.1	%		14.1	%
Recorded investment of impaired loans not requiring a specific allowance	$	87,558		$	70,658
Percentage of recorded investment of impaired loans not requiring a specific allowance		93.3	%		93.1	%
TDRs included in impaired loans:
Recorded investment of TDRs	$	188		$	192
Recorded investment of TDRs with a specific allowance		188			192
Specific allowance		25			25
Recorded investment of TDRs without a specific allowance		—			—

For the years ended December 31, 2018 and 2017, there was no accrued interest income recognized on nonaccrual loans, cash basis interest income recognized on nonaccrual loans was $9.0 million and $5.2 million, respectively, and the average recorded investment of impaired loans, computed using month-end balances, was $78.0 million and $69.5 million, respectively. There were no commitments to lend additional funds to debtors whose loans have been modified as of December 31, 2018 and 2017.

(b) Allowance for Loan Losses

Activity in the allowance for loan losses during the years ended December 31, 2018 and 2017 was as follows (in thousands):

	2018			2017
Beginning balance	$	1,886		$	2,529
Provision for loan losses		201			421
Charge-offs		(407	)		(1,064	)
Ending balance	$	1,680		$	1,886
Allowance related to:
Loans individually evaluated for impairment	$	636		$	735
Loans collectively evaluated for impairment		1,044			1,151

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(c) Credit Quality Indicator

A credit quality indicator is a statistic used by management to monitor and assess the credit quality of loans held for investment, excluding loans held for investment at fair value. Management monitors delinquencies, bankruptcies, and foreclosures as its primary credit quality indicator, and the following table provides delinquency information on the recorded investment in the loans held for investment portfolio as of December 31, 2018 and 2017 (in thousands):

	30–59 days past due		60–89 days past due		90+ days past due(1)		Total past due		Current		Total loans
December 31, 2018:
Impaired loans	$	1,421	$	2,286	$	90,134	$	93,841	$	—	$	93,841
Nonimpaired loans		78,538		21,930		187		100,655		1,374,592		1,475,247
Ending balance	$	79,959	$	24,216	$	90,321	$	194,496	$	1,374,592	$	1,569,088
December 31, 2017:
Impaired loans	$	2,588	$	1,595	$	71,485	$	75,668	$	192	$	75,860
Nonimpaired loans		57,401		17,023		203		74,627		1,150,440		1,225,067
Ending balance	$	59,989	$	18,618	$	71,688	$	150,295	$	1,150,632	$	1,300,927

(1) Includes loans in bankruptcy and foreclosure less than 90 days past due.

Note 6 — Property and Equipment, Net

As of December 31, 2018 and 2017, property and equipment consisted of the following (in thousands):

	2018			2017
Furniture	$	565		$	662
Computer equipment		964			785
Office equipment		380			374
Leasehold improvements		181			111
Capitalized software		7,482			6,546
		9,572			8,478
Accumulated depreciation and amortization		(4,037	)		(2,712	)
Ending balance	$	5,535		$	5,766

During the years ended December 31, 2018, 2017 and 2016, depreciation and amortization expense was $1.4 million, $1.2 million and $0.5 million, respectively.

The Company engaged a third-party consulting firm to assist in the building and implementation of a data warehouse and loan origination systems. As of December 31, 2018 and 2017, the total capitalized costs for the data warehouse and loan origination systems was $5.8 million and $4.9 million, respectively. The data warehouse was placed into service in the third quarter of 2017. The last phase of the loan origination system was placed into service in October 2018. Total accumulated depreciation and amortization included accumulated amortization on capitalized software of $2.7 million and $1.6 million for the years ended December 31, 2018 and 2017, respectively. The estimated aggregate amortization expense related to capitalized software for each of the next five years is $1.0 million for 2019, $0.9 million for 2020, $0.8 million for 2021, and $0.4 million for 2022 and 2023.

F-18

Note 7 — Real Estate Owned, Net

The Company’s real estate owned activities were as follows during the years ended December 31, 2018 and 2017 (in thousands):

	2018			2017
Beginning balance	$	5,322		$	1,454
Additions		7,880			6,453
Capitalized improvements		397			—
Sales		(5,544	)		(2,374	)
Valuation adjustments		(888	)		(211	)
Ending balance	$	7,167		$	5,322

The following table summarizes information about real estate operating income and expenses, realized gains and losses on sales of real estate, and unrealized gains and losses resulting from adjustments to valuation allowances for the years ended December 31, 2018, 2017 and 2016 (in thousands):

	2018			2017			2016
Operating income	$	2		$	258		$	216
Operating expenses		(1,127	)		(783	)		(466	)
Valuation adjustments		(888	)		(211	)		(183	)
Net gain (loss) on sales of real estate		640			133			(18	)
Ending balance	$	(1,373	)	$	(603	)	$	(451	)

Net gain (loss) on sales of real estate represent the difference between the net proceeds from the liquidation of the underlying properties and their respective carrying values. The following table provides additional information about the number of properties sold and the gross gains and losses recognized in real estate owned, net, in the consolidated statements of income, during the years ended December 31, 2018, 2017 and 2016 (in thousands, except properties sold):

	2018					2017					2016
	Properties		Gain			Properties		Gain			Properties		Gain
	sold		(loss)			sold		(loss)			sold		(loss)
Sales resulting in gains		13	$	649			5	$	163			4	$	8
Sales resulting in losses		2		(9	)		3		(30	)		1		(26	)
Total		15	$	640			8	$	133			5	$	(18	)

Note 8 — Other Assets

In 2017, the Company started originating and selling interest-only short-term loans either at a cash premium without any beneficial interest or at par value with a retained beneficial interest in the excess interest spread over a stated coupon rate. The retained beneficial interest or interest-only strips is included in other assets in the consolidated statements of financial condition.

F-19

Other assets were comprised of the following as of December 31, 2018 and 2017 (in thousands):

	December 31,
	2018		2017
Prepaid expenses	$	1,117	$	937
Interest-only strips and deposits		946		498
Deferred costs		1,259		—
Income tax receivable		1,438		—
Total other assets	$	4,760	$	1,435

Note 9 — Securitizations, Net

From May 2011 through October 2018, the Company completed nine securitizations of $2.1 billion of loans, issuing $1.9 billion of securities to third parties through nine respective Trusts. The Company is the sole beneficial interest holder of the Trusts, which are variable interest entities included in the consolidated financial statements. The transactions are accounted for as secured borrowings under U.S. GAAP. The securities are subject to redemption by the Company when the stated principal balance is less than a certain percentage, ranging from 5%–25% of the original stated principal balance of loans at issuance. As a result, the actual maturity dates of the securities issued could be earlier than their respective stated maturity dates. The following table summarizes the investor real estate loans securitized, and securities issued, ownership retained by the Company at the time of the securitization, and as of December 31, 2018 and 2017, and the stated maturity for each securitization (in thousands):

					Securities Retained as of
Trusts	Mortgage Loans		Securities Issued		Issuance Date		December 31, 2018		December 31, 2017		Stated Maturity Date
2011-1 Trust	$	74,898	$	61,042	$	13,856	$	13,856	$	13,856		August 2040
2014-1 Trust		191,757		161,076		30,682		9,596		18,696		September 2044
2015-1 Trust		312,829		285,457		27,372		15,657		27,352		July 2045
2016-1 Trust		358,601		319,809		38,792		17,931		32,723		April 2046
2016-2 Trust		190,255		166,853		23,402		9,514		23,402		October 2046
2017-1 Trust		223,064		211,910		11,154		11,154		11,154		April 2047
2017-2 Trust		258,528		245,601		12,927		10,631		12,797		October 2047
2018-1 Trust		186,124		176,816		9,308		8,256		—		April 2048
2018-2 Trust		324,198		307,988		16,210		15,893		—		October 2048
Total	$	2,120,254	$	1,936,552	$	183,703	$	112,488	$	139,980

The following table summarizes outstanding bond balances for each securitization as of December 31, 2018 and 2017 (in thousands).

	2018		2017
2011-1 Trust	$	3,593	$	9,103
2014-1 Trust		36,751		56,300
2015-1 Trust		91,246		142,328
2016-1 Trust		164,715		218,082
2016-2 Trust		114,143		138,967
2017-1 Trust		147,326		193,326
2017-2 Trust		205,388		243,129
2018-1 Trust		159,116		—
2018-2 Trust		298,556		—

F-20

The securities and certificates were issued at a discount to par, which is recorded as a contra liability to the securities issued. The discount is amortized as an adjustment of yield over the stated term of the securities adjusted for prepayments. In 2018, the Company sold some retained securities at a premium, resulting in a net premium for the 2016-2 Trust. As of December 31, 2018 and 2017, unamortized discounts or premiums associated with the Trusts are as follows in (thousands):

	2018			2017
2011-1 Trust	$	198		$	1,214
2014-1 Trust		512			699
2015-1 Trust		95			237
2016-1 Trust		679			1,584
2016-2 Trust		(209	)		355
2017-1 Trust		1,917			2,067
2017-2 Trust		38			48
2018-1 Trust		44			—
2018-2 Trust		45			—

Professional and other capitalized issuance costs associated with the securitizations are recorded as a contra liability to the securities issued. As of December 31, 2018 and 2017, capitalized issuance costs associated with the Trusts are as follows (in thousands):

	2018		2017
2011-1 Trust	$	51	$	310
2014-1 Trust		116		310
2015-1 Trust		551		1,319
2016-1 Trust		2,090		2,739
2016-2 Trust		1,487		1,884
2017-1 Trust		2,074		2,569
2017-2 Trust		2,924		3,508
2017-1 Trust		2,224		—
2017-2 Trust		3,877		—

As of December 31, 2018 and 2017, the weighted average rate on the securities and certificates for the Trusts are as follows:

	2018			2017
2011-1 Trust		6.19	%		5.24	%
2014-1 Trust		7.09			5.86
2015-1 Trust		6.63			5.07
2016-1 Trust		5.48			4.52
2016-2 Trust		4.67			3.70
2017-1 Trust		4.35			3.81
2017-2 Trust		3.56			3.25
2018-1 Trust		3.99			—
2018-2 Trust		4.40			—

Note 10 — Other Debt

The secured financing and warehouse repurchase facilities were utilized to finance the origination and purchase of commercial real estate mortgage loans. Warehouse repurchase facilities are designated to fund mortgage loans that are purchased and originated within specified underwriting guidelines. These lines of credit fund less than 100% of the principal balance of the mortgage loans originated and purchased, requiring the use of working capital to fund the remaining portion.

F-21

(a) Secured Financing, Net (Corporate Debt)

On December 18, 2014, the Company entered into a five-year, $100.0 million corporate debt agreement with the owners of the Class C preferred units, with an original note draw of $50.0 million and additional delayed draw notes up to an aggregate original principal amount of $50.0 million, which matures on December 16, 2019, and issued at par. In January 2016, the Company made its final delayed draw of $10.0 million. The notes bear interest at either 10% paid in cash or 11% paid in kind on June 15 and December 15 of each year. All principal and paid-in-kind interest are due at maturity. As of December 31, 2018 and 2017, including paid-in-kind interest, the balance of the notes was $127.6 million. The balances in the consolidated statements of financial condition are net of debt issuance costs of $0.6 million and $1.1 million as of December 31, 2018 and 2017, respectively. During the first half of 2017 and prior periods, the interest due was paid in kind. For the second half of 2017 and the year 2018, the interest due was paid in cash. The Company expects to pay future interest due in cash for the foreseeable future. The notes are secured by substantially all assets of the Company not otherwise pledged under a securitization or warehouse and repurchase facility and contain certain reporting and net worth covenants. Should the Company fail to adhere to those covenants or otherwise default under the notes, the lenders have the right to demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of December 31, 2018 and 2017, the Company was in compliance with these covenants.

(b) Warehouse Repurchase and Revolving Loan Facilities, Net

The Barclays Repurchase Agreement was originally entered into on May 29, 2015 by and between VCC and Barclays Bank PLC and currently has an extended maturity date of October 25, 2019. The agreement is a short-term borrowing facility, collateralized by a pool of performing loans, with an initial maximum capacity of $250.0 million, and bears interest at one-month LIBOR plus a margin that ranges from 2.75% to 2.875%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. All amounts in excess are returned to VCC. As of December 31, 2018 and 2017, the effective interest rates were 4.67% and 4.02%, respectively.

The Citibank Repurchase Agreement was originally entered into on May 17, 2013 by and between VCC and Citibank, N.A. and has a current extended maturity date of August 30, 2019. The Agreement is a short-term borrowing facility, collateralized by a pool of mainly performing loans, with a maximum capacity of $200.0 million, and bears interest at one-month LIBOR plus 3.00%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. All amounts in excess are returned to VCC. As of December 31, 2018 and 2017, the effective interest rates were 4.54% and 4.11%, respectively.

On September 12, 2018, the Company entered into a three-year secured revolving loan facility agreement with Pacific Western Bank. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at the lesser of the one-month LIBOR Rate plus 3.5% per annum and the maximum rate, which is the highest lawful and non-usurious rate of interest applicable to the loan. The maximum loan amount under this facility is $50 million. The outstanding loan advances under this facility was $365 thousand as of December 31, 2018.

Certain of the Company’s loans are pledged as security under the warehouse repurchase facilities and the revolving loan facility, which contain covenants. Should the Company fail to adhere to those covenants or otherwise default under the facilities, the lenders have the right to terminate the facilities and demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of December 31, 2018 and 2017, the Company was in compliance with these covenants.

F-22

The following table summarizes the maximum borrowing capacity and current gross balances outstanding for the Company’s repurchase facilities as of December 31, 2018 and 2017 (in thousands):

	Year end balance(1) 2018		Maximum borrowing capacity 2018		Year end balance(1) 2017		Maximum borrowing capacity 2017
Barclays warehouse repurchase agreement	$	94,659	$	250,000	$	51,712	$	200,000
Citibank warehouse repurchase agreement		121,701		200,000		34,360		200,000
Pacific Western repurchase agreement		365		50,000		—		—

(1) Warehouse repurchase facilities amounts in the consolidated statements of financial condition are net of debt issuance costs amounting to $0.8 million as of December 31, 2018 and 2017.

The following table provides an overview of the activity and effective interest rate for the years ended December 31, 2018 and 2017 (dollars in thousands):

	2018			2017
Warehouse repurchase facilities:
Average outstanding balance	$	177,081		$	144,825
Highest outstanding balance at any month-end		319,630			253,206
Effective interest rate(1)		5.20	%		4.96	%

(1) Represents annualized interest expense divided by average gross outstanding balance and includes average rate (4.61%) and debt issue cost amortization (0.59%) and average rate (4.06%) and debt issue cost amortization (0.9%) as of December 31, 2018 and 2017, respectively.

The following table provides a summary of interest expense that includes debt issuance cost amortization, interest, amortization of discount, and deal cost amortization for the years ended December 31, 2018 and 2017 (in thousands):

	2018		2017
Warehouse repurchase facilities	$	9,213	$	7,185
Securitizations		53,384		40,453
Interest expense – portfolio related		62,597		47,638
Interest expense – corporate debt	$	13,322	$	13,654
Total interest expense	$	75,919	$	61,292

Note 11 — Income Taxes

The Company adopted the requirements for accounting for uncertainty in income taxes in accordance with the “Accounting for Income Taxes” topic of FASB ASC 740, Income Taxes, on January 1, 2018. The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination by the applicable taxing authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the positions in question. The tax benefit recognized in the financial statements for any given tax position is limited to the amount that has a greater than 50% likelihood of being sustained upon ultimate settlement with the applicable taxing authorities. Based on its analysis, the Company has determined that it has not taken any uncertain tax positions, which do not meet the more-likely-than-not standard.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and local

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jurisdictions, where applicable. As of December 31, 2018, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the year 2013 forward (with limited exceptions). There are currently no examinations being conducted of the Company by the Internal Revenue Service or any other taxing authority.

Prior to January 1, 2018, the Company was treated as a partnership and was generally not subject to income taxes. The Company has elected to be treated as a corporation, for tax purposes, effective January 1, 2018. As a result, the Company calculated its deferred tax asset balance as of January 1, 2018 and, per U.S. GAAP, recognized the deferred tax liability offsetting to income in January 2018, the period in which the change was made. The January 1, 2018 deferred tax liability was $2.6 million. The Company recorded approximately $5.6 million of deferred tax asset for the year ended December 31, 2018, resulting in a deferred tax asset of approximately $3.0 million as of December 31, 2018.

The following table details the Company’s income tax expense (benefit) (in thousands):

	December 31, 2018
Current income tax expense:
Federal	$	7,307
State		4,379
Total current income tax expense	$	11,686
Deferred income tax benefit:
Federal		(1,788	)
State		(1,198	)
Total deferred income tax benefit	$	(2,986	)
Total income tax expense	$	8,700

The Company’s provision for deferred income taxes is primarily due to the difference between the tax and U.S. GAAP treatment on the issuance of its REMIC securities. For tax purposes, the issuances are considered taxable sales; whereas, for U.S. GAAP purposes, the REMIC issuances are considered financings.

The following table contains a reconciliation of the Company’s provision for income taxes at statutory rates to the provision for income taxes at the effective tax rate:

	December 31, 2018
Federal income tax provision at statutory rate		21.0	%
State income taxes, net of federal tax benefit		10.0	%
Income tax liability from establishing beginning deferred tax liability		13.4	%
Permanent item: meals & entertainment		0.6	%
Effective tax rate		45.0	%

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The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of December 31, 2018 are presented below (in thousands):

	December 31, 2018
Deferred Tax Assets:
REMIC book-tax basis difference	$	9,416
Unrealized gain/loss cumulative adjustment		1,640
Provision for loan loss		517
Accrued vacation		138
Deferred rent expense		63
Intangibles		15
Gross deferred tax assets		11,789
Deferred Tax Liabilities:
Deferred origination costs		(6,833	)
Fixed assets		(1,172	)
Purchase pool market discount		(496	)
Deferred state tax		(252	)
Loans held for sale book-tax market value difference		(40	)
REO		(10	)
Gross deferred tax liabilities		(8,803	)
Total net deferred tax asset	$	2,986

The Company had no valuation allowance as of December 31, 2018. Based on the Company’s estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.

Note 12 — Class C Preferred Units

Class C preferred units were issued on December 18, 2014 by the Company bearing a liquidation preference return equal to seven percent (7%) per annum of the Class C base amount of $20 million plus cumulative quarterly returns paid in kind. The Class C return accrues and is payable in arrears in kind quarterly on the last day of each fiscal quarter of each fiscal year and on any date on which a distribution is paid. Each Class C member has the right to convert their Class C preferred units into Class A units without the payment of additional consideration. Prior to December 19, 2016, the Class C preferred units were included in equity. As a result of the issuance of a put option in December 2016, the Company reassessed the revised characteristics of the Class C preferred units and determined the units were more akin to mezzanine equity and reclassified preferred C balances from equity to Class C preferred units on the consolidated statements of financial condition. The put right allows the Class C unit holders at any time from and after the third anniversary until the fifth anniversary of December 19, 2016, the right (but not the obligation) to require the Company to purchase all of the Class C preferred units for a cash payment equal to the aggregate Class C Liquidation Preference Amount of such Class C preferred units as defined by the agreement. The Company also has the right to require Class C members to convert all of each Class C member’s preferred units into Class A units in connection with, and upon consummation of, an initial public offering (IPO). As of December 31, 2018 and 2017, each Class C preferred unit was convertible into a number of Class A units at a conversion price of 1.044472 per Class C preferred unit. As of December 31, 2018 and 2017, representatives of Class C members held one of nine seats on the Company’s board of managers. Certain corporate matters and business decisions require the consent of the Class C unit holders. The Class C Liquidation Preference Amounts were $26.5 million and $24.7 million as of

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December 31, 2018 and 2017, respectively. Total authorized, issued, and outstanding Class C units as of December 31, 2018 and 2017 were 17.6 million.

Note 13 — Members’ Equity

VF has the authority to issue four types of membership units, Class A, Class B, Class C, and Class D units. The Class A units represent ownership interests in VF. Class B units are profit interest units, which represent a right to share, with the Class A units, in the distribution of profits earned by VF. The Class C and Class D units are preferred units, which have the right to convert to Class A units in VF. The outstanding Class A, Class B and Class D units and equity balance are as follows (in thousands):

	2018		2017
Class A units issued and outstanding		97,514		97,514
Class A equity balance	$	79,524	$	70,749
Class B units issued and outstanding		16,072		16,072
Class B equity balance	$	—	$	—
Class D units issued and outstanding		60,194		60,194
Class D equity balance	$	60,194	$	60,194

See note (12) on Class C preferred units.

Class A units are issued when capital contributions are made to the Company in the form of cash. Class B units have been issued as part of the Velocity Financial, LLC 2012 Equity Incentive Plan (formerly, Velocity Commercial Capital, LLC 2007 Equity Incentive Plan) (the “2012 Plan”) and are subordinate to the Class A units for purposes of distribution preferences. The Class B units are not entitled to receive profit distributions until all Class A, C, and D unit holders have received the stated value of their equity. Therefore, the value of the Class B units as of December 2018 and 2017 was zero.

As of December 31, 2018 and 2017, the majority owner owned approximately 95 million Class A units representing an ownership interest of approximately 97.4% of the Class A units. Representatives of the majority owner currently hold five of nine seats on the Company’s board of managers.

Class B units vest over a three-year period. Under the 2012 Plan, approximately 16.1 million Class B units were authorized for grant. As of December 31, 2018 and 2017, there were 16.1 million units issued and outstanding. The following table summarizes the activity in Class B units as of December 31, 2018 and 2017 and the years then ended (in thousands):

	2018		2017
Beginning balance		16,072		8,075
Awards granted		—		7,997
Awards canceled		—		—
Ending balance		16,072		16,072
Vested units		10,741		8,075

Class B units are last in the waterfall for distributions and profit sharing upon liquidation. As the value of the Class B units awarded is zero, no share-based compensation expenses have been recognized in the consolidated statements of income for the years ended December 31, 2018 and 2017.

The Company issued 60 million Class D preferred units at one dollar per share on December 19, 2016. On March 6, 2017, the Company issued an aggregate of 193,989 Class D preferred units at one dollar per unit to two investors. The Class D preferred units earn a return equal to sixteen percent (16%) per annum of the Class D Base Amount (purchase price amount plus cumulative quarterly returns paid in kind) with respect to such member’s Class D preferred units until December 19, 2019 and, from and after such date, an amount equal to fifteen percent (15%) per annum of the Class D Base Amount. The Class D return accrues

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and is payable in arrears in kind quarterly on the last day of each fiscal quarter of each fiscal year and on any date on which a distribution is paid. For the years ended December 31, 2018 and 2017, the Class D returns paid in kind were $12.0 million and $10.3 million, respectively. Each Class D member has the right to convert their Class D preferred units into Class A units without the payment of additional consideration. The Company also has the right to require Class D members to convert all of each Class D member’s preferred units into Class A units in connection with, and upon consummation of, an IPO. As of December 31, 2018 and 2017, each Class D preferred unit is convertible into a number of Class A units at a conversion price of $0.876971 per Class D preferred unit. Certain corporate matters and business decisions require the consent of the Class D unit holders. As of December 31, 2018 and 2017, representatives of Class D members held two of nine seats on the Company’s board of managers. The Class D Units liquidation preference amount was $82.8 million and $70.8 million as of December 31, 2018 and 2017, respectively.

Note 14 — Concentration of Risk

The Company originates and purchases loans secured by a broad spectrum of commercial property throughout the United States. As of December 31, 2018 and 2017, geographic and property type concentrations of loans, by unpaid principal balance, were as follows:

	2018			2017
Geographic concentration:
New York		25.0	%		25.4	%
California		22.2			22.6
Florida		10.6			9.8
New Jersey		8.5			8.5
Other states (individually less than 5.0%)		33.7			33.7
		100.0	%		100.0	%

	2018			2017
Property type concentration:
Investor 1-4		49.7	%		50.0	%
Multifamily		7.1			12.8
Mixed use		12.5			11.0
Retail		9.2			8.6
Office		5.6			5.7
Warehouse		5.1			5.3
Other (individually less than 5.0%)		10.8			6.6
		100.0	%		100.0	%

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As of December 31, 2018 and 2017, the Company held $7.2 million and $5.3 million, respectively, of real estate owned, net, with geographic concentrations as follows:

	2018			2017
Geographic concentration:
Maryland		53.0	%		—	%
California		21.8			—
Georgia		8.8			—
North Carolina		—			39.8
Nevada		—			17.3
New Jersey		—			11.9
Virginia		—			8.6
Alabama		—			5.2
Other states (individually less than 5.0%)		16.4			17.2
		100.0	%		100.0	%

Note 15 — Commitments and Contingencies

(a) Leases

The Company leases office space in California, Pennsylvania, Virginia, Massachusetts, Florida, Texas, and Washington. The noncancelable operating leases range from three to five years. Rental payments are accounted for on a straight-line basis based on minimum annual amounts plus escalation amounts to adjust for inflation. The Company leases certain office equipment under noncancelable operating leases. Total minimum lease payments for all leases as of December 31, 2018 are as follows (in thousands):

	Lease payments
2019	$	1,065
2020		674
2021		534
2022		463
2023		206
Thereafter		217

Rent expense was approximately $1.3 million, $1.1 million and $0.8 million for the years ended December 31, 2018, 2017 and 2016, respectively.

(b) Repurchase Liability

When the Company sells loans, it is required to make normal and customary representations and warranties about the loans to the purchaser. The loan sale agreements generally require the Company to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. In addition, the Company may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a loan shortly after its sale.

The Company records a repurchase liability relating to representations and warranties and early payment defaults. The method used to estimate the liability for repurchase is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults. The Company establishes a liability at the time loans are sold and continually update the estimated repurchase liability. The level of the repurchase liability for representations and warranties and early payment default requires considerable management judgment.

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The Company regularly evaluates the adequacy of repurchase reserves based on trends in repurchase, actual loss experience, estimated future loss exposure and other relevant factors including economic conditions. During the years ended December 31, 2018 and 2017, the Company repurchased $3.9 million and $1.5 million of loans and reversed approximately $145 thousand and $62 thousand of accrued interest income and gains recognized upon sale, respectively. The Company believes its reserve balance of $68 thousand as of December 31, 2018 and 2017 was sufficient to cover future loss exposure associated with repurchase contingencies.

(c) Legal Proceedings

The Company is a party to various legal proceedings in the normal course of business. The Company, after consultation with legal counsel, believes the disposition of all pending litigation will not have a material effect on the Company’s consolidated financial condition or results of operations.

Note 16 — Retirement Plan

The Company maintains a qualified 401(k) retirement plan in accordance with the Code. Employees meeting certain eligibility requirements as detailed in the plan document may participate by deferring eligible compensation into the plan. The plan allows for discretionary employer matching contribution. For the years ended December 31, 2018, and 2017, the Company expensed $367 thousand and $121 thousand, respectively. No discretionary contributions were made for the year ended December 31, 2016.

Note 17 — Other Operating Expenses

The following table presents the components of other operating expenses for the years ended December 31, 2018, 2017 and 2016 (in thousands):

	2018		2017		2016
Travel, marketing and business development	$	1,052	$	899	$	637
Data processing and telecommunications		1,704		854		395
Office expenses		1,896		1,559		745
Insurance, taxes, and licenses		376		397		327
Other		285		237		316
Total other operating expenses	$	5,313	$	3,946	$	2,420

Note 18 — Related Party Transactions

In the ordinary course of business, the Company sells held for sale loans to various financial institutions. From time to time, the Company sells held for sale loans to an affiliate of a Class D preferred unit holder.

In 2014, we entered into a five-year, $100.0 million corporate debt agreement with the owners of our Class C preferred units, pursuant to which we issued at par senior secured notes that mature on December 16, 2019. The senior secured notes bear interest, at our election, at either 10% annually paid in cash or 11% annually paid in kind. As of December 31, 2018 and 2017, including paid-in-kind interests, the senior secured notes balance was $127.6 million, and is presented within secured financing, net on the consolidated statements of financial condition.

Note 19 — Fair Value Measurements

(a) Fair Value Determination

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value

F-29

measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

• Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets.

• Level 2 - Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.

• Level 3 - Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.

Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurement date.

(b) Cash and Cash Equivalents and Restricted Cash

Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

(c) Loans Held for Investment

Loans held for investment are recorded at their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for loan losses.

The Company determined the fair value estimate of loans held for investment using a cash flow model incorporating the latest securitization execution prices as a proxy, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are interest rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement.

(d) Impaired Loans

Nonaccrual loans held for investment are considered impaired and are measured and recorded at fair value on a nonrecurring basis. Impaired loans are reviewed individually for the amount of impairment, if any. To the extent a loan is collateral dependent, the Company measures such impairment based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.

(e) Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The Company uses a discounted cash flow model to estimate the fair value of loans held for sale, a Level 3 measurement.

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(f) Interest-Only Strips

The Company retains an interest-only strip on certain sales of held for sale loans. The interest-only strips are classified as trading securities under FASB ASC Topic 320, Investments-Debt Securities. The interest-only strips are measured based on their estimated fair values using a discounted cash flow model, a Level 3 measurement. Changes in fair value are reflected in income as they occur.

(g) Loans Held for Investment, at Fair Value

The Company has elected to account for certain purchased distressed loans held for investment, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

The Company uses a modified discounted cash flow model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

(h) Real Estate Owned, Net (REO)

Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.

(i) Secured Financing, Net (Corporate Debt)

The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

(j) Warehouse Repurchase Facilities, Net

Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

(k) Securitizations, Net

The fair value estimate of securities issued is determined by using estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

(l) Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

The Company does not have any off-balance sheet financial instruments.

F-31

(m) Fair Value Disclosures

The following tables present information on assets measured and recorded at fair value as of December 31, 2018 and 2017, by level, in the fair value hierarchy (in thousands):

	Fair value measurements using						Total at fair value
December 31, 2018	Level 1		Level 2		Level 3
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	3,463	$	3,463
Interest-only strips		—		—		812		812
Total recurring fair value measurements		—		—		4,275		4,275
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		78,446		78,446
Real estate owned, net		—		—		7,167		7,167
Impaired loans requiring specific allowance, net		—		—		5,647		5,647
Total nonrecurring fair value measurements		—		—		91,260		91,260
Total assets	$	—	$	—	$	95,535	$	95,535

	Fair value measurements using						Total at fair value
December 31, 2017	Level 1		Level 2		Level 3
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	4,632	$	4,632
Interest-only strips		—		—		369		369
Total recurring fair value measurements		—		—		5,001		5,001
Nonrecurring fair value measurements:
Real estate owned, net		—		—		5,322		5,322
Impaired loans requiring specific allowance, net		—		—		4,467		4,467
Total nonrecurring fair value measurements		—		—		9,789		9,789
Total assets	$	—	$	—	$	14,790	$	14,790

The following table presents losses recognized on assets measured on a nonrecurring basis for the years indicated (in thousands):

	Years Ended December 31,
Loss on assets measured on a nonrecurring basis	2018		2017		2016
Loans held for sale, net	$	174	$	102	$	—
Real estate held for sale, net		888		211		183
Impaired loans requiring specific allowance, net		3		—		—
Total net loss	$	1,065	$	313	$	183

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The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of December 31, 2018 and 2017 (dollars in thousands):

December 31, 2018
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Collateral dependent impaired loans requiring specific allowance, net	$	5,647	Market comparables	Selling costs	8%	8%
Real estate owned, net		7,167	Market comparables	Selling costs	8%	8%
Loans held for investment, at fair value		3,463	Discounted cash flow	Discount rate	10.5%	10.5%
				Collateral value (% of UPB)	-40% to 100%	86%
				Timing of resolution/payoff (months)	1 to 230	64.2
				Prepayment rate	20%	20%
				Default rate	1%	1%
				Loss severity rate	10%	10%
Interest-only strips		812	Discounted cash flow	Discount rate	15%	15%
				Timing of resolution/payoff (months)	1 to 12	8.4
Collateral dependent impaired loans requiring specific allowance, net	$	4,467	Market comparables	Selling costs	8%	8%
Real estate held for sale, net		5,322	Market comparables	Selling costs	8%	8%
Loans held for investment, at fair value		4,632	Discounted cash flow	Discount rate	12%	12%
				Collateral value (% of UPB)	0% to 139%	103%
				Timing of resolution/payoff (months)	3 to 243	59
				Prepayment rate	12%	12%
				Default rate	1%	1%
				Loss severity rate	10%	10%
Interest-only strips		369	Discounted cash flow	Discount rate	15%	15%
				Timing of resolution/payoff (months)	3 to 12	9.6

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The following is a rollforward of loans that are measured at estimated fair value on a recurring basis for the years indicated (in thousands):

	December 31,
	2018			2017			2016
Beginning balance	$	4,632		$	7,278		$	10,143
Loans liquidated		(895	)		(2,506	)		(2,806	)
Principal paydowns		(515	)		(179	)		(211	)
Total unrealized gain included in net income		241			39			152
Ending balance	$	3,463		$	4,632		$	7,278

The following is a rollforward of interest-only strips that are measured at estimated fair value on a recurring basis for the years indicated (in thousands):

	December 31,
	2018			2017			2016
Beginning balance	$	369		$	—		$	—
Interest-only strip additions		1,314			499			—
Interest-only strip write-offs		(97	)		(25	)		—
Total unrealized loss included in net income		(774	)		(105	)		—
Ending balance	$	812		$	369		$	—

The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are impaired. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of December 31, 2018 and 2017, the only financial assets measured at fair value were certain impaired loans held for investment, loans held for sale, interest-only strips, REO and FVO loans, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Impaired loans were carried at approximately $5.6 million and $4.5 million as of December 31, 2018 and 2017, net of specific allowance for loan losses of approximately $0.6 million and $0.7 million, respectively.

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above.

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The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated (in thousands):

	December 31, 2018
Asset category	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Assets:
Cash	$	15,008	$	15,008	$	—	$	—	$	15,008
Restricted cash		1,669		1,669		—		—		1,669
Loans held for sale, net		78,446		—		—		79,335		79,335
Loans held for investment, net		1,567,408		—		—		1,609,860		1,609,860
Loans held for investment, at fair value		3,463		—		—		3,463		3,463
Accrued interest receivable		10,096		10,096		—		—		10,096
Liabilities:
Secured financing, net	$	127,040	$	—	$	—	$	122,631	$	122,631
Warehouse repurchase facilities, net		215,931		215,931		—		—		215,931
Securitizations, net		1,202,202		—		—		1,222,677		1,222,677
Accrued interest payable		5,651		5,651		—		—		5,651

	December 31, 2017
Asset category	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Assets:
Cash	$	15,422	$	15,422	$	—	$	—	$	15,422
Restricted cash		305		305		—		—		305
Loans held for sale, net		5,651		—		—		5,787		5,787
Loans held for investment, net		1,299,041		—		—		1,351,003		1,351,003
Loans held for investment, at fair value		4,632		—		—		4,632		4,632
Accrued interest receivable		7,678		7,678		—		—		7,678
Liabilities:
Secured financing, net	$	126,486	$	—	$	—	$	124,313	$	124,313
Warehouse repurchase facilities, net		85,303		85,303		—		—		85,303
Securitizations, net		982,393		—		—		1,032,512		1,032,512
Accrued interest payable		3,558		3,558		—		—		3,558

Note 20 — Subsequent Events

The Company completed the securitization of $248.0 million of loans on March 14, 2019 which is accounted for as secured borrowings.

The Company has evaluated events that have occurred subsequent to December 31, 2018 and has concluded there are no other subsequent events that would require recognition in the accompanying consolidated financial statements.

F-35

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

Note 21 - Mortgage Loans on Real Estate

The following table presents the Company’s loans collateralized by real estate as of December 31, 2018.

Mortgage Loans on Real Estate

As of December 31, 2018

(in thousands)

Description	Interest Rate		Final Maturity Date		Unpaid Principal Balance(1)(2)		Nonaccrual
1-4 unit residential(3)
Under $1.0 million		6.0% - 13.3%		January 1, 2049	$	731,262	$	43,975
$1.0 million and over		6.0% - 10.3%		January 1, 2049		79,787		7,455
						811,049		51,430
Traditional commercial(4)
Under $1.0 million		4.5% - 13.0%		January 1, 2049		647,802		40,925
$1.0 million and over		4.1% - 11.8%		January 1, 2049		172,475		18,585
						820,277		59,510
Total at December 31, 2018					$	1,631,326	$	110,940

Note (1): The aggregate cost of the Company’s loan portfolio for Federal income tax purposes was $1,651,123.

Note (2): $79.3 million of the total UPB are interest-only loans with interest payable monthly and the principal payable at maturity. These loans generally contain a 4-months interest prepayment penalty provision if the loan is paid-off within the first 4 months.

Note (3): The principal and interest on the 1-4 unit residential mortgage loans is payable monthly at a level amount over the life of the loan to maturity. These loans generally contain a 3% prepayment penalty provision if the loan is prepaid within the first 3 years.

Note (4): The principal and interest on the traditional commercial mortgage loans is payable monthly at a level amount over the life of the loan to maturity. These loans generally contain a 5% prepayment penalty provision if the loan is prepaid within the first 3 years.

The following table presents the reconciliation of the UPB of mortgage loans for the years ended December 31, 2018, 2017, and 2016:

	2018			2017			2016
Balance at beginning of period	$	1,295,439		$	1,037,857		$	874,436
Addition during period:
New mortgage loans		737,297			554,710			348,419
Acquisition		16,243			985
Deduction during period:
Collection of principal		(337,565	)		(238,805	)		(177,230	)
Foreclosures		(7,481	)		(6,929	)		(3,575	)
Mortgages sold		(72,607	)		(52,379	)		(4,193	)
Balance at ending of period	$	1,631,326		$	1,295,439		$	1,037,857

F-36

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands)

	September 30, 2019		December 31, 2018
	(Unaudited)
Assets
Cash and cash equivalents	$	8,849	$	15,008
Restricted cash		3,152		1,669
Loans held for sale, net		170,440		78,446
Loans held for investment, net		1,775,935		1,567,408
Loans held for investment, at fair value		2,936		3,463
Total loans, net		1,949,311		1,649,317
Accrued interest receivables		12,450		10,096
Receivables due from servicers		38,349		40,473
Other receivables		7,585		974
Real estate owned, net		15,806		7,167
Property and equipment, net		4,903		5,535
Net deferred tax asset		6,597		2,986
Other assets		17,499		4,760
Total assets	$	2,064,501	$	1,737,985
Liabilities and Members’ Equity
Accounts payable and accrued expenses	$	41,789	$	26,629
Secured financing, net		145,285		127,040
Securitizations, net		1,377,733		1,202,202
Warehouse repurchase facilities, net		349,115		215,931
Total liabilities		1,913,922		1,571,802
Commitments and contingencies Class C preferred units		—		26,465
Members’ equity		150,579		139,718
Total liabilities and members’ equity	$	2,064,501	$	1,737,985

See accompanying notes to consolidated financial statements.

F-37

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Interest income	$	40,379		$	32,207	$	113,407		$	91,163
Interest expense — portfolio related		21,827			16,428		61,214			44,791
Net interest income — portfolio related		18,552			15,779		52,193			46,372
Interest expense — corporate debt		3,842			3,328		10,548			9,985
Net interest income		14,710			12,451		41,645			36,387
Provision for (reversal of) loan losses		338			213		898			(21	)
Net interest income after provision for loan losses		14,372			12,238		40,747			36,408
Other operating income
Gain on disposition of loans		56			234		2,914			1,173
Unrealized gain (loss) on fair value loans		(18	)		90		(51	)		300
Other income (expense)		(250	)		850		(1,046	)		1,243
Total other operating income		(212	)		1,174		1,817			2,716
Operating expenses
Compensation and employee benefits		3,712			3,752		11,519			11,277
Rent and occupancy		369			373		1,105			985
Loan servicing		1,957			1,746		5,457			4,191
Professional fees		398			772		1,587			1,804
Real estate owned, net		485			396		1,348			1,089
Other operating expenses		1,563			1,527		4,292			3,943
Total operating expenses		8,484			8,566		25,308			23,289
Income before income taxes		5,676			4,846		17,256			15,835
Income tax expense		1,796			1,528		5,146			7,241
Net income	$	3,880		$	3,318	$	12,110		$	8,594

See accompanying notes to consolidated financial statements.

F-38

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

(In thousands)

(Unaudited)

	Total Members’ Equity
Balance — December 31, 2017	$	130,943
Liquidation preference return, Class C		(432	)
Net income		956
Balance — March 31, 2018	$	131,467
Liquidation preference return, Class C		(440	)
Net income		4,320
Balance — June 30, 2018	$	135,347
Liquidation preference return, Class C		(4407	)
Net income		3,318
Balance — September 30, 2018	$	138,218
Balance — December 31, 2018	$	139,718
Liquidation preference return, Class C		(464	)
Net income		4,695
Balance — March 31, 2019	$	143,949
Liquidation preference return, Class C		(471	)
Net income		3,535
Balance — June 30, 2019	$	147,013
Liquidation preference return, Class C		(314	)
Net income		3,880
Balance — September 30, 2019	$	150,579

See accompanying notes to consolidated financial statements.

F-39

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	12,110		$	8,594
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,004			1,069
Amortization of right-of-use assets		772			—
Provision for (reversal of) loan losses		898			(21	)
Origination of loans held for sale		(214,370	)		(88,742	)
Proceeds from sales of loans held for sale		114,046			28,091
Repayments on loans held for sale		11,162			36,489
Net accretion of discount on purchased loans and deferred loan origination costs		3,393			2,520
Provision for (reversal of) uncollectible borrower advances		49			(21	)
Gain on sale of loans		(2,749	)		(683	)
Real estate acquired through foreclosure in excess of recorded investment		(165	)		(491	)
Amortization of debt issuance discount and costs		7,695			5,441
Loss on disposal of property & equipment		7			77
Change in valuation of real estate owned		572			845
Change in valuation of fair value loans		51			(300	)
Change in valuation of held for sale loans		(84	)		—
Gain on sale of real estate owned		(211	)		(626	)
Net deferred tax benefit		(3,611	)		(855	)
(Increase) decrease in operating assets and liabilities:
Accrued interest and other receivables		(6,277	)		(11,318	)
Other assets		(13,511	)		(882	)
Accounts payable and accrued expenses		12,026			(240	)
Net cash used in operating activities		(77,193	)		(21,053	)
Cash flows from investing activities:
Purchase of loans held for investment		(9,276	)		—
Origination of loans held for investment		(482,475	)		(443,284	)
Payoffs of loans held for investment and loans at fair value		268,671			238,779
Proceeds from sale of real estate owned		3,028			5,479
Capitalized real estate owned improvements		(1,122	)		(63	)
Change in advances		(614	)		179
Change in impounds and deposits		3,132			641
Purchase of property and equipment		(378	)		(1,158	)
Net cash used in investing activities		(219,034	)		(199,427	)
Cash flows from financing activities:
Warehouse repurchase facilities advances		650,331			444,725
Warehouse repurchase facilities repayments		(517,197	)		(211,167	)
Proceeds from secured financing		153,000			—
Repayment of secured financing		(127,594	)		—
Proceeds of securitizations, net		444,105			227,566
Repayment of securitizations		(268,547	)		(218,706	)
Debt issuance cost		(14,833	)		(3,134	)
Repurchase of Class C preferred units		(27,714	)		—
Net cash provided by financing activities		291,551			239,284
Net (decrease) increase in cash, cash equivalents, and restricted cash		(4,676	)		18,804
Cash, cash equivalents, and restricted cash, beginning of period		16,677			15,727
Cash, cash equivalents, and restricted cash, end of period	$	12,001		$	34,531
Supplemental cash flow information:
Cash paid during the period for interest	$	61,846		$	44,511
Cash paid during the period for income taxes		14,073			8,241
Noncash transactions from investing and financing activities:
Transfer of loans held for investment to real estate owned		10,741			7,389
Discount (premium) on issuance of securitizations		67			(1,269	)
Return paid-in-kind on Class C preferred units		1,249			1,319
Return paid-in-kind on Class D preferred units		10,340			8,839

See accompanying notes to consolidated financial statements.

F-40

VELOCITY FINANCIAL, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Organization and Description of Business

Velocity Financial, LLC (VF or the Company) is a Delaware limited liability company (LLC) formed on July 9, 2012 for the purpose of acquiring all membership units in Velocity Commercial Capital, LLC (VCC). The ownership of VF at date of formation was the same as VCC’s ownership at such date. In 2015, VCC began doing business as Velocity Mortgage Capital (VMC).

VCC, a California LLC formed on June 2, 2004, is a mortgage lender that originates and acquires small balance investor real estate loans, providing capital to the investor real estate loan market. The Company is licensed as a California Finance Lender and, as such, is required to maintain a minimum net worth of $250 thousand. The Company does not believe there is any potential risk of not being able to meet this regulatory requirement. The Company uses its equity capital and borrowed funds to originate and invest in investor real estate loans and seeks to generate income based on the difference between the yield on its investor real estate loan portfolio and the cost of its borrowings. The Company does not engage in any other significant line of business or offer any other products or services, nor does it originate or acquire investments outside of the United States of America.

The Company, through its wholly owned subsidiaries, is the sole beneficial owner of the Velocity Commercial Capital Loan Trust 2011-1 (the 2011-1 Trust), a Delaware statutory trust formed on April 5, 2011; Velocity Commercial Capital Loan Trust 2014-1 (the 2014-1 Trust), a New York common law trust formed on September 26, 2014; Velocity Commercial Capital Loan Trust 2015-1 (the 2015-1 Trust), a New York common law trust formed on July 10, 2015; Velocity Commercial Capital Loan Trust 2016-1 (the 2016-1 Trust), a New York common law trust formed on April 29, 2016; Velocity Commercial Capital Loan Trust 2016-2 (the 2016-2 Trust), a New York common law trust formed on November 7, 2016, Velocity Commercial Capital Loan Trust 2017-1 (the 2017-1 Trust), a New York common law trust formed on May 11, 2017; Velocity Commercial Capital Loan Trust 2017-2 (the 2017-2 Trust), a New York common law trust formed on November 21, 2017; Velocity Commercial Capital Loan Trust 2018-1 (the 2018-1 Trust), a New York common law trust formed on April 12, 2018, Velocity Commercial Capital Loan Trust 2018-2 (the 2018-2 Trust), a New York common law trust formed on October 15, 2018, Velocity Commercial Capital Loan Trust 2019-1 (the 2019-1 Trust), a New York common law trust formed on March 14, 2019, and Velocity Commercial Capital Loan Trust 2019-2 (the 2019-2 Trust), a New York common law trust formed on July 22, 2019 collectively known as the Trusts. The Trusts are bankruptcy remote, variable interest entities (VIE) formed for the purpose of providing secured borrowings to the Company and are consolidated with the accounts of the Company.

Note 2 — Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report. The financial statements as of, and for the interim periods presented, are unaudited and, in management’s opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year. The financial information as of December 31, 2018 has been derived from the audited financial statements as of those dates. For further information, refer to the financial statements and the notes elsewhere included in this filing.

(a) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of

F-41

contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of consolidated income and expenses during the reporting period. Significant estimates subject to change include determination of the allowance for loans losses, determination of asset fair values, and other valuations using expected future cash flows. Actual results could differ from those estimates.

(b) Principles of Consolidation

The principles of consolidation require management to determine and reassess the requirement to consolidate VIEs each reporting period, and therefore, the determination may change based on new facts and circumstances pertaining to each VIE. This could result in a material impact to the Company’s consolidated financial statements in subsequent reporting periods.

The Company consolidates the assets, liabilities, and remainder interests of the Trusts as management determined that VCC is the primary beneficiary of these entities. The Company’s ongoing asset management responsibilities provide the Company with the power to direct the activities that most significantly impact the VIE’s economic performance, and the remainder interests provide the Company with the right to receive benefits and the obligation to absorb losses, limited to its investment in the remainder interest of the Trusts.

The following table presents a summary of the assets and liabilities of the Trusts as of September 30, 2019 and December 31, 2018. Intercompany balances have been eliminated for purposes of this presentation (in thousands):

	September 30, 2019		December 31, 2018
Restricted cash	$	—	$	305
Loans held for investment, net		1,517,184		1,328,619
Accrued interest and other receivables		45,493		44,840
Real estate owned, net		7,435		1,132
Other assets		—		4
Total assets	$	1,570,112	$	1,374,900
Accounts payable and accrued expenses	$	19,668	$	17,087
Securities issued		1,377,733		1,202,202
Total liabilities	$	1,397,401	$	1,219,289

The consolidated financial statements as of September 30, 2019 and December 31, 2018 include only those assets, liabilities, and results of operations related to the business of the Company, its subsidiaries, and VIEs, and do not include any assets, liabilities, revenues, and expenses attributable to limited liability members’ individual activities. The liability of each member in an LLC is limited to the amounts reflected in their respective member accounts.

Note 3 — Current Accounting Developments

(a) Accounting Standards Adopted in 2019

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” and the related amendments to this new standard issued in 2018. ASU 2016-02 supersedes Topic 840, “Leases,” and is intended to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted the new standard using the optional transition method under ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” on January 1, 2019. Upon adoption, the Company

F-42

recognized an operating lease liability of $2.8 million, and a corresponding right-of-use asset of $2.6 million based on the present value of the remaining minimum lease payments for existing operating leases. The Company has elected the following practical expedients: (1) As a lessee the Company will not separate lease and non-lease components when determining the amount of right of use assets; (2) to not reassess whether any expired or existing contracts are or contain leases and to maintain existing lease classifications; (3) to not record short-term leases (initial term of 12 months or less) on the balance sheet.

Effective January 1, 2019, the Company early-adopted any removed or modified disclosures as permitted by ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to Disclosure Requirements for Fair Value Measurements,” but will defer adoption of the additional disclosures until the effective date of January 1, 2020 as permitted in the transition guidance in ASU 2018-13.

(b) Other Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, which significantly changes the way entities recognize credit losses and impairment of financial assets recorded at amortized cost. Currently, the credit loss and impairment model for loans and leases is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms. Under the new current expected credit loss (“CECL”) model, the standard requires immediate recognition of estimated credit losses expected to occur over the remaining life of the asset. This standard also expands the disclosure requirements regarding an entity’s assumptions, models and methods for estimating the allowance for loan and lease losses, and requires disclosure of the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination (i.e., by vintage year). ASU 2016-13 is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with earlier adoption permitted. Entities are required to use a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted (modified-retrospective approach). The Company has selected a CECL software and is currently working with the vendor to implement the software. Model validation and parallel runs will begin in the fourth quarter of 2019. The Company plans to adopt this standard on January 1, 2020. This new standard will be significant to the policies, processes, and methodology used to determine credit losses, however the Company has not yet determined the quantitative effect ASU 2016-13 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. Specifically, if a cloud computing arrangement is deemed to be a service contract, certain implementation costs are eligible for capitalization. The new guidance prescribes the balance sheet and income statement presentation and cash flow classification for the capitalized costs and related amortization expense. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for the Company on January 1, 2020 and the Company expects to adopt this ASU on January 1, 2020. The adoption of ASU 2018-15 will not have a material impact on the Company’s consolidated financial statements.

Note 4 — Restricted Cash

The 2011-1 securitization agreement requires the Company to set aside cash to cover potential shortfall. The Company is also required to hold cash for potential future advances due certain borrowers. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Company’s consolidated statement of financial condition that sum to the total of the same such

F-43

amounts shown in the consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018.

	September 30,
	2019		2018
Cash and cash equivalents	$	8,849	$	33,793
Restricted cash		3,152		738
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	12,001	$	34,531

Note 5 — Loans Held for Sale, Net

The unpaid principal balance of loans held for sale as of September 30, 2019 and December 31, 2018 was $171.5 million and $79.3 million, respectively, and the net deferred loan origination costs was $968 thousand and $716 thousand, respectively.

Note 6 — Loans Held for Investment

Prior to June 1, 2019, our loans held for investment portfolio consisted of Non-PCI loans and PCI loans. Non-PCI loans were loans the Company originated or acquired that were not credit impaired at the dates of acquisition. PCI loans were purchased loans for which there was, at the acquisition date, evidence of credit deterioration since their origination and for which it was probable that collection of all contractually required payments was unlikely. As the Company’s PCI loan portfolio represented less than 0.7% of total loans with remaining purchased discount of less than $0.5 million at the end of the first quarter in 2019, the PCI loans were accounted for as Non-PCI loans effective June 1, 2019. Accordingly, the allowance for loan losses in the tables below related to the September 30, 2019 period are for total loans held for investment, and amounts related to the 2018 period are for Non-PCI loans.

The following tables summarize loans held for investment as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019			December 31, 2018
Unpaid principal balance	$	1,756,711		$	1,551,866
Discount on acquired loans		—			(541	)
Valuation adjustments on FVO loans		(486	)		(586	)
Deferred loan origination costs		24,757			21,812
		1,780,982			1,572,551
Allowance for loan losses		(2,111	)		(1,680	)
	$	1,778,871		$	1,570,871

F-44

As of September 30, 2019 and December 31, 2018, the gross unpaid principal balance of loans held for investment pledged as collateral for the Company’s warehouse repurchase agreements, and securitizations issued were as follows (in thousands):

	September 30, 2019		December 31, 2018
Citibank warehouse repurchase agreement	$	95,370	$	114,112
Barclays warehouse repurchase agreement		136,984		85,448
Pacific Western Bank agreement		5,229		—
Total pledged loans	$	237,583	$	199,560
2011-1 Trust	$	—	$	17,226
2014-1 Trust		33,407		45,770
2015-1 Trust		71,236		100,414
2016-1 Trust		112,459		173,494
2016-2 Trust		85,061		120,937
2017-1 Trust		129,901		155,861
2017-2 Trust		183,790		214,111
2018-1 Trust		150,701		168,615
2018-2 Trust		277,238		314,860
2019-1 Trust		236,710		—
2019-2 Trust		215,504		—
Total	$	1,496,007	$	1,311,288

(a) Nonaccrual Loans

The following table presents certain information about the Company’s loans held for investment and loans that were considered impaired and on nonaccrual status as of September 30, 2019 and December 31, 2018. There were no loans accruing interest that were greater than 90 days past due as of September 30, 2019 or December 31, 2018.

	September 30, 2019			December 31, 2018
Nonaccrual loans:
Recorded investment	$	109,953		$	93,653
Percentage of the originated loans held for investment		6.2	%		5.9	%
Impaired loans:
Unpaid principal balance	$	108,547		$	92,410
Recorded investment		110,134			93,841
Recorded investment of impaired loans requiring a specific allowance		8,161			6,283
Specific allowance		739			636
Specific allowance as a percentage of recorded investment of impaired loans requiring a specific allowance		9.0	%		10.1	%
Recorded investment of impaired loans not requiring a specific allowance	$	101,973		$	87,558
Percentage of recorded investment of impaired loans not requiring a specific allowance		92.6	%		93.3	%
TDRs included in impaired loans:
Recorded investment of TDRs	$	181		$	188
Recorded investment of TDRs with a specific allowance		181			188
Specific allowance		25			25
Recorded investment of TDRs without a specific allowance		—			—

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For the nine months ended September 30, 2019 and 2018, there was no accrued interest income recognized on nonaccrual loans, cash basis interest income recognized on nonaccrual loans was $8.7 million and $7.1 million, respectively, and the average recorded investment of impaired loans, computed using month-end balances, was $106.3 million and $74.8 million, respectively. There were no commitments to lend additional funds to debtors whose loans have been modified as of September 30, 2019 and December 31, 2018.

(b) Allowance for Loan Losses

Activity in the allowance for loan losses during the nine months ended September 30, 2019 and 2018 was as follows (in thousands):

	Nine Months Ended September 30,
	2019			2018
Beginning balance	$	1,680		$	1,886
Provision for (reversal of) loan losses		898			(21	)
Charge-offs		(467	)		(347	)
Ending balance	$	2,111		$	1,518
Allowance related to:
Loans individually evaluated for impairment	$	739		$	383
Loans collectively evaluated for impairment		1,372			1,135
Recorded investment related to:
Loans individually evaluated for impairment	$	110,134		$	82,637
Loans collectively evaluated for impairment		1,667,784			1,414,608

(c) Credit Quality Indicator

A credit quality indicator is a statistic used by management to monitor and assess the credit quality of loans held for investment, excluding loans held for investment at fair value. Management monitors delinquencies, bankruptcies, and foreclosures as its primary credit quality indicator, and the following table provides delinquency information on the recorded investment in the loans held for investment portfolio as of September 30, 2019 and December 31, 2018 (in thousands):

	30–59 days past due		60–89 days past due		90+ days past due(1)		Total past due		Current		Total loans
September 30, 2019:
Impaired loans	$	3,960	$	4,526	$	101,467	$	109,953	$	181	$	110,134
Nonimpaired loans		108,290		30,612		—		138,902		1,528,882		1,667,784
Ending balance	$	112,250	$	35,138	$	101,467	$	248,855	$	1,529,063	$	1,777,918
December 31, 2018:
Impaired loans	$	1,421	$	2,286	$	90,134	$	93,841	$	—	$	93,841
Nonimpaired loans		78,538		21,930		187		100,655		1,374,592		1,475,247
Ending balance	$	79,959	$	24,216	$	90,321	$	194,496	$	1,374,592	$	1,569,088

(1) Includes loans in bankruptcy and foreclosure less than 90 days past due.

Note 7 — Securitizations, Net

From May 2011 through September 2019, the Company completed eleven securitizations of $2.6 billion of loans, issuing $2.4 billion of securities to third parties through eleven respective Trusts. The Company is the sole beneficial interest holder of the Trusts, which are variable interest entities included in

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the consolidated financial statements. The transactions are accounted for as secured borrowings under U.S. GAAP. The securities are subject to redemption by the Company when the stated principal balance is less than a certain percentage, ranging from 5%–25% of the original stated principal balance of loans at issuance. As a result, the actual maturity dates of the securities issued could be earlier than their respective stated maturity dates, ranging from August 2040 through June 2049.

In July 2019, the Company exercised its redemption option in its 2011-1 securitization and purchased the remaining note principal balance for approximately $2.7 million. The 2011-1 securitization agreement allows for the Company, as issuer, to purchase the remaining note principal balance once the balance is 5% or less of the original issued balance.

The outstanding balance, net of discounts and deals costs, of the securities as of September 30, 2019 and December 31, 2018 was $1.4 billion and $1.2 billion, respectively.

Note 8 — Other Debt

The secured financing and warehouse repurchase facilities were utilized to finance the origination and purchase of commercial real estate mortgage loans. Warehouse repurchase facilities are designated to fund mortgage loans that are originated and purchased within specified underwriting guidelines. These lines of credit fund less than 100% of the principal balance of the mortgage loans originated and purchased, requiring the use of working capital to fund the remaining portion.

(a) Secured Financing, Net (Corporate Debt)

On December 18, 2014, the Company entered into a five-year, $100.0 million corporate debt agreement with the owners of the Class C preferred units, pursuant to which the Company issued at par senior secured notes, the 2014 Senior Secured Notes, which matures on December 16, 2019. The notes bear interest at either 10% paid in cash or 11% paid in kind on June 15 and December 15 of each year. All principal and paid-in-kind interest are due at maturity. On August 29, 2019, the Company entered into a five-year $153.0 million corporate debt agreement with Owl Rock Capital Corporation, “he “2019 Term Loans”. The 2019 Term Loans under this agreement bear interest at a rate equal to one-month LIBOR plus 7.50% and mature in August 2024. A portion of the net proceeds from the 2019 Term Loans was used to redeem the 2014 Senior Secured Notes for an aggregate amount of approximately $130.2 million, equal to the principal and accrued interest.

As of September 30, 2019, the balance of the 2019 Term Loans was $153.0 million. The balances in the consolidated statements of financial condition are net of debt issuance costs of $7.7 million. The 2019 Term Loans are secured by substantially all assets of the Company not otherwise pledged under a securitization or warehouse and repurchase facility and contain certain reporting and net worth covenants effective December 31, 2019. Should the Company fail to adhere to those covenants or otherwise default under the notes, the lenders have the right to demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of September 30, 2019, the Company was not required to comply with these covenants.

(b) Warehouse Repurchase and Revolving Loan Facilities, Net

The Barclays Repurchase Agreement was originally entered into on May 29, 2015 by and between VCC and Barclays Bank PLC and currently has an extended maturity date of October 23, 2020. The agreement is a short-term borrowing facility, collateralized by a pool of performing loans, with an initial maximum capacity of $250.0 million, and bears interest at one-month LIBOR plus a margin that ranges from 2.75% to 2.875%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. All amounts in excess are returned to VCC. As of September 30, 2019 and December 31, 2018, the effective interest rates were 5.29% and 4.67%, respectively.

The Citibank Repurchase Agreement was originally entered into on May 17, 2013 by and between VCC and Citibank, N.A. and has a current extended maturity date of August 3, 2020. The Agreement is a

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short-term borrowing facility, collateralized by a pool of mainly performing loans, with a maximum capacity of $200.0 million, and bears interest at one-month LIBOR plus 3.00%. All borrower payments on loans financed under the warehouse repurchase facility are first used to pay interest on the facility. All amounts in excess are returned to VCC. As of September 30, 2019 and December 31, 2018, the effective interest rates were 5.35% and 4.54%, respectively.

On September 12, 2018, the Company entered into a three-year secured revolving loan facility agreement with Pacific Western Bank. During the borrowing period, the Company can take loan advances from time to time subject to availability. Each loan advance bears interest at the lesser of the one-month LIBOR Rate plus 3.5% per annum and the maximum rate, which is the highest lawful and non-usurious rate of interest applicable to the loan. The maximum loan amount under this facility is $50 million. As of September 30, 2019, the effective interest rate was 6.48%. There was no interest expense for the year ended December 31, 2018.

Certain of the Company’s loans are pledged as security under the warehouse repurchase facilities and the revolving loan facility, which contain covenants. Should the Company fail to adhere to those covenants or otherwise default under the facilities, the lenders have the right to terminate the facilities and demand immediate repayment that may require the Company to sell the collateral at less than the carrying amounts. As of September 30, 2019 and December 31, 2018, the Company was in compliance with these covenants.

The following table summarizes the maximum borrowing capacity and current gross balances outstanding for the Company’s warehouse facilities as of September 30, 2019 and December 31, 2018 (in thousands):

	September 30, 2019				December 31, 2018
	Balance outstanding(1)		Maximum borrowing capacity		Balance outstanding(1)		Maximum borrowing capacity
Barclays warehouse repurchase agreement	$	194,554	$	250,000	$	94,659	$	250,000
Citibank warehouse repurchase agreement		151,382		200,000		121,701		200,000
Pacific Western credit agreement		3,923		50,000		365		50,000

(1) Warehouse and repurchase facilities amounts in the consolidated statements of financial condition are net of debt issuance costs amounting to $0.7 million and $0.8 million as of September 30, 2019 and December 31, 2018, respectively.

The following table provides an overview of the activity and effective interest rate for the nine months ended September 30, 2019 and 2018 (dollars in thousands):

	Nine Months Ended September 30,
	2019			2018
Warehouse and repurchase facilities:
Average outstanding balance	$	216,613		$	180,536
Highest outstanding balance at any month-end		349,859			319,506
Effective interest rate(1)		5.76	%		5.35	%

(1) Represents annualized interest expense divided by average gross outstanding balance and includes average rate of 5.35% and debt issue cost amortization of 0.41% and average rate of 4.72% and debt issue cost amortization of 0.63% as of September 30, 2019 and 2018, respectively.

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The following table provides a summary of interest expense that includes debt issuance cost amortization, interest, amortization of discount, and deal cost amortization for the periods indicated (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Warehouse and repurchase facilities	$	3,526	$	3,714	$	9,362	$	7,240
Securitizations		18,301		12,714		51,852		37,551
Interest expense — portfolio related		21,827		16,428		61,214		44,791
Interest expense — corporate debt	$	3,842	$	3,328	$	10,548	$	9,985
Total interest expense		25,669		19,756		71,762		54,776

Note 9 — Income Taxes

The effective tax rate was 31.6% and 31.5% for the three months ended September 30, 2019 and 2018, respectively. The effective tax rate was 29.8% for the nine months ended September 30, 2019, compared to 45.7% for the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2018 included an adjustment to establish a 2018 beginning of the year deferred tax position as a result of the Company electing to be treated as a corporation effective January 1, 2018. This adjustment resulted in an increase to the 2018 effective tax rate.

The Company had no valuation allowance as of September 30, 2019 and December 31, 2018. Based on the Company’s estimates of taxable income over the years in which the items giving rise to the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.

Note 10 — Class C Preferred Units

Class C preferred units were issued on December 18, 2014 by the Company bearing a liquidation preference return equal to seven percent (7%) per annum of the Class C base amount of $20 million plus cumulative quarterly returns paid in kind. The Class C return accrues and is payable in arrears in kind quarterly on the last day of each fiscal quarter of each fiscal year and on any date on which a distribution is paid. Each Class C member has the right to convert their Class C preferred units into Class A units without the payment of additional consideration. Prior to December 19, 2016, the Class C preferred units were included in equity. As a result of the issuance of a put option in December 2016, the Company reassessed the revised characteristics of the Class C preferred units and determined the units were more akin to mezzanine equity and reclassified preferred C balances from equity to Class C preferred units on the consolidated statements of financial condition. The put right allows the Class C unit holders at any time from and after the third anniversary until the fifth anniversary of December 19, 2016, the right (but not the obligation) to require the Company to purchase all of the Class C preferred units for a cash payment equal to the aggregate Class C Liquidation Preference Amount of such Class C preferred units as defined by the agreement. The Company also has the right to require Class C members to convert all of each Class C member’s preferred units into Class A units in connection with, and upon consummation of, an initial public offering (IPO). In connection with the 2019 Term Loans, the Company repurchased all outstanding Class C preferred units for an aggregate purchase price equal to the Class C liquidation preference of approximately $27.7 million on August 29, 2019.

Note 11 — Members’ Equity

The Company has the authority to issue four types of membership units, Class A, Class B, Class C, and Class D units. The Class A units represent ownership interests in VF. Class B units are profit interest units, which represent a right to share, with the Class A units, in the distribution of profits earned by VF. The

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Class C and Class D units are preferred units, which have the right to convert to Class A units in VF. The outstanding Class A, Class B and Class D units and equity balance are as follows (in thousands):

	September 30, 2019		December 31, 2018
Class A units issued and outstanding		97,514		97,514
Class A equity balance	$	90,385	$	79,524
Class B units issued and outstanding		16,072		16,072
Class B equity balance	$	—	$	—
Class D units issued and outstanding		60,194		60,194
Class D equity balance	$	60,194	$	60,194

See note (10) on Class C preferred units.

Class A units are issued when capital contributions are made to the Company in the form of cash. Class B units have been issued as part of the Velocity Financial, LLC 2012 Equity Incentive Plan (formerly, Velocity Commercial Capital, LLC 2007 Equity Incentive Plan) (the “2012 Plan”) and are subordinate to the Class A units for purposes of distribution preferences. The Class B units are not entitled to receive profit distributions until all Class A, C, and D unit holders have received the stated value of their equity. Therefore, the value of the Class B units as of September 30, 2019 and December 31, 2018 was zero.

As of September 30, 2019 and December 31, 2018, the majority owner owned approximately 95 million Class A units representing an ownership interest of approximately 97.4% of the Class A units. Representatives of the majority owner currently hold five of seven seats on the Company’s board of managers.

Class B units vest over a three-year period. Under the 2012 Plan, approximately 16.1 million Class B units were authorized for grant. As of September 30, 2019 and December 31, 2018, there were 16.1 million units issued and outstanding. The following table summarizes the activity in Class B units as of September 30, 2019 and December 31, 2018 and the periods then ended (in thousands):

	September 30, 2019		December 31, 2018
Beginning balance		16,072		16,072
Awards granted		—		—
Awards canceled		—		—
Ending balance		16,072		16,072
Vested units		13,406		10,741

Class B units are last in the waterfall for distributions and profit sharing upon liquidation. As the value of the Class B units awarded is zero, no share-based compensation expenses have been recognized in the consolidated statements of income for the nine months ended September 30, 2019 and 2018.

The Company issued 60 million Class D preferred units at one dollar per share on December 19, 2016. On March 6, 2017, the Company issued an aggregate of 193,989 Class D preferred units at one dollar per unit to two investors. The Class D preferred units earn a return equal to sixteen percent (16%) per annum of the Class D Base Amount (purchase price amount plus cumulative quarterly returns paid in kind) with respect to such member’s Class D preferred units until December 19, 2019 and, from and after such date, an amount equal to fifteen percent (15%) per annum of the Class D Base Amount. The Class D return accrues and is payable in arrears in kind quarterly on the last day of each fiscal quarter of each fiscal year and on any date on which a distribution is paid. For the nine months ended September 30, 2019 and 2018, the Class D returns paid in kind were $10.3 million and $8.8 million, respectively. Each Class D member has the right to convert their Class D preferred units into Class A units without the payment of additional consideration. The Company also has the right to require Class D members to convert all of each Class D member’s preferred units into Class A units in connection with, and upon consummation of, an IPO. As of

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September 30, 2019 and December 31, 2018, each Class D preferred unit is convertible into a number of Class A units at a conversion price of $0.876971 per Class D preferred unit. Certain corporate matters and business decisions require the consent of the Class D unit holders. As of September 30, 2019 and December 31, 2018, representatives of Class D members held one of seven seats on the Company’s board of managers. The Class D Units liquidation preference amount was $93.1 million and $82.8 million as of September 30, 2019 and December 31, 2018, respectively.

Note 12 — Commitments and Contingencies

(a) Leases

The Company leases office space in California, Pennsylvania, Virginia, Massachusetts, Florida, Texas, and Washington. The noncancelable operating leases range from three to five years. Rental payments are accounted for on a straight-line basis based on minimum annual amounts plus escalation amounts to adjust for inflation. The Company leases certain office equipment under noncancelable operating leases.

(b) Repurchase Liability

When the Company sells loans, it is required to make normal and customary representations and warranties about the loans to the purchaser. The loan sale agreements generally require the Company to repurchase loans if the Company breaches a representation or warranty given to the loan purchaser. In addition, the Company may be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a loan shortly after its sale.

The Company records a repurchase liability relating to representations and warranties and early payment defaults. The method used to estimate the liability for repurchase is a function of the representations and warranties given and considers a combination of factors, including, but not limited to, estimated future defaults and loan repurchase rates and the potential severity of loss in the event of defaults. The Company establishes a liability at the time loans are sold and continually updates the estimated repurchase liability. The level of the repurchase liability for representations and warranties and early payment default requires considerable management judgment.

(c) Legal Proceedings

The Company is a party to various legal proceedings in the normal course of business. The Company, after consultation with legal counsel, believes the disposition of all pending litigation will not have a material effect on the Company’s consolidated financial condition or results of operations.

Note 13 — Leases

The Company adopted ASU 2016-02, Leases (Topic 842) and all subsequent related ASUs using the alternative transition method effective January 1, 2019. The Company has elected the package of practical expedients that permits the Company to not reassess prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all leases.

The Company determines if a contract arrangement is a lease at inception. The Company primarily enters into operating lease contracts for office space and certain equipment. As part of the property lease agreements, the Company may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The ROU lease asset also includes any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not possess any leases that have variable lease payments or residual value guarantees.

The Company uses its incremental borrowing rates ranging from 5.26% to 6.01% to determine the present value of its lease liabilities. The Company’s leases have remaining terms ranging from 2 years to 5

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years, and the weighted average remaining lease term was 3.9 years as of September 30, 2019. Short-term leases (initial term of less than 12 months) are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term.

As of September 30, 2019, the Company recorded a ROU asset of $5.8 million, net of accumulated amortization of $0.8 million. Operating lease expense was $0.3 million and $1.0 million for the three months and nine months ended September 30, 2019, respectively, and included short-term leases that were immaterial. Operating cash flows from operating leases were $1.0 million for the nine months ended September 30, 2019.

The following table presents maturities of operating lease liabilities as of September 30, 2019 (in thousands):

	Operating Leases
Remaining 2019	$	276
2020		1,448
2021		1,489
2022		1,471
2023		1,291
Thereafter		980
Total lease payments		6,955
Less: Imputed interest		(923	)
Present value of lease liabilities	$	6,032

Total minimum lease payments for all leases as of December 31, 2018 are as follows (in thousands):

	Lease payments
2019	$	1,065
2020		674
2021		534
2022		463
2023		206
Thereafter		217

Note 14 — Retirement Plan

The Company maintains a qualified 401(k) retirement plan in accordance with the Code. Employees meeting certain eligibility requirements as detailed in the plan document may participate by deferring eligible compensation into the plan. The plan allows for discretionary employer matching contribution. For the nine months ended September 30, 2019 and 2018, the Company expensed $267 thousand and $299 thousand, respectively.

Note 15 — Related Party Transactions

In the ordinary course of business, the Company sells held for sale loans to various financial institutions. From time to time, the Company sells held for sale loans to an affiliate of a Class D preferred unit holder.

In 2014, the Company entered into a five-year, $100.0 million corporate debt agreement with the owners of Class C preferred units, pursuant to which the Company issued at par senior secured notes that mature on December 16, 2019. The 2014 senior secured notes bear interest, at our election, at either 10% annually paid in cash or 11% annually paid in kind. On August 29, 2019, the Company redeemed the

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outstanding balance, including paid-in-kind interests of the 2014 senior secured notes. As of September 30, 2019, the 2014 senior secured notes balance was zero. The 2014 senior secured notes balance, including paid-in-kind interests, was $127.6 million as of December 31, 2018 and is presented within secured financing, net on the consolidated statements of financial condition.

Note 16 — Fair Value Measurements

(a) Fair Value Determination

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

• Level 1 — Valuation is based on quoted prices for identical instruments traded in active markets.

• Level 2 — Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.

• Level 3 — Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants would use in pricing the assets or liabilities.

Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.

Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurement date.

(b) Cash and Cash Equivalents and Restricted Cash

Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

(c) Loans Held for Investment

Loans held for investment are recorded at their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for loan losses.

The Company determined the fair value estimate of loans held for investment using a cash flow model incorporating the latest securitization execution prices as a proxy, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are interest rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement.

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(d) Impaired Loans

Nonaccrual loans held for investment are considered impaired and are measured and recorded at fair value on a nonrecurring basis. Impaired loans are reviewed individually for the amount of impairment, if any. To the extent a loan is collateral dependent, the Company measures such impairment based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.

(e) Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The Company uses a discounted cash flow model to estimate the fair value of loans held for sale, a Level 3 measurement.

(f) Interest-Only Strips

The Company retains an interest-only strip on certain sales of held for sale loans. The interest-only strips are classified as trading securities under FASB ASC Topic 320, Investments-Debt Securities. The interest-only strips are measured based on their estimated fair values using a discounted cash flow model, a Level 3 measurement. Changes in fair value are reflected in income as they occur.

(g) Loans Held for Investment, at Fair Value

The Company has elected to account for certain purchased distressed loans held for investment, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

The Company uses a modified discounted cash flow model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

(h) Real Estate Owned, Net (REO)

Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.

(i) Secured Financing, Net (Corporate Debt)

The Company determined the fair value estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

(j) Warehouse Repurchase Facilities, Net

Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

(k) Securitizations, Net

The fair value estimate of securities issued is determined by using estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

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(l) Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

The Company does not have any off-balance sheet financial instruments.

(m) Fair Value Disclosures

The following tables present information on assets measured and recorded at fair value as of September 30, 2019 and December 31, 2018, by level, in the fair value hierarchy (in thousands):

	Fair value measurements using						Total at fair value
September 30, 2019	Level 1		Level 2		Level 3
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	2,936	$	2,936
Interest-only strips		—		—		694		694
Total recurring fair value measurements		—		—		3,630		3,630
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		170,440		170,440
Real estate owned, net		—		—		15,806		15,806
Impaired loans requiring specific allowance, net		—		—		7,422		7,422
Total nonrecurring fair value measurements		—		—		193,668		193,668
Total assets	$	—	$	—	$	197,298	$	197,298

	Fair value measurements using						Total at fair value
December 31, 2018	Level 1		Level 2		Level 3
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	3,463	$	3,463
Interest-only strips		—		—		812		812
Total recurring fair value measurements		—		—		4,275		4,275
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		78,446		78,446
Real estate owned, net		—		—		7,167		7,167
Impaired loans requiring specific allowance, net		—		—		5,647		5,647
Total nonrecurring fair value measurements		—		—		91,260		91,260
Total assets	$	—	$	—	$	95,535	$	95,535

The following table presents the total change in value of assets measured on a nonrecurring basis for which a fair value adjustment has been included on the consolidated statement of income for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine Months Ended September 30,
Gain (loss) on assets measured on a nonrecurring basis	2019			2018
Loans held for sale, net	$	84		$	—
Real estate owned, net		(572	)		(846	)
Impaired loans requiring specific allowance, net		(103	)		352
Total net loss	$	(591	)	$	(494	)

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The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of September 30, 2019 and December 31, 2018 (dollars in thousands):

September 30, 2019
Asset category	Fair value		Primary valuation technique		Unobservable input	Range	Weighted average
Collateral dependent impaired loans requiring specific allowance, net	$	7,422		Market comparables	Selling costs	8%	8%
Real estate owned, net		15,806		Market comparables	Selling costs	8%	8%
Loans held for investment, at fair value		2,936		Discounted cash flow	Discount rate	10.5%	10.5%
					Collateral value (% of UPB)	15% to 93%	86%
					Timing of resolution/payoff (months)	8 to 221	68
					Prepayment rate	15%	15%
					Default rate	1%	1%
					Loss severity rate	10%	10%
Interest-only strips		694		Discounted cash flow	Discount rate	15%	15%
					Timing of resolution/payoff (months)	0 to 12	4.6

December 31, 2018
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Collateral dependent impaired loans requiring specific allowance, net	$	5,647	Market comparables	Selling costs	8%	8%
Real estate owned, net		7,167	Market comparables	Selling costs	8%	8%
Loans held for investment, at fair value		3,463	Discounted cash flow	Discount rate	10.5%	10.5%
				Collateral value (% of UPB)	-40% to 100%	86%
				Timing of resolution/payoff (months)	1 to 230	64.2
				Prepayment rate	20%	20%
				Default rate	1%	1%
				Loss severity rate	10%	10%
Interest-only strips		812	Discounted cash flow	Discount rate	15%	15%
				Timing of resolution/payoff (months)	1 to 12	8.4

F-56

The following is a rollforward of loans that are measured at estimated fair value on a recurring basis for the nine months ended September 30, 2019 and the year ended December 31, 2018 (in thousands):

	Nine Months Ended September 30, 2019			Year Ended December 31, 2018
Beginning balance	$	3,463		$	4,632
Loans liquidated		(421	)		(895	)
Principal paydowns		(55	)		(515	)
Total unrealized (loss) gain included in net income		(51	)		241
Ending balance	$	2,936		$	3,463

The following is a rollforward of interest-only strips that are measured at estimated fair value on a recurring basis for the nine months ended September 30, 2019 and the year ended December 31, 2018 (in thousands):

	Nine Months Ended September 30, 2019			Year Ended December 31, 2018
Beginning balance	$	812		$	369
Interest-only strip additions		1,633			1,314
Interest-only strip write-offs		(1,630	)		(97	)
Total unrealized loss included in net income		(122	)		(774	)
Ending balance	$	694		$	812

The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are impaired. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of September 30, 2019 and December 31, 2018, the only financial assets measured at fair value were certain impaired loans held for investment, loans held for sale, interest-only strips, REO and FVO loans, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Impaired loans were carried at approximately $7.4 million and $5.6 million as of September 30, 2019 and December 31, 2018, net of specific allowance for loan losses of approximately $0.7 million and $0.6 million, respectively.

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above.

F-57

The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated (in thousands):

	September 30, 2019
Asset category	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Assets:
Cash	$	8,849	$	8,849	$	—	$	—	$	8,849
Restricted cash		3,152		3,152		—		—		3,152
Loans held for sale, net		170,440		—		—		170,440		170,440
Loans held for investment, net		1,775,935		—		—		1,823,421		1,823,421
Loans held for investment, at fair value		2,936		—		—		2,936		2,936
Accrued interest receivable		12,450		12,450		—		—		12,450
Liabilities:
Secured financing, net	$	145,285	$	—	$	—	$	153,000	$	153,000
Warehouse repurchase facilities, net		349,115		349,859		—		—		349,859
Securitizations, net		1,377,733		—		—		1,422,156		1,422,156
Accrued interest payable		7,797		7,797		—		—		7,797

	December 31, 2018
Asset category	Carrying Value		Level 1		Level 2		Level 3		Estimated Fair Value
Assets:
Cash	$	15,008	$	15,008	$	—	$	—	$	15,008
Restricted cash		1,669		1,669		—		—		1,669
Loans held for sale, net		78,446		—		—		79,335		79,335
Loans held for investment, net		1,567,408		—		—		1,609,860		1,609,860
Loans held for investment, at fair value		3,463		—		—		3,463		3,463
Accrued interest receivable		10,096		10,096		—		—		10,096
Liabilities:
Secured financing, net	$	127,040	$	—	$	—	$	122,631	$	122,631
Warehouse repurchase facilities, net		215,931		215,931		—		—		215,931
Securitizations, net		1,202,202		—		—		1,222,677		1,222,677
Accrued interest payable		5,651		5,651		—		—		5,651

Note 17 — Subsequent Events

The Company completed the securitization of $162.5 million of loans on October 11, 2019 which is accounted for as a secured borrowing.

The Company sold its remaining retained interests in securitization 2014-1 for approximately $9.7 million in October 2019.

The Company renewed the Barclays Repurchase Agreement on October 25, 2019. The maturity date was extended to October 23, 2020, and all other material terms were retained..

The Company has evaluated events that have occurred subsequent to September 30, 2019 through November 4, 2019 and has concluded there are no other subsequent events that would require recognition or disclosure in the accompanying consolidated financial statements.

F-58

Through and including                 , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than the underwriting discount, payable by the registrant in connection with the sale and distribution of the securities being registered. All amounts are estimated except the SEC registration fee, the FINRA filing fee and the NYSE listing fee.

	Amount to be paid
SEC Registration Fee	$	17,315
FINRA Filing Fee		49,850
Initial NYSE Listing Fee		25,000
Legal Fees and Expenses		3,071,241
Accounting Fees and Expenses		423,424
Printing Fees and Expenses		685,372
Blue Sky Fees and Expenses		5,000
Transfer Agent and Registrar Fees		5,000
Miscellaneous Expenses		787,970
Total	$	5,070,172

Item 14. Indemnification of Directors and Officers

Section 102(b)(7) of the Delaware General Corporation Law, or the DGCL, allows a corporation to provide in its certificate of incorporation that a director of the corporation will not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except where the director breached the duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our certificate of incorporation will provide for this limitation of liability.

Section 145 of the DGCL, or Section 145, provides, among other things, that a Delaware corporation may indemnify any person who was, is or is threatened to be made, party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer, director, employee or agent of such corporation or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. A Delaware corporation may indemnify any persons who were or are a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person is or was a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation’s best interests, provided further that no indemnification is permitted without judicial approval if the officer, director, employee or agent is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses (including attorneys’ fees) which such officer or director has actually and reasonably incurred.

II-1

Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the corporation would otherwise have the power to indemnify such person under Section 145.

Our bylaws will provide that we must indemnify and advance expenses to our directors and officers to the full extent authorized by the DGCL.

Further, upon the completion of this offering, we intend to enter into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in our amended and restated bylaws or the DGCL. Such agreements may require us, among other things, to advance expenses and otherwise indemnify our executive officers and directors against certain liabilities that may arise by reason of their status or service as executive officers or directors, to the fullest extent permitted by law. We intend to enter into indemnification agreements with any new directors and executive officers in the future.

The indemnification rights set forth above shall not be exclusive of any other right which an indemnified person may have or hereafter acquire under any statute, any provision of our amended and restated certificate of incorporation, our bylaws, agreement, vote of stockholders or disinterested directors or otherwise. Notwithstanding the foregoing, we shall not be obligated to indemnify a director or officer in respect of a proceeding (or part thereof) instituted by such director or officer, unless such proceeding (or part thereof) has been authorized by the board of directors pursuant to the applicable procedure outlined in the bylaws.

Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held jointly and severally liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

We expect to maintain standard policies of insurance that provide coverage (1) to our directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to indemnification payments that we may make to such directors and officers.

The underwriting agreement provides for indemnification by the underwriters of us and our officers and directors, and by us of the underwriters, for certain liabilities arising under the Securities Act or otherwise in connection with this offering.

Item 15. Recent Sales of Unregistered Securities

Set forth below is information regarding shares of our capital stock issued by us within the past three years that were not registered under the Securities Act. Also included is the consideration, if any, received by us for such shares of capital stock and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.

Class B Units

On May 19, 2017, the Company issued an aggregate of 7,566,872 Class B units to eight employees pursuant to its 2012 Equity Incentive Plan. On September 30, 2017, the Company issued 400,000 Class B units to one employee pursuant to its 2012 Equity Incentive Plan. On August 14, 2017, the Company issued 30,000 Class B units to one employee pursuant to its 2012 Equity Incentive Plan. Each of these Class B unit issuances were made pursuant to the Velocity Financial, LLC 2012 Equity Incentive Plan in reliance on the exemption provided by Rule 701 promulgated under the Securities Act.

II-2

Class D Units

On December 19, 2016, the Company issued 60,000,000 Class D units at $1.00 per unit to one investor. On March 6, 2017, the Company issued an aggregate of 193,989 Class D units at $1.00 per unit to two investors. Each of these Class D sales were conducted pursuant to Section 4(a)(2) under the Securities Act, relating to transactions by an issuer not involving any public offering.

All recipients of Class B units and Class D units described in this Item 15 received adequate information about the Company or had access, through employment or other relationships, to such information.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits.    See Exhibit Index immediately preceding the signature page hereto which is incorporated by reference as if fully set forth herein.

(b) Financial Statement Schedules.    Schedule IV - Mortgage Loans on Real Estate is included as Note 21 to the Company’s Audited Consolidated Financial Statements.

Item 17. Undertakings

(1)    Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

(2)    The undersigned registrant hereby undertakes that:

(a)    For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus as filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(b)    For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-3

EXHIBIT INDEX

Exhibit Number	Description
1.1	Form of Underwriting Agreement
2.1	Form of Plan of Conversion
2.2	Form of Certificate of Conversion
3.1	Form of Certificate of Incorporation of Velocity Financial, Inc.
3.2	Form of Bylaws of Velocity Financial, Inc.+
4.1	Form of Stock Certificate for Common Stock+
5.1	Form of Opinion of Simpson Thacher & Bartlett LLP
10.1	Form of Stockholders Agreement+
10.2	Form of Registration Rights Agreement+
10.3	Velocity Financial, LLC 2012 Equity Incentive Plan*+
10.4	Form of Class B Unit Award Agreement under the 2012 Equity Incentive Plan*+
10.5	Velocity Financial, Inc. 2020 Omnibus Incentive Plan*
10.6	Form of Nonqualified Stock Option Award Notice and Agreement under the 2020 Omnibus Incentive Plan*
10.7	Form of Nonqualified Stock Option Award Notice and Agreement (Director Grant-IPO) under the 2020 Omnibus Incentive Plan*
10.8	Form of Nonqualified Stock Option Award Notice and Agreement (Executive Officer Grant-IPO) under the 2020 Omnibus Incentive Plan*
10.9	Form of Restricted Stock Unit Grant and Agreement (Director Grant) under the 2020 Omnibus Incentive Plan*
10.10	Form of Restricted Stock Unit Grant and Agreement (Standard Grant) under the 2020 Omnibus Incentive Plan*
10.11	Form of Restricted Stock Grant and Agreement under the 2020 Omnibus Incentive Plan*
10.12	Offer Letter between the Registrant and Mark Szczepaniak, dated as of April 27, 2017*+
10.13	Offer Letter between the Registrant and Graham Comley, dated as of July 26, 2016*+
10.14	Amended and Restated Master Purchase Agreement between Velocity Commercial Capital, LLC and Barclays Bank PLC, dated July 13, 2018+
10.15	Amendment Number One to the Amended and Restated Master Purchase Agreement between Velocity Commercial Capital, LLC and Barclays Bank PLC, dated July 13, 2018, as amended October 26, 2018+
10.16	Amendment Number Two to the Amended and Restated Master Purchase Agreement, between Velocity Commercial Capital, LLC and Barclays Bank PLC, dated July 13, 2018, as amended March 25, 2019+
10.17	Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013+
10.18	Amendment Number One to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended September 10, 2013+
10.19	Amendment Number Two to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended May 14, 2014+
10.20	Amendment Number Three to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended June 16, 2014+
10.21	Amendment Number Four to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended December 18, 2014+

II-4

Exhibit Number	Description
10.22	Amendment Number Five to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended February 26, 2015+
10.23	Amendment Number Six to the Master Repurchase Agreement, between Velocity Commercial Capital LLC, and Citibank, N.A., dated May  17, 2013, as amended May 29, 2015+
10.24	Amendment Number Seven to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended June 15, 2015+
10.25	Amendment Number Eight to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended February 3, 2016+
10.26	Amendment Number Nine to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended June 13, 2016+
10.27	Amendment Number Ten to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended June 13, 2016+
10.28	Amendment Number Eleven to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended July 15, 2016+
10.29	Amendment Number Twelve to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended July 22, 2016+
10.30	Amendment Number Thirteen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended July 21, 2017+
10.31	Amendment Number Fourteen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended June 19, 2018+
10.32	Amendment Number Fifteen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended July 19, 2018+
10.33	Amendment Number Sixteen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended August 10, 2018+
10.34	Amendment Number Seventeen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended August 31, 2018+
10.35	Amendment Number Eighteen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended December 19, 2018+
10.36	Amendment Number Nineteen to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May 17, 2013, as amended August 5, 2019+
10.37	Amendment Number Twenty to the Master Repurchase Agreement, between Velocity Commercial Capital, LLC and Citibank, N.A., dated May  17, 2013, as amended October 4, 2019+

II-5

Exhibit Number	Description
10.38	Credit Agreement among Velocity Financial, LLC, Velocity Commercial Capital, LLC and Owl Rock Capital Corporation, dated August  29, 2019+
10.39	Amendment No. 1 to the Credit Agreement among Velocity Financial, LLC, Velocity Commercial Capital, LLC and Owl Rock Capital Corporation, dated as of October 15, 2019+
10.40	Form of Officer and Director Indemnity Agreement+
10.41	Amendment Number Three to the Amended and Restated Master Purchase Agreement, between Velocity Commercial Capital, LLC and Barclays Bank PLC, dated July 13, 2018, as amended October 25, 2019+
21.1	List of Subsidiaries of the Registrant+
23.1	Consent of Simpson Thacher & Bartlett LLP (included in Exhibit 5.1)
23.2	Consent of KPMG LLP
23.3	Consent of John Burns Real Estate Consulting, LLC+
23.4	Consent of Boxwood Means, LLC+
24.1	Power of Attorney (included in the signature page)+
99.1	Rule 438 Consent of John P. Pitstick+
99.2	Rule 438 Consent of Joy L. Schaefer

* Management contract or compensatory plan or arrangement.

+ Previously filed.

II-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Westlake Village, State of California, on January 6, 2020.

VELOCITY FINANCIAL, LLC
By:	/s/ Christopher D. Farrar
Name:	Christopher D. Farrar
Title:	Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement and power of attorney have been signed by the following persons in the capacities indicated on January 6, 2020.

Signature	Title
/s/ Christopher D. Farrar Christopher D. Farrar	Chief Executive Officer and Manager (Principal Executive Officer)
/s/ Mark R. Szczepaniak Mark R. Szczepaniak	Chief Financial Officer (Principal Financial Officer)
/s/ Christopher J. Oltmann Christopher J. Oltmann	Chief Accounting Officer (Principal Accounting Officer)
* Alan H. Mantel	Manager
* Ian Snow	Manager
* John Pless	Manager
* Brandon Kiss	Manager
* Ogden Phipps	Manager
* Daniel Ballen	Manager

*By:	/s/ Christopher D. Farrar
	Name: Christopher D. Farrar
	Title: Attorney-in-fact

II-7

EX-1.1

Exhibit 1.1

VELOCITY FINANCIAL, LLC

[            ] Shares of Common Stock

UNDERWRITING AGREEMENT

Dated:                     , 2020

Table of Contents

	Page
SECTION 1. Representations and Warranties		2
SECTION 2. Sale and Delivery to Underwriters; Closing		13
SECTION 3. Covenants of the Company		14
SECTION 4. Payment of Expenses		18
SECTION 5. Conditions of Underwriters’ Obligations		19
SECTION 6. Indemnification		22
SECTION 7. Contribution		24
SECTION 8. Representations, Warranties and Agreements to Survive Delivery		24
SECTION 9. Termination of Agreement		25
SECTION 10. Default by One or More of the Underwriters		25
SECTION 11. Notices		26
SECTION 12. Recognition of the U.S. Special Resolution Regimes		26
SECTION 13. Parties		26
SECTION 14. GOVERNING LAW AND TIME		27
SECTION 15. Effect of Headings		27
SECTION 16. Definitions		27
SECTION 17. Permitted Free Writing Prospectuses		30
SECTION 18. Absence of Fiduciary Relationship		30
SECTION 19. Research Analyst Independence		31
SECTION 20. Trial By Jury		31

EXHIBITS

Exhibit A	–	Underwriters
Exhibit B	–	Significant Subsidiaries of the Company
Exhibit C	–	List of Persons Subject to Lock-Up
Exhibit D	–	Form of Lock-Up Agreement
Exhibit E	–	Form of Opinion of Company Counsel
Exhibit F	–	Price-Related Information
Exhibit G	–	Issuer General Use Free Writing Prospectuses

i

VELOCITY FINANCIAL, LLC

[    ] Shares of Common Stock

UNDERWRITING AGREEMENT

                    , 2020

Wells Fargo Securities, LLC

Citigroup Global Markets Inc.

JMP Securities LLC

As Representatives of the several Underwriters

c/o Wells Fargo Securities, LLC

375 Park Avenue

New York, New York 10152

c/o Citigroup Global Markets Inc.

388 Greenwich Avenue

New York, New York 10013

c/o JMP Securities LLC

600 Montgomery Street

San Francisco, California 94111

Ladies and Gentlemen:

Velocity Financial, LLC, a Delaware limited liability company (the “Company”), confirms its agreement with Wells Fargo Securities, LLC (“Wells Fargo”), Citigroup Global Markets Inc. (“Citi”) and JMP Securities LLC (“JMP”) and each of the other Underwriters named in Exhibit A hereto (collectively, the “Underwriters,” which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Wells Fargo, Citi and JMP are acting as representatives (in such capacity, the “Representatives”), with respect to the issue and sale by the Company of a total of [    ] shares (the “Initial Securities”) of the Company’s common stock, par value $0.01 per share (the “Common Stock”), and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of Initial Securities set forth in said Exhibit A hereto, and with respect to the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of [    ] additional shares of Common Stock to cover over-allotments, if any. The Initial Securities to be purchased by the Underwriters and all or any part of the [    ] shares of Common Stock subject to the option described in Section 2(b) hereof (the “Option Securities”) are hereinafter called, collectively, the “Securities.” Certain terms used in this Agreement are defined in Section 16 hereof.

The Company understands that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered.

Promptly after the execution and delivery of this Agreement, the Company will prepare and file with the Commission a prospectus dated                     , 2020 in accordance with the provisions of Rule 430A and Rule 424(b) and the Company has previously advised you of all information (financial and other) that will be set forth therein. Such prospectus, in the form first furnished to the Underwriters for use in connection with the offering of the Securities (whether to meet the request of purchasers pursuant to Rule 173(d) or otherwise), is herein called the “Prospectus.”

Prior to or substantially concurrently with the purchase of the Initial Securities by the Underwriters on the Closing Date referred to in Section 2(c):

(a)    the Stockholder Documents, in the form previously provided to the Representatives, have been executed and delivered by such persons and entities as are required, pursuant to the terms thereunder,

(b)    the Corporate Conversion Documents have been filed with the Secretary of State of Delaware or adopted by the Company, as applicable, giving effect to the Company’s corporate conversion, and

(c)    all Consents and Waivers shall have been obtained and shall be in full force and effect,

all on the terms contemplated by the Pre-Pricing Prospectus, the Prospectus, the Registration Statement and the Disclosure Package.

SECTION 1. Representations and Warranties.

(a)    Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, as of the Applicable Time, as of the Closing Date referred to in Section 2(c) hereof, and as of each Option Closing Date (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows:

(1)    Compliance with Registration Requirements. The Securities have been duly registered under the 1933 Act pursuant to the Registration Statement. Each of the Initial Registration Statement and any post-effective amendments thereto have been declared effective under the 1933 Act and any Rule 462(b) Registration Statement has become effective under the 1933 Act or, not later than 8:00 a.m. (New York City time) on the business day immediately after the date of this Agreement, will become effective under the 1933 Act, and no stop order suspending the effectiveness of the Initial Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. The Initial Registration Statement was initially confidentially submitted to the Commission on December 17, 2018 and initially publicly filed with the Commission on October 18, 2019.

(2)    Registration Statement, Prospectus and Disclosure at Time of Sale. At the respective times that the Initial Registration Statement, any Rule 462(b) Registration Statement and any amendments to any of the foregoing were declared or became effective, as the case may be, and at the Closing Date (and, if any Option Securities are purchased, at the applicable Option Closing Date), the Initial Registration Statement, any Rule 462(b) Registration Statement and any amendments to any of the foregoing complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

At the respective times the Prospectus or any amendment or supplement thereto was filed pursuant to Rule 424(b) or issued, at the Closing Date (and, if any Option Securities are purchased, at the applicable Option Closing Date), and at any time when a prospectus is required (or, but for the provisions of Rule 172, would be required) by applicable law to be delivered in connection with sales of Securities (whether to meet the requests of purchasers pursuant to Rule 173(d) or otherwise), neither the Prospectus nor any amendments or supplements thereto included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

As of the Applicable Time (except in the case of clause (z) below), neither (x) any Issuer General Use Free Writing Prospectuses, if any, issued at or prior to the Applicable Time, the Pre-Pricing Prospectus as of the Applicable Time and the information, if any, included on Exhibit F hereto, all considered together (collectively, the “General Disclosure Package”), nor (y) any individual Issuer Limited Use Free Writing Prospectus, when considered together with the General Disclosure Package, nor (z) any Issuer General Use Free Writing Prospectus issued subsequent to the Applicable Time, when considered together with the General Disclosure Package, included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

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Each preliminary prospectus and the Prospectus and any amendments or supplements to any of the foregoing filed as part of the Registration Statement or any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, or delivered to the Underwriters for use in connection with the offering of the Securities, complied when so filed or when so delivered, as the case may be, in all material respects with the 1933 Act and the 1933 Act Regulations.

The representations and warranties in the preceding paragraphs of this Section 1(a)(2) do not apply to statements in or omissions from the Registration Statement, any preliminary prospectus, the Prospectus or any Issuer Free Writing Prospectus, the General Disclosure Package or any amendment or supplement to any the foregoing made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives expressly for use therein, it being understood and agreed that the only such information furnished by the Underwriters as aforesaid consists of the information described as such in Section 6(c) hereof.

At the respective times that the Initial Registration Statement, any Rule 462(b) Registration Statement or any amendment to any of the foregoing were filed and at the date hereof, the Company was not and is not an “ineligible issuer” as defined in Rule 405, in each case without taking into account any determination made by the Commission pursuant to paragraph (2) of the definition of such term in Rule 405; and, without limitation to the foregoing, the Company has at all relevant times met, meets and will at all relevant times meet the requirements of Rule 164 for the use of a free writing prospectus (as defined in Rule 405) in connection with the offering contemplated hereby.

The copies of the Initial Registration Statement and any Rule 462(b) Registration Statement and any amendments to any of the foregoing and the copies of each preliminary prospectus, each Issuer Free Writing Prospectus that is required to be filed with the Commission pursuant to Rule 433 and the Prospectus and any amendments or supplements to any of the foregoing, that have been or subsequently are delivered to the Underwriters in connection with the offering of the Securities (whether to meet the request of purchasers pursuant to Rule 173(d) or otherwise) were and will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. For purposes of this Agreement, references to the “delivery” or “furnishing” of any of the foregoing documents to the Underwriters, and any similar terms, include, without limitation, electronic delivery.

The Company has made available a “bona fide electronic road show” (as defined in Rule 433(h)) in compliance with Rule 433(d)(8)(ii) such that no filing with the Commission of any “road show” (as defined in Rule 433(h)) is required in connection with the offering of the Securities.

Each Issuer Free Writing Prospectus (if any), as of its issue date and at all subsequent times through the completion of the public offering and sale of the Securities, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, any preliminary prospectus or the Prospectus that has not been superseded or modified.

The Company has filed publicly on EDGAR at least 15 calendar days prior to the commencement of any “road show” (as defined in Rule 433 under the Securities Act), any confidentially submitted registration statement and registration statement amendments relating to the offer and sale of the Common Stock.

(3)    Pre-Closing Transactions. Prior to the purchase of the Initial Securities on the Closing Date, the Pre-Closing Transactions shall have been consummated on the terms contemplated by this Agreement, the Pre-Pricing Prospectus and the Prospectus, and the Corporate Conversion Documents, the Stockholder Documents and the Consents and Waivers shall be in full force and effect as of the Closing Date.

(4)    Independent Accountants. KPMG LLP, who certified the financial statements and any supporting schedules included in the Registration Statement, the General Disclosure Package and the Prospectus, are independent public accountants as required by the 1933 Act, the 1933 Act Regulations and the PCAOB.

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(5)    Financial Statements. The financial statements of the Company and its consolidated subsidiaries included in the Registration Statement, the General Disclosure Package and the Prospectus, together with the related schedules (if any) and notes, present fairly in all material respects the financial position of the Company and its consolidated subsidiaries at the dates indicated and the results of operations, changes in stockholders’ equity and cash flows of the Company and its consolidated subsidiaries for the periods specified; and all such financial statements have been prepared in conformity with GAAP applied on a consistent basis throughout the periods involved and comply with all applicable accounting requirements under the 1933 Act and the 1933 Act Regulations. The supporting schedules, if any, included in the Registration Statement present fairly in all material respects, in accordance with GAAP, the information required to be stated therein. The information in the Pre-Pricing Prospectus and the Prospectus under the captions “Summary Consolidated Financial and Other Information” and “Selected Consolidated Financial Information” presents fairly in all material respects the information shown therein and has been compiled on a basis consistent with that of the audited financial statements of the Company and its consolidated subsidiaries included in the Registration Statement, the General Disclosure Package and the Prospectus. All “non-GAAP financial measures” (as such term is defined in the rules and regulations of the Commission), if any, contained in the Registration Statement, the General Disclosure Package and the Prospectus comply with Item 10 of Regulation S-K of the Commission, to the extent applicable.

(6)    No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus (in each case exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), (A) there has been no material adverse change or any development that could reasonably be expected to result in a material adverse change in the condition (financial or other), results of operations, business, management or prospects of the Company and its subsidiaries taken as a whole, whether or not arising in the ordinary course of business (in any such case, a “Material Adverse Effect”); (B) except as otherwise disclosed in the General Disclosure Package and the Prospectus (in each case exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), neither the Company nor any of its subsidiaries has incurred any liability or obligation or entered into any transaction or agreement that, individually or in the aggregate, is material with respect to the Company and its subsidiaries, taken as a whole, and neither the Company nor any of its subsidiaries has sustained any loss or interference with its business or operations from fire, explosion, flood, earthquake or other natural disaster or calamity, whether or not covered by insurance, or from any labor dispute or disturbance or court or governmental action, order or decree which could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect; and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock; provided that, for the avoidance of doubt, no action taken in connection with the Pre-Closing Transactions shall be deemed to constitute a dividend or distribution.

(7)    Good Standing of the Company. The Company (i) has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and (ii) has power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement and (iii) is duly qualified as a foreign corporation to transact business and is in good standing in the State of Delaware and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except (solely in the case of jurisdictions other than the State of Delaware) where the failure so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Effect.

(8)    Good Standing of Subsidiaries. Each of the Company’s “significant subsidiaries” as defined by Rule 1-02 of Regulation S-X that is organized as a corporation, limited or general partnership or limited liability company is listed on Exhibit B hereto. Each such significant subsidiary of the Company

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(i) has been duly organized and is validly existing as a corporation, limited or general partnership or limited liability company, as the case may be, in good standing under the laws of the jurisdiction of its organization, (ii) has power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package or the Prospectus and (iii) is duly qualified as a foreign corporation, limited or general partnership or limited liability company, as the case may be, to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, all of the issued and outstanding shares of capital stock of each such subsidiary that is a corporation, all of the issued and outstanding partnership interests of each such subsidiary that is a limited or general partnership and all of the issued and outstanding limited liability company interests, membership interests or other similar interests of each such subsidiary that is a limited liability company have been duly authorized and validly issued, are fully paid and (except in the case of general partnership interests) non-assessable and are owned by the Company, directly or through subsidiaries, free and clear of any Lien; and none of the issued and outstanding shares of capital stock of any such subsidiary that is a corporation, none of the issued and outstanding partnership interests of any such subsidiary that is a limited or general partnership, and none of the issued and outstanding limited liability company interests, membership interests or other similar interests of any such subsidiary that is a limited liability company was issued in violation of any preemptive rights, rights of first refusal or other similar rights of any securityholder of such subsidiary or any other person. Exhibit B hereto accurately sets forth whether each such significant subsidiary of the Company is a corporation, limited or general partnership or limited liability company and the jurisdiction of organization of each such subsidiary and, in the case of any significant subsidiary which is a partnership or limited liability company, its general partners and managing members, respectively. The only subsidiaries of the Company are (A) the subsidiaries of the Company listed on Exhibit 21 to the Registration Statement and (B) certain other subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a “significant subsidiary,” as defined in Rule 1-02 of Regulation S-X.

(9)    Capitalization. The authorized, issued and outstanding capital stock of the Company as of September 30, 2019 is as set forth in the column entitled “Actual” and in the corresponding line items under the caption “Capitalization” in the Pre-Pricing Prospectus and the Prospectus and, at the time of the purchase of the Initial Securities by the Underwriters on the Closing Date and as of each Option Closing Date (if any), the authorized, issued and outstanding capital stock of the Company will be as set forth in the column entitled “Pro Forma As Adjusted” and in the corresponding line items under such caption (in each case except for any Option Securities issued by the Company pursuant to this Agreement and issuances, if any, subsequent to the date of this Agreement pursuant to employee or director stock option, stock purchase or other equity incentive plans described in the Pre-Pricing Prospectus and the Prospectus upon the exercise of options issued pursuant to any such stock option, stock purchase or other equity incentive plans as so described, or upon the exercise of options or the conversion of convertible securities described in the General Disclosure Package and the Prospectus). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable and were issued in compliance with all applicable foreign, state and federal securities and “blue-sky” laws; and none of the outstanding shares of capital stock of the Company was issued in violation of any preemptive rights, rights of first refusal or other similar rights of any securityholder of the Company or any other person.

(10)    Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company.

(11)    Authorization of Securities. The Securities to be sold by the Company under this Agreement have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued, fully paid and non-assessable; and the issuance and sale of the Securities to be sold by the Company under this Agreement are not subject to any preemptive rights, rights of first refusal or other similar rights of any securityholder of the Company or any other person.

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(12)    Description of Securities. The Common Stock, the authorized but unissued Preferred Stock, all outstanding warrants and convertible securities, and the Company’s charter and bylaws conform in all material respects to the respective statements relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus and such statements conform to the rights set forth in the respective instruments and agreements defining the same.

(13)    Absence of Defaults and Conflicts. Neither the Company nor any of its significant subsidiaries is in violation of (A) its Organizational Documents or (B) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any Company Document, except (solely in the case of Company Documents other than Organizational Documents of the Company or its significant subsidiaries) for such defaults as would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect and would not materially adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement, the General Disclosure Package and the Prospectus (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Pre-Pricing Prospectus and the Prospectus under the caption “Use of Proceeds”) and compliance by the Company with its obligations under this Agreement do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default, Termination Event or Repayment Event under, or result in the creation or imposition of any Lien upon any property or assets of the Company or any of its significant subsidiaries pursuant to, any Company Documents, except (solely in the case of Company Documents other than Subject Instruments) for such conflicts, breaches, defaults or Liens that would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect and would not materially adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement, nor will such action result in any violation of (i) the provisions of the Organizational Documents of the Company or any of its significant subsidiaries or (ii) any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its significant subsidiaries or any of their respective assets, properties or operations, except (solely in the case of clause (ii)) for such violations as would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect and would not materially adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement.

(14)    Absence of Labor Dispute. No labor dispute with the employees of the Company or any subsidiary of the Company exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of the principal suppliers, manufacturers, customers or contractors of the Company or any of its subsidiaries which might reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

(15)    Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries which is required to be disclosed in the Registration Statement, the Pre-Pricing Prospectus or the Prospectus (other than as disclosed therein), or which might reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect or to materially and adversely affect the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations under this Agreement; the aggregate of all pending legal or governmental proceedings to which the Company or any of its subsidiaries is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, the Pre-Pricing Prospectus and the Prospectus, including ordinary routine litigation incidental to the business, would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

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(16)    Accuracy of Descriptions and Exhibits. The information in the Pre-Pricing Prospectus and the Prospectus under the captions “Risk Factors—Risks Related to our Organization and Structure,” Risk Factors—Risks Relating to Regulatory Matters,” “Business—Government Regulation,” “Business—Legal Proceedings,” “Executive Compensation—Long-Term Equity Incentive Compensation,” “Executive Compensation—2020 Omnibus Incentive Plan,” “Certain Relationships and Related Party Transactions,” “Description of Capital Stock,” “Shares Eligible for Future Sale,” and “Certain United States Federal Income and Estate Tax Considerations to Non-U.S. Holders,” and the information in the Registration Statement under Items 14 and 15, in each case to the extent that it constitutes summaries of legal matters, summaries of provisions of the Company’s charter or bylaws or any other instruments or agreements discussed therein, summaries of legal proceedings discussed therein, or legal conclusions, is correct in all material respects; all descriptions in the Registration Statement, the General Disclosure Package and the Prospectus of any other Company Documents are accurate in all material respects; and there are no franchises, contracts, indentures, mortgages, deeds of trust, loan or credit agreements, bonds, notes, debentures, evidences of indebtedness, leases or other instruments, agreements or documents required to be described or referred to in the Registration Statement, the Pre-Pricing Prospectus or the Prospectus or to be filed as exhibits to the Registration Statement which have not been so described and filed as required.

(17)    Possession of Intellectual Property. The Company and its subsidiaries own and possess or have valid and enforceable licenses to use, all patents, patent rights, patent applications, licenses, copyrights, inventions, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, service names, software, internet addresses, domain names and other intellectual property (collectively, “Intellectual Property”) that is described in the Registration Statement, the General Disclosure Package or the Prospectus or that is necessary for the conduct of their respective businesses as currently conducted, as proposed to be conducted and as described in the Registration Statement, the General Disclosure Package and the Prospectus; neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interests of the Company or any of its subsidiaries therein; there are no third parties who have or, to the knowledge of the Company, will be able to establish rights to any Intellectual Property of the Company or any of its subsidiaries, except for, and to the extent of, the ownership rights of the owners of the Intellectual Property which the Registration Statement, the General Disclosure Package and the Prospectus disclose is licensed to the Company or any of its subsidiaries; there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the Company’s or any subsidiary’s rights in or to any such Intellectual Property, or challenging the validity, enforceability or scope of any such Intellectual Property, or asserting that the Company or any subsidiary infringes or otherwise violates, or would, upon the commercialization of any product or service described in the Registration Statement, the General Disclosure Package or the Prospectus, infringe or violate, any Intellectual Property of others, and the Company is unaware of any facts which could form a reasonable basis for any such action, suit, proceeding or claim; the Company and its subsidiaries have complied with the terms of each agreement pursuant to which any Intellectual Property has been licensed to the Company or any subsidiary, all such agreements are in full force and effect, and no event or condition has occurred or exists that gives or, with notice or passage of time or both, would give any person the right to terminate any such agreement; and there is no patent or patent application that contains claims that interfere with the issued or pending claims of any such Intellectual Property of the Company or any of its subsidiaries or that challenges the validity, enforceability or scope of any such Intellectual Property, except, in each case with respect to this Section 1(a)(17), such failures, allegations, actions, proceedings, violations, infringements, or other circumstances as would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

(18)    Absence of Further Requirements. (A) No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, (B) no authorization, approval, vote or consent of any holder of capital stock or other securities of the Company or creditor of the Company or any of its subsidiaries, (C) no authorization,

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approval, waiver or consent under any Company Document, and (D) no authorization, approval, vote or consent of any other person or entity, is necessary or required for the authorization, execution, delivery or performance by the Company of this Agreement, for the offering of the Securities as contemplated by this Agreement, for the issuance, sale or delivery of the Securities to be sold by the Company pursuant to this Agreement, or for the consummation of any of the other transactions contemplated by this Agreement, in each case on the terms contemplated by the Registration Statement, the General Disclosure Package and the Prospectus, except such as have been obtained or filed or shall be obtained or filed prior to the Closing Date and except that no representation is made as to such as may be required under state or foreign securities laws.

(19)    Possession of Licenses and Permits. The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them, except where the failure to possess such Governmental Licenses would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect; and, except as would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect, the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, all such Governmental Licenses are valid and in full force and effect and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses.

(20)    Title to Property. The Company and its subsidiaries have good and marketable title to all real property owned by any of them (if any) and good title to all other properties and assets owned by any of them, in each case, free and clear of all Liens except such as (A) are described in the Registration Statement, the General Disclosure Package and the Prospectus or (B) are not, individually or in the aggregate, material to the Company and its subsidiaries taken as a whole, are not required to be disclosed in the Registration Statement, the Pre-Pricing Prospectus or the Prospectus, do not, individually or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; all real property, buildings and other improvements, and all equipment and other property, held under lease or sublease by the Company or any of its subsidiaries is held by them under valid, subsisting and enforceable leases or subleases, as the case may be, with, solely in the case of leases or subleases relating to real property, buildings or other improvements, such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings or other improvements by the Company and its subsidiaries, and all such leases and subleases are in full force and effect; and neither the Company nor any of its subsidiaries has received any notice of any claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above or affecting or questioning the rights of the Company or any of its subsidiaries to the continued possession of the leased or subleased premises, or to the continued use of the leased or subleased equipment or other property, except for such claims which, if successfully asserted against the Company or any of its subsidiaries, would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.

(21)    Investment Company Act. Neither the Company nor any of its subsidiaries, and upon the issuance and sale of the Securities as herein contemplated and the receipt and application of the net proceeds therefrom as described in the General Disclosure Package and the Prospectus under the caption “Use of Proceeds,” will be, an “investment company” or an entity “controlled” by an “investment company” as such terms are defined in the 1940 Act.

(22)    Environmental Laws. Except as described in the Registration Statement, the General Disclosure Package and the Prospectus and except as would not, individually or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment

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(including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, “Hazardous Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “Environmental Laws”), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws to conduct the business now operated by them and are each in compliance with their requirements, (C) there are no pending or threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, Liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws.

(23)    Absence of Registration Rights. There are no persons with registration rights or other similar rights to have any securities (debt or equity) registered pursuant to the Registration Statement or included in the offering contemplated by this Agreement and there are no persons with co-sale rights, tag-along rights or other similar rights to have any securities (debt or equity) included in the offering contemplated by this Agreement or sold in connection with the sale of Securities, except in each case for such rights that have been duly waived in writing.

(24)    Parties to Lock-Up Agreements. Each of the persons listed on Exhibit C hereto has executed and delivered to the Representatives a lock-up agreement in the form of Exhibit D hereto. Exhibit C hereto contains a true, complete and correct list of all directors, officers and holders of Common Stock or other capital stock of the Company, all holders of options, warrants, convertible debt securities, or other securities convertible into or exercisable or exchangeable for Common Stock or other capital stock of the Company. All stock options that may be issued by the Company at any time during the Lock-Up Period will provide, in each case pursuant to written stock option agreements or similar agreements executed and delivered by the holders of such stock options, that the holders of such stock options will not effect any public sale or distribution (including sales pursuant to Rule 144 under the 1933 Act) of any Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, during the Lock-Up Period; and, during the Lock-Up Period, the Company will not cause or permit any waiver, release, modification or amendment of any such restriction on transfer without the prior written consent of the Representatives other than as permitted by the lock-up agreement.

(25)    NYSE. The outstanding shares of Common Stock and the Securities being sold hereunder by the Company have been approved for listing, subject only to official notice of issuance, on the NYSE.

(26)    FINRA Matters. All of the information provided by the Company to the Representatives or to counsel for the Underwriters in connection with any letters, filings or other supplemental information provided to FINRA pursuant to FINRA Rule 5110 or 5121 is true, complete and correct in all material respects.

(27)    Tax Returns. The Company and its subsidiaries have filed all foreign, federal, state and local tax returns that are required to be filed or have obtained extensions thereof, except where the failure so to file would not, individually or in the aggregate, result in a Material Adverse Effect, and have paid all taxes (including, without limitation, any estimated taxes) required to be paid and any other assessment, fine or penalty, to the extent that any of the foregoing is due and payable, except for any such tax, assessment, fine or penalty that is currently being contested in good faith by appropriate actions and except for such taxes, assessments, fines or penalties the nonpayment of which would not, individually or in the aggregate, result in a Material Adverse Effect.

(28)    Insurance. The Company and its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary

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in the businesses in which they are engaged; all policies of insurance and any fidelity or surety bonds insuring the Company or any of its subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect; the Company and its subsidiaries are in compliance with the terms of such policies and instruments in all material respects; there are no claims by the Company or any of its subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a cost that would not, individually or in the aggregate, result in a Material Adverse Effect.

(29)    Accounting Controls. The Company and its consolidated subsidiaries have taken all actions reasonably necessary to ensure that, within the time period required by applicable law, they will have established and will maintain effective “internal control over financial reporting” (as defined in Rule 13a-15 of the 1934 Act Regulations). The Company and its consolidated subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management’s general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (C) access to assets is permitted only in accordance with management’s general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Registration Statement, the Company is not aware of any material weakness (as defined in Rule 1-02 of Regulation S-X of the Commission) in the Company’s and its subsidiaries’ internal controls over financial reporting (whether or not remediated). The Company and its subsidiaries, on a consolidated basis, maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15 of the 1934 Act Regulations.

(30)    Compliance with the Sarbanes-Oxley Act. The Company has taken all necessary actions such that, upon the effectiveness of the Registration Statement, it will be in compliance with all provisions of the Sarbanes-Oxley Act with which the Company is required to comply as of such time, including Section 402 related to loans.

(31)    Pending Proceedings and Examinations; Comment Letters. The Registration Statement is not the subject of a pending proceeding or examination under Section 8(d) or 8(e) of the 1933 Act, and the Company is not the subject of a pending proceeding under Section 8A of the 1933 Act. The Company has provided the Representatives with true, complete and correct copies of any written comments received from the Commission by the Company or its legal counsel or accountants, and of any transcripts made by the Company, its legal counsel or accountants of any oral comments received from the Commission, with respect to the Registration Statement, any preliminary prospectus, the Prospectus, any Issuer Free Writing Prospectus or any amendments or supplements to any of the foregoing and of all written responses thereto, and no such comments remain unresolved.

(32)    Absence of Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that would constitute or that might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security to facilitate the sale or resale of the Securities.

(33)    Statistical and Market-Related Data. Any statistical, demographic, market-related and similar data included in the Registration Statement, the General Disclosure Package or the Prospectus are based on or derived from sources that the Company believes to be reliable and accurate and accurately reflect the materials upon which such data is based or from which it was derived, and the Company has delivered true, complete and correct copies of such materials to the Representatives.

(34)    No Unlawful Payments. Neither the Company nor any of its subsidiaries nor any director or officer, nor, to the knowledge of the Company, any employee, agent, affiliate or other person associated

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with or acting on behalf of the Company or any of its subsidiaries, in each case acting on behalf of the Company or any of its subsidiaries, is aware of or has taken any action, directly or indirectly, that has resulted or would result in (i) the use of any funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; (ii) the making or taking of an act in furtherance of an offer, promise or authorization of any direct or indirect unlawful payment or benefit to any foreign or domestic government or regulatory official or employee, including of any government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office; (iii) a violation by any such person of any provision of the Foreign Corrupt Practices Act of 1977, as amended, or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offence under the Bribery Act 2010 of the United Kingdom, or any other applicable anti-bribery or anti-corruption laws; or (iv) the making, offering, requesting or taking of, or the agreement to take, an act in furtherance of any unlawful bribe or other unlawful benefit, including, without limitation, any rebate, payoff, influence payment, kickback or other unlawful or improper payment or benefit. The Company and its subsidiaries have instituted, maintain and enforce, and will continue to maintain and enforce policies and procedures designed to promote and ensure compliance with all applicable anti-bribery and anti-corruption laws. Neither the Company nor its subsidiaries will use, directly or indirectly, the proceeds of the offering of Securities for the purpose of funding or facilitating offering, paying, promising to pay or authorizing the payment or giving of money, or anything else of value, to any person in violation of any applicable anti-corruption laws.

(35)    Compliance with Money Laundering Laws. The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements, including those of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the applicable money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by any governmental or regulatory agency (collectively, the “Anti-Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental or regulatory agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Company or any of its subsidiaries is, threatened.

(36)    No Conflicts with Sanction Laws. Neither the Company nor any of its subsidiaries nor any director or officer of the Company or any of its subsidiaries, nor, to the knowledge of the Company, any employee, agent, affiliate or other person associated with or acting on behalf of the Company or its subsidiaries, in each case acting on behalf of the Company or any of its subsidiaries, is currently the subject or the target of any sanctions administered or enforced by the U.S. Government, (including, without limitation, OFAC or the U.S. Department of State and including, without limitation, the designation as a “specially designated national” or “blocked person”), the United Nations Security Council (“UNSC”), the European Union, Her Majesty’s Treasury (“HMT”), or other relevant sanctions authority (collectively, “Sanctions”), nor is the Company, any of its subsidiaries located, organized or resident in a country or territory that is the subject or the target of Sanctions, including, without limitation, Crimea, Cuba, Burma (Myanmar), Iran, North Korea, Sudan and Syria (each, a “Sanctioned Country”); and the Company will not directly or indirectly use any of the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other person or entity (i) to fund or facilitate any activities of or business with any person that, at the time of such funding or facilitation, is the subject or the target of any Sanctions, (ii) to fund or facilitate any activities of or any business in any Sanctioned Country or (iii) in any other manner that could result in a violation by any person (including any person participating in the transaction, whether as underwriter, advisor, investor or otherwise) of any Sanctions.    For the past five years, the Company and its subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not engage in, any dealings or transactions with any person that at the time of the dealing or transaction is or was the subject or the target of any Sanctions or with any Sanctioned Country.

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(37)    ERISA Compliance. None of the following events has occurred or exists: (i) a failure to fulfill the obligations, if any, under the minimum funding standards of Section 302 of ERISA with respect to a Plan (as defined below) determined without regard to any waiver of such obligations or extension of any amortization period; (ii) an audit or investigation by the Internal Revenue Service, the U.S. Department of Labor, the Pension Benefit Guaranty Corporation or any other federal, state or foreign governmental or regulatory agency with respect to the employment or compensation of employees by the Company or any of its subsidiaries that might reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect; or (iii) any breach of any contractual obligation, or any violation of law or applicable qualification standards, with respect to the employment or compensation of employees by the Company or any of its subsidiaries that might reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. None of the following events has occurred or is reasonably likely to occur: (i) a material increase in the aggregate amount of contributions required to be made to all Plans in the current fiscal year of the Company and its subsidiaries compared to the amount of such contributions made in the Company’s most recently completed fiscal year; (ii) a material increase in the “accumulated post-retirement benefit obligations” (within the meaning of Accounting Standards Codification Topic 715-60) of the Company and its subsidiaries compared to the amount of such obligations in the Company’s most recently completed fiscal year; (iii) any event or condition giving rise to a liability under Title IV of ERISA that might reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect; or (iv) the filing of a claim by one or more employees or former employees of the Company or any of its subsidiaries related to its or their employment that might reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. For purposes of this paragraph and the definition of ERISA, the term “Plan” means a plan (within the meaning of Section 3(3) of ERISA) with respect to which the Company or any of its subsidiaries may have any liability.

(38)    [Reserved].

(39)    Changes in Management. Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, none of the persons who were officers or directors of the Company as of the date of the Pre-Pricing Prospectus has given oral or written notice to the Company or any of its subsidiaries of his or her resignation (or otherwise indicated to the Company or any of its subsidiaries an intention to resign within the next 24 months), nor has any such officer or director been terminated by the Company or otherwise removed from his or her office or from the board of directors, as the case may be (including, without limitation, any such termination or removal which is to be effective as of a future date).

(40)    Transfer Taxes. There are no stock or other transfer taxes, stamp duties, capital duties or other similar duties, taxes or charges payable in connection with the execution or delivery of this Agreement by the Company or the issuance or sale by the Company of the Securities to be sold by the Company to the Underwriters hereunder.

(41)    Related Party Transactions. There are no business relationships or related party transactions involving the Company or any of its subsidiaries or, to the knowledge of the Company, any other person that are required that is required by the Securities Act to be described in the Pre-Pricing Prospectus or the Prospectus that have not been described as required.

(42)    Stop Transfer Instructions. The Company has, with respect to any Common Stock (other than the Securities to be sold pursuant to this Agreement) or other capital stock or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock owned or held (of record or beneficially) by any other persons who have entered into or are required to enter into a lock-up agreement in the form of Exhibit D hereto, instructed the transfer agent or other registrar to enter stop transfer instructions and implement stop transfer procedures with respect to such securities during the Lock-Up Period; and, during the Lock-Up Period, the Company will not cause or permit any waiver, release, modification or amendment of any such stop transfer instructions or stop transfer procedures without the prior written consent of the Representatives other than as permitted by the lock-up agreement.

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(43)    Offering Materials. Without limitation to the provisions of Section 17 hereof, the Company has not distributed and will not distribute, directly or indirectly (other than through the Underwriters), any “written communication” (as defined Rule 405 under the 1933 Act) or other offering materials in connection with the offering or sale of the Securities, other than the Pre-Pricing Prospectus, the Prospectus, any amendment or supplements to any of the foregoing that are filed with the Commission and any Permitted Free Writing Prospectuses (as defined in Section 17).

(44)    No Restrictions on Dividends. As of the Closing Date, neither the Company nor any of its subsidiaries will be a party to or otherwise bound by any instrument or agreement that limits or prohibits or could limit or prohibit, directly or indirectly, the Company from paying any dividends or making other distributions on its capital stock, and no subsidiary of the Company is a party to or otherwise bound by any instrument or agreement that limits or prohibits or could limit or prohibit, directly or indirectly, any subsidiary of the Company from paying any dividends or making any other distributions on its capital stock, limited or general partnership interests, limited liability company interests, or other equity interests, as the case may be, or from repaying any loans or advances from, or (except for instruments or agreements that by their express terms prohibit the transfer or assignment thereof or of any rights thereunder) transferring any of its properties or assets to, the Company or any other subsidiary, in each case except as described in the Registration Statement, the General Disclosure Package and the Prospectus.

(45)    Brokers. There is not a broker, finder or other party that is entitled to receive from the Company any brokerage or finder’s fee or other fee or commission as a result of any of the transactions contemplated by this Agreement, except for underwriting discounts and commissions payable to the Underwriters in connection with the sale of the Securities to the Underwriters pursuant to this Agreement.

(46)    Cybersecurity. There has been no security breach or incident, unauthorized access or disclosure, or other compromise of or relating to any of the Company’s and its subsidiaries’ information technology and computer systems, networks, hardware, software, data and databases (including the data and information of their respective customers, employees, suppliers, vendors and any third party data maintained, processed or stored by the Company and its subsidiaries, and any such data processed or stored by third parties on behalf of the Company and its subsidiaries), equipment or technology (collectively, “IT Systems and Data”) and the Company and its subsidiaries have not been notified of, and have no knowledge of any event or condition that would reasonably be expected to result in, any security breach or incident, unauthorized access or disclosure or other com-promise to their IT Systems and Data, except, in each case, for any breach, incident, access, compromise, event or condition that would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. The Company and its subsidiaries are presently in compliance with all applicable laws or statutes and all judgments, orders, rules and regulations of any court or arbitrator or governmental or regulatory authority, internal policies and contractual obligations relating to the privacy and security of IT Systems and Data and to the protection of such IT Systems and Data from unauthorized use, access, misappropriation or modification, except for any failure to comply that would not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. The Company and its subsidiaries have implemented appropriate controls, policies, procedures, and technological safeguards designed to maintain and protect the integrity, continuous operation, redundancy and security of their IT Systems and Data reasonably consistent with industry standards and practices, or as required by applicable regulatory standards.

(b)    Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries (whether signed on behalf of such officer, the Company or such subsidiary) and delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby.

SECTION 2. Sale and Delivery to Underwriters; Closing.

(a)    Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, severally and not jointly, the Initial Securities, and each Underwriter, severally and not jointly, agrees to purchase the respective number of Initial Securities set forth opposite its name in Exhibit A hereto plus any additional number of

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Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, subject to such adjustments among the Underwriters as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional Securities, in each case at a price of $[    ] per share (the “Purchase Price”).

(b)    Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase the Option Securities at a price per share equal to the Purchase Price referred to in Section 2(a) above; provided that the price per share for any Option Securities shall be reduced by an amount per share equal to any dividends or distributions declared, paid or payable by the Company on the Initial Securities but not payable on such Option Securities. The option hereby granted will expire at 11:59 P.M. (New York City time) on the 30th day after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representatives to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (an “Option Closing Date”) shall be determined by the Representatives, but shall not be later than seven full business days after the exercise of said option (unless postponed in accordance with the provisions of Section 10), nor in any event prior to the Closing Date. If the option is exercised as to all or any portion of the Option Securities, the Company will sell to the Underwriters that proportion of the total number of Option Securities then being purchased, and each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Exhibit A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial Securities, subject in each case to such adjustments as the Representatives in their discretion shall make to eliminate any sales or purchases of fractional shares.

(c)    Payment. Payment of the purchase price for, and delivery of, the Initial Securities shall be made at the offices of Clifford Chance US LLP, 31 W. 52^nd Street, New York, NY 10019, or at such other place as shall be agreed upon by the Representatives and the Company, at 9:00 A.M. (New York City time) on                      (unless postponed in accordance with the provisions of Section 10), or such other time not later than five business days after such date as shall be agreed upon by the Representatives and the Company (such time and date of payment and delivery being herein called “Closing Date”).

In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of, such Option Securities shall be made at the above-mentioned offices at 9:00 A.M. (New York City time), or at such other place as shall be agreed upon by the Representatives and the Company, on each Option Closing Date as specified in the notice from the Representatives to the Company.

Payment shall be made to the Company by wire transfer of immediately available funds to a single bank account designated by the Company, in each case against delivery to the Representatives for the respective accounts of the Underwriters of the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Wells Fargo, individually and not as Representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Date or the relevant Option Closing Date, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.

(d)    Delivery of Securities. Delivery of the Initial Securities and any Option Securities shall be made through the facilities of DTC unless the Representatives shall otherwise instruct.

SECTION 3. Covenants of the Company. The Company covenants with each Underwriter as follows:

(a)    Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A and Rule 433 and will notify the

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Representatives immediately, and confirm the notice in writing, (i) when the Initial Registration Statement, any Rule 462(b) Registration Statement or any post-effective amendment to the Registration Statement shall be declared or become effective, or when any preliminary prospectus, the Prospectus, any Issuer Free Writing Prospectus or any amendment or supplement to any of the foregoing shall have been filed or distributed, (ii) of the receipt of any comments from the Commission (and shall promptly furnish the Representatives with a copy of any comment letters and any transcript of oral comments, and shall furnish the Representatives with copies of any written responses thereto a reasonable amount of time prior to the proposed filing thereof with the Commission and will not file any such response to which the Representatives or counsel for the Underwriters shall object), (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, or any Issuer Free Writing Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, the Prospectus, any Issuer Free Writing Prospectus or any amendment or supplement to any of the foregoing, or any notice from the Commission objecting to the use of the form of the Registration Statement or any post-effective amendment thereto, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction or of the loss or suspension of any exemption from any such qualification, or of the initiation or threatening of any proceedings for any of such purposes, or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Company will make every reasonable effort to prevent the issuance of any stop order and the suspension or loss of any qualification of the Securities for offering or sale and any loss or suspension of any exemption from any such qualification, and if any such stop order is issued, or any such suspension or loss occurs, to obtain the lifting thereof at the earliest possible moment.

(b)    Filing of Amendments. The Company will give the Representatives notice of its intention to file or prepare any amendment to the Registration Statement, any Rule 462(b) Registration Statement, any Issuer Free Writing Prospectus or any amendment, supplement or revision to any preliminary prospectus, the Prospectus or any Issuer Free Writing Prospectus, whether pursuant to the 1933 Act or otherwise, and the Company will furnish the Representatives with copies of any such documents within a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall object. The Company will give the Representatives notice of its intention to make any filing pursuant to the 1934 Act or the 1934 Act Regulations from the Applicable Time through the Closing Time (or, if later, through the end of the period during which the Prospectus is required (or, but for the provisions of Rule 172, would be required) to be delivered by applicable law (whether to meet the requests of purchasers pursuant to Rule 173(d) or otherwise)) and will furnish the Representatives with copies of any such documents a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representatives or counsel for the Underwriters shall object.

(c)    Delivery of Registration Statements. The Company has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, copies of the Initial Registration Statement and any Rule 462(b) Registration Statement and of each amendment thereto (including exhibits filed therewith) and copies of all consents and certificates of experts.

(d)    Delivery of Prospectuses. The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus and any amendments or supplements thereto as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required (or, but for the provisions of Rule 172, would be required) to be delivered by applicable law (whether to meet the request of purchasers pursuant to Rule 173(d) or otherwise), such number of copies of the Pre-Pricing Prospectus, the Prospectus and any Issuer Free Writing Prospectus and any amendments or supplements to any of the foregoing as such Underwriter may reasonably request.

(e)    Continued Compliance with Securities Laws. The Company will comply with the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations so as to permit the completion of

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the distribution of the Securities as contemplated by this Agreement, the General Disclosure Package and the Prospectus. If at any time when a prospectus is required (or, but for the provisions of Rule 172, would be required) by the applicable law to be delivered in connection with sales of the Securities (whether to meet the request of purchasers pursuant to Rule 173(d) or otherwise), any event shall occur or condition shall exist as a result of which it is necessary (or if the Representatives or counsel for the Underwriters shall notify the Company that, in their judgment, it is necessary) to amend the Registration Statement or amend or supplement the General Disclosure Package or the Prospectus so that the Registration Statement, the General Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made or then prevailing, not misleading or if it is necessary (or if the Representatives or counsel for the Underwriters shall notify the Company that, in their judgment, it is necessary) to amend the Registration Statement or amend or supplement the General Disclosure Package or the Prospectus in order to comply with the requirements of the 1933 Act, the 1933 Act Regulations, the 1934 Act or the 1934 Act Regulations, the Company will promptly notify the Representatives of such event or condition and of its intention to file such amendment or supplement (or, if the Representatives or counsel for the Underwriters shall have notified the Company as aforesaid, the Company will promptly notify the Representatives of its intention to prepare such amendment or supplement) and will promptly prepare and file with the Commission, subject to Section 3(b) hereof, such amendment or supplement as may be necessary to correct such untrue statement or omission or to comply with such requirements, and, in the case of an amendment or post-effective amendment to the Registration Statement, the Company will use its best efforts to have such amendment declared or become effective as soon as practicable, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. If at any time an Issuer Free Writing Prospectus conflicts with the information contained in the Registration Statement or if an event shall occur or condition shall exist as a result of which it is necessary (or, if the Representatives or counsel for the Underwriters shall notify the Company that, in their judgment, it is necessary) to amend or supplement such Issuer Free Writing Prospectus so that it will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made or then prevailing, not misleading, or if it is necessary (or, if the Representatives or counsel for the Underwriters shall notify the Company that, in their judgment, it is necessary) to amend or supplement such Issuer Free Writing Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly notify the Representatives of such event or condition and of its intention to file such amendment or supplement (or, if the Representatives or counsel for the Underwriters shall have notified the Company as aforesaid, the Company will promptly notify the Representatives of its intention to prepare such amendment or supplement) and will promptly prepare and, if required by the 1933 Act or the 1933 Act Regulations, file with the Commission, subject to Section 3(b) hereof, such amendment or supplement as may be necessary to eliminate or correct such conflict, untrue statement or omission or to comply with such requirements, and the Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request.

(f)    Blue Sky and Other Qualifications. The Company will use its reasonable best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale, or to obtain an exemption for the Securities to be offered and sold, under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representatives may reasonably designate and to maintain such qualifications and exemptions in effect for so long as required for the distribution of the Securities (but in no event for a period of not less than one year from the date of this Agreement); provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified or exempt, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification or exemption, as the case may be, in effect for so long as required for the distribution of the Securities (but in no event for a period of not less than one year from the date of this Agreement).

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(g)    Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.

(h)    Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Pre-Pricing Prospectus and the Prospectus under “Use of Proceeds.”

(i)    Listing. The Company will use its reasonable best efforts to effect the listing of the Securities on the NYSE as and when required by this Agreement.

(j)    Restriction on Sale of Securities. During the Lock-Up Period, the Company will not, without the prior written consent of the Representatives, directly or indirectly:

(i)    issue, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for Common Stock or other capital stock,

(ii)    file or cause the filing of any registration statement under the 1933 Act with respect to any Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for any Common Stock or other capital stock (other than any Rule 462(b) Registration Statement filed to register Securities to be sold to the Underwriters pursuant to this Agreement); or

(iii)    enter into any swap or other agreement, arrangement or transaction that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of any Common Stock or other capital stock or any securities convertible into or exercisable or exchangeable for any Common Stock or other capital stock,

whether any transaction described in clause (i) or (iii) above is to be settled by delivery of Common Stock, other capital stock, other securities, in cash or otherwise, or publicly announce any intention to do any of the foregoing.

Notwithstanding the provisions set forth in the immediately preceding paragraph, the Company may, without the prior written consent of the Representatives:

(1)    issue Securities to the Underwriters pursuant to this Agreement,

(2)    issue shares, options to purchase shares, or other equity incentive awards based on shares, of Common Stock pursuant to stock option plans, stock purchase or other equity incentive described in the General Disclosure Package and the Prospectus or file any registration statement on Form S-8 with respect to any such shares, options to purchase shares, or other equity incentive awards,

(3)    issue shares of Common Stock upon the exercise of stock options issued under stock option or other equity incentive plans referred to in clause (2) above or file any registration statement on Form S-8 with respect to any such shares,

(4)    consummate the Pre-Closing Transactions on the terms contemplated by this Agreement, the General Disclosure Package and the Prospectus,

(5)    the issuance of shares of Common Stock in connection with the acquisition by the Company or any of its subsidiaries of the securities, business, property or other assets of another person or business entity or pursuant to any employee benefit plan assumed by the Company in connection with any such acquisition, or

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(6)    the issuance of shares of Common Stock, of restricted stock awards or of options to purchase shares of Common Stock, in each case, in connection with joint ventures, commercial relationships or other strategic transactions,

provided, however, that, in the case of any issuance described in clause (5) or (6) above, the aggregate number of shares of Common Stock issued in connection with, or issuable pursuant to the exercise of any options or equity incentive awards issued in connection with, all such acquisitions and other transactions does not exceed 5% of the aggregate number of shares of Common Stock outstanding immediately following the consummation of the offering of the Securities and, in the cases issuances described in clause (3), (5) or (6) above, it shall be a condition to the issuance that each recipient executes and delivers to the Representatives, acting on behalf of the Underwriters, not later than one business day prior to the date of such issuance, a written agreement, in substantially the form of Exhibit D to this Agreement and otherwise satisfactory in form and substance to the Representatives.

If the Representatives, in their sole and absolute discretion, agree to release or waive the restrictions set forth in a lock-up agreement described in Section 5(j) hereof to permit the transfer of shares of Common Stock or other securities by an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release through a major news service at least two business days before the effective date of the release or waiver.

(k)    Reporting Requirements. The Company, during the period when the Prospectus is required (or, but for the provisions of Rule 172, would be required) by applicable law to be delivered (whether to meet the request of purchasers pursuant to Rule 173(d) or otherwise), will file all documents required to be filed with the Commission pursuant to the 1934 Act and the 1934 Act Regulations within the time periods required by the 1934 Act and the 1934 Act Regulations.

(l)    Preparation of Prospectus. Immediately following the execution of this Agreement, the Company will, subject to Section 3(b) hereof, prepare the Prospectus, which shall contain the selling terms of the Securities, the plan of distribution thereof and such other information as may be required by the 1933 Act or the 1933 Act Regulations or as the Representatives and the Company may deem appropriate, and, if requested by the Representatives, will prepare an Issuer Free Writing Prospectus containing the information set forth in Exhibit F hereto and such other information as may be required by Rule 433 or as the Representatives and the Company may deem appropriate, and will file or transmit for filing with the Commission the Prospectus in accordance with the provisions of Rule 430A and in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)) and any such Issuer Free Writing Prospectus in the manner and within the time period required by Rule 433.

(m)    Absence of Manipulation. The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of the price of any security of the Company to facilitate the sale or resale of the Securities.

(n)    1940 Act. The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Securities in such a manner as would require the Company to register as an investment company under the 1940 Act.

SECTION 4. Payment of Expenses.

(a)    Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement and each amendment thereto (in each case including exhibits) and any costs associated with electronic delivery of any of the foregoing, (ii)

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the printing and delivery to the Underwriters of this Agreement and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities and the issuance and delivery of the Securities to be sold by the Company to the Underwriters, including any stock or other transfer taxes and any stamp or other taxes or duties payable in connection with the sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees and disbursements of the counsel, accountants and other advisors to the Company, (v) the qualification or exemption of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplements thereto in an amount not to exceed $5,000, (vi) the preparation, printing and delivery to the Underwriters of copies of each preliminary prospectus, any Permitted Free Writing Prospectus and the Prospectus and any amendments or supplements to any of the foregoing and any costs associated with electronic delivery of any of the foregoing, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any Canadian “wrapper” and any supplements thereto and any costs associated with electronic delivery of any of the foregoing, (viii) the fees and expenses of the transfer agent and registrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review, if any, by FINRA of the terms of the sale of the Securities in an amount not to exceed $35,000, (x) the fees and expenses incurred in connection with the listing of the Securities on the NYSE, (xi) the costs and expenses of the Company and any of its officers, directors, counsel or other representatives in connection with presentations or meetings undertaken in connection with the offering of the Securities, including, without limitation, expenses approved in advance by the Company associated with the production of road show slides and graphics and the production and hosting of any electronic road shows, fees and expenses approved in advance by the Company of any consultants engaged in connection with road show presentations, and travel, lodging, transportation, and other expenses of the officers, directors, counsel and other representatives of the Company incurred in connection with any such presentations or meetings (including one half of the cost of any aircraft chartered and used jointly by officers, directors, counsel or other representatives of the Company and the Underwriters in connection with any road show), and (xii) the reasonable and documented fees and disbursements of counsel for the Underwriters in connection with the copying and delivery of closing documents and other documents relating to the offering contemplated hereby (and in connection with the preparation and delivery of any electronic versions or compilations of such documents) to the Company, the Company’s accountants and counsel and the Underwriters.

(b)    Termination of Agreement. If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5, 9(a)(i), 9(a)(iii)(A) or 9(a)(v) hereof, the Company shall reimburse the Underwriters for all of their reasonable out-of-pocket expenses, including the reasonable and documented fees and disbursements of counsel for the Underwriters.

SECTION 5. Conditions of Underwriters’ Obligations. The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company contained in this Agreement, or in certificates signed by any officer of the Company or any subsidiary of the Company (whether signed on behalf of such officer, the Company or such subsidiary) delivered to the Representatives or counsel for the Underwriters, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions:

(a)    Effectiveness of Registration Statement. The Initial Registration Statement and any post-effective amendments thereto have been declared effective, any Rule 462(b) Registration Statement has become effective, and no stop order suspending the effectiveness of the Initial Registration Statement or any Rule 462(b) Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or, to the knowledge of the Company, threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of the Representatives and the Commission shall not have notified the Company of any objection to the use of the form of the Registration Statement. The Prospectus shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) (without reliance upon Rule 424(b)(8)) and each Issuer Free Writing Prospectus required to be filed with the Commission shall have been filed in the manner and within the time period required by Rule 433, and, prior to the Closing Date, the Company shall have provided evidence satisfactory to the Representatives of such timely filings.

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(b)    Opinion of Counsel for Company. At the Closing Date, the Representatives shall have received the favorable opinion and negative assurance letter, dated as of Closing Date, of Simpson Thacher & Bartlett LLP, counsel for the Company (“Company Counsel”), in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such opinion for each of the other Underwriters, to the effect set forth in Exhibit E hereto and to such further effect as the Representatives may reasonably request.

(c)    Opinion of Counsel for Underwriters. At the Closing Date, the Representatives shall have received the favorable opinion and negative assurance letter, dated as of Closing Date, of Clifford Chance US LLP, counsel for the Underwriters (“Underwriters’ Counsel”), together with signed or reproduced copies of such letter for each of the other Underwriters, with respect to the Securities to be sold by the Company pursuant to this Agreement, this Agreement, the Initial Registration Statement, any Rule 462(b) Registration Statement, the General Disclosure Package and the Prospectus and any amendments or supplements thereto and such other matters as the Representatives may reasonably request.

(d)    Officer’s Certificate. At the Closing Date or the applicable Option Closing Date, as the case may be, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package and the Prospectus (in each case exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), any material adverse change or any development that could reasonably be expected to result in a material adverse change, in the condition (financial or other), results of operations, business, properties, management or prospects of the Company and its subsidiaries taken as a whole, whether or not arising in the ordinary course of business, and, at the Closing Date, the Representatives shall have received a certificate, signed on behalf of the Company by the Chief Executive Officer of the Company, the President of the Company, the Chief Financial Officer of the Company or the Chief Accounting Officer of the Company, dated as of Closing Date, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Company in this Agreement are true and correct at and as of the Closing Date with the same force and effect as though expressly made at and as of Closing Date, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Date under or pursuant to this Agreement, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission and the Commission has not notified the Company of any objection to the use of the form of the Registration Statement.

(e)    Accountant’s Comfort Letter. At the time of the execution of this Agreement, the Representatives shall have received from KPMG LLP a letter, dated the date of this Agreement and in form and substance satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information of the Company contained in the Registration Statement, the General Disclosure Package, any Issuer Free Writing Prospectuses (other than any electronic road show) and the Prospectus and any amendments or supplements to any of the foregoing.

(f)    Bring-down Comfort Letter. At the Closing Date, the Representatives shall have received from KPMG LLP a letter, dated as of Closing Date and in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Date.

(g)    Approval of Listing. At the Closing Date and each Option Closing Date, if any, the Securities to be purchased by the Underwriters at such time shall have been approved for listing on the NYSE, subject only to official notice of issuance.

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(h)    Lock-up Agreements. Prior to the date of this Agreement, the Representatives shall have received an agreement substantially in the form of Exhibit D hereto signed by each of the persons listed in Exhibit C hereto.

(i)    No Objection. Prior to the date of this Agreement, FINRA shall have confirmed in writing that it has no objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.

(j)    Chief Financial Officer’s Certificate. At the time of the execution of this Agreement and at the Closing Date, the Representatives shall have received a certificate, signed on behalf of the Company by the Chief Financial Officer of the Company, dated as of the Closing Date, in form and substance reasonably satisfactory to the Representatives, certifying certain financial information contained in the Registration Statement, the General Disclosure Package and the Prospectus.

(k)    Pre-Closing Transactions. Prior to the purchase of the Initial Securities on the Closing Date, the Pre-Closing Transactions shall have been duly consummated at the respective times and on the terms contemplated by this Agreement, the General Disclosure Package and the Prospectus and the Representatives shall have received a copy of the amended and restated charter of the Company certified by the Secretary of State of the State of Delaware, executed copies of the Stockholder Documents Amendment and such other evidence that the Pre-Closing Transactions have been consummated as the Representatives may reasonably request.

(l)    Conditions to Purchase of Option Securities. In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities on any Option Closing Date that is after the Closing Date, the obligations of the several Underwriters to purchase the applicable Option Securities shall be subject to the conditions specified in the introductory paragraph of this Section 5 and to the further condition that, at the applicable Option Closing Date, the Representatives shall have received:

(1)    Opinion of Counsel for Company. The favorable opinion and negative assurance letter of Company Counsel in form and substance satisfactory to the Representatives and dated such Option Closing Date, relating to the Option Securities to be purchased on such Option Closing Date and otherwise to the same effect as the opinion required by Section 5(b) hereof.

(2)    Opinion of Counsel for Underwriters. The favorable opinion and negative assurance letter of Underwriters’ Counsel, in form and substance satisfactory to the Representatives and dated such Option Closing Date, relating to the Option Securities to be purchased on such Option Closing Date and otherwise to the same effect as the opinion required by Section 5(c) hereof.

(3)    Officers’ Certificate. A certificate, dated such Option Closing Date, to the effect set forth in, and signed on behalf of the Company by the officers specified in, Section 5(d) hereof, except that the references in such certificate to the Closing Date shall be changed to refer to such Option Closing Date.

(4)    Bring-down Comfort Letter. A letter from KPMG LLP, in form and substance satisfactory to the Representatives and dated such Option Closing Date, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(f) hereof, except that the specified date in the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Option Closing Date, and except that such letter shall also cover any amendments or supplements to the Registration Statement, any Issuer Free Writing Prospectus (other than any electronic road show) and the Prospectus subsequent to the Closing Date.

(5)    Chief Financial Officer’s Certificate. A certificate, dated such Option Closing Date, to the effect set forth in, and signed on behalf of the Company by the Chief Financial Officer of the Company as specified in, Section 5(l) hereof, except that the references in such certificate to the Closing Date shall be changed to refer to such Option Closing Date.

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(m)    Additional Documents. At the Closing Date and each Option Closing Date, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, contained in this Agreement, or as the Representatives or counsel for the Underwriters may otherwise reasonably request; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated and in connection with the other transactions contemplated by this Agreement shall be satisfactory in form and substance to the Representatives.

(n)    Termination of Agreement. If any condition specified in this Section 5 shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on an Option Closing Date which is after the Closing Date, the obligations of the several Underwriters to purchase the relevant Option Securities on such Option Closing Date, may be terminated by the Representatives by notice to the Company at any time on or prior to Closing Date or such Option Closing Date, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 hereof and except that, in the case of any such termination of this Agreement, Sections 1, 6, 7, 8, 11, 12, 13, 14, 15, 16, 18, 19 and 20 and hereof shall survive such termination of this Agreement and remain in full force and effect.

SECTION 6. Indemnification.

(a)    Indemnification by the Company. The Company agrees to indemnify and hold harmless each Underwriter, its affiliates, and its and their officers, directors, employees, agents, partners and members and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:

(i)    against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement to any of the foregoing), or in any “road show” (as defined in Rule 433) that does not constitute an Issuer Free Writing Prospectus, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(ii)    against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(e) below) any such settlement is effected with the written consent of the Company; and

(iii)    against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel), reasonably incurred in investigating, preparing for or defending against any such loss, liability, claim, damage or litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above,

provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance

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upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives expressly for use in the Registration Statement (or any amendment thereto), or in any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or in any amendment or supplement to any of the foregoing), it being understood and agreed that the only such information furnished by the Underwriters as aforesaid consists of the information described as such in Section 6(c) hereof.

(b)    Indemnification by the Underwriters. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section 6, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), or in any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement to any of the foregoing), in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein. The Company hereby acknowledges and agrees that the information furnished to the Company by the Underwriters through the Representatives expressly for use in the Registration Statement (or any amendment thereto), or in any preliminary prospectus, any Issuer Free Writing Prospectus, the General Disclosure Package or the Prospectus (or any amendment or supplement to any of the foregoing), consists exclusively of the following information appearing under the caption “Underwriting” in the Pre-Pricing Prospectus and the Prospectus: (i) the information regarding the concession and reallowance appearing in the third paragraph under such caption and (ii) the information regarding stabilization, syndicate covering transactions and penalty bids appearing in the twelfth, thirteenth and fourteenth paragraphs under such caption (but only insofar as such information concerns the Underwriters).

(c)    Actions Against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder. Counsel to the indemnified parties shall be selected as follows: counsel to the Underwriters and the other indemnified parties referred to in Section 6(a) above shall be selected by Wells Fargo, and counsel to the Company, its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party be liable for the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for the Underwriters and the other indemnified parties referred to in Section 6(a) above, and the fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for the Company, its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, in each case in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.

(d)    Settlement Without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by this Section 6, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.

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SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.

The relative benefits received by the Company on the one hand and the Underwriters on the other hand in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth on the cover of the Prospectus, bear to the aggregate initial public offering price of the Securities as set forth on such cover.

The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing for or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.

Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.

No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

For purposes of this Section 7, each affiliate of any Underwriter, each officer, director, employee, agent, partner and member of any Underwriter or any such affiliate, and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters’ respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Exhibit A hereto and not joint.

SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates signed by any officer of the Company or any

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of its subsidiaries (whether signed on behalf of such officer, the Company or such subsidiary) and delivered to the Representatives or counsel to the Underwriters, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, any officer, director, employee, partner, member or agent of any Underwriter or any person controlling any Underwriter, or by or on behalf of the Company, any officer, director or employee of the Company or any person controlling the Company, and shall survive delivery of and payment for the Securities.

SECTION 9. Termination of Agreement.

(a)    Termination; General. The Representatives may terminate this Agreement, by notice to the Company, at any time on or prior to Closing Date (and, if any Option Securities are to be purchased on an Option Closing Date which occurs after the Closing Date, the Representatives may terminate the obligations of the several Underwriters to purchase such Option Securities, by notice to the Company at any time on or prior to such Option Closing Date) (i) if there has been, at any time on or after the date of this Agreement or since the respective dates as of which information is given in the General Disclosure Package or the Prospectus (in each case exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), any material adverse change or any development that would reasonably be expected to result in a material adverse change in the condition (financial or other), results of operations, business, properties, management or prospects of the Company and its subsidiaries taken as a whole, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any declaration of a national emergency or war by the United States, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions (including, without limitation, as a result of terrorist activities), in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable or inadvisable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if (A) trading in any securities of the Company has been suspended or materially limited by the Commission or the NYSE, or (B) trading generally on the NYSE, the Nasdaq Global Select Market, the Nasdaq Global Market or the NYSE Amex has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of such exchanges or by order of the Commission, FINRA or any other governmental authority, or (C) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States or in Europe, or (iv) if a banking moratorium has been declared by either Federal or New York authorities, or (v) if there shall have occurred, at any time on or after the date of this Agreement, any downgrading in the rating of any debt securities of or guaranteed by the Company, any Preferred Stock of the Company or any debt securities, preferred stock or trust preferred securities of any subsidiary or subsidiary trust of the Company by any “nationally recognized statistical rating organization” (as defined in Section 3(a)(62) of the 1934 Act) or any public announcement that any such organization has placed its rating on the Company or any such debt securities, Preferred Stock or other securities under surveillance or review or on a so-called “watch list” (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating) or any announcement by any such organization that the Company or any such debt securities, Preferred Stock or other securities has been placed on negative outlook.

(b)    Liabilities. If this Agreement is terminated pursuant to this Section 9, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof and except that Sections 1, 6, 7, 8, 11, 12, 13, 14, 15, 16, 18, 19 and 20 hereof shall survive such termination and remain in full force and effect.

SECTION 10. Default by One or More of the Underwriters. If one or more of the Underwriters shall fail at the Closing Date or an Option Closing Date to purchase the Securities which it or they are obligated to purchase under this Agreement (the “Defaulted Securities”), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then:

(a)    if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount of such Defaulted Securities in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters; or

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(b)    if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Option Closing Date which occurs after the Closing Date, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities that were to have been purchased and sold on such Option Closing Date, shall terminate without liability on the part of any non-defaulting Underwriter.

No action taken pursuant to this Section 10 shall relieve any defaulting Underwriter from liability in respect of its default.

In the event of any such default which does not result in a termination of this Agreement or, in the case of an Option Closing Date which is after the Closing Date, which does not result in a termination of the obligations of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, the Representatives shall have the right to postpone the Closing Date or the relevant Option Closing Date, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement, the General Disclosure Package or Prospectus or in any other documents or arrangements. As used herein, the term “Underwriter” includes any person substituted for an Underwriter under this Section 10.

SECTION 11. Notices. All notices and other communications hereunder shall be in writing, shall be effective only upon receipt and shall be mailed, delivered by hand or overnight courier, or transmitted by fax (with the receipt of such fax to be confirmed by telephone). Notices to the Underwriters shall be directed to the Representatives at Wells Fargo Securities, LLC, 375 Park Avenue, New York, New York 10152, Attention of Equity Syndicate, fax no. 212-214-5918 (with such fax to be confirmed by telephone to 212-214-6144), Citigroup Global Markets Inc., 388 Greenwich Avenue, New York, New York 10013, Attention of General Counsel, fax no. 646-291-1469 and JMP Securities LLC, 600 Montgomery Street, San Francisco, California 94111, Attention of [    ], fax no. [    ] (with such fax to be confirmed by telephone to [    ]); and notices to the Company shall be directed to it at Velocity Financial, LLC, 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362, Attention of Christopher D. Farrar, fax no. [●] (with such fax to be confirmed by telephone to 818-532-3700).

SECTION 12. Recognition of the U.S. Special Resolution Regimes.

(a)    In the event that any Underwriter that is a Covered Entity becomes subject to a proceeding under a U.S. Special Resolution Regime, the transfer from such Underwriter of this Agreement, and any interest and obligation in or under this Agreement, will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if this Agreement, and any such interest and obligation, were governed by the laws of the United States or a state of the United States.

(b)    In the event that any Underwriter that is a Covered Entity or a BHC Act Affiliate of such Underwriter becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights under this Agreement that may be exercised against such Underwriter are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if this Agreement were governed by the laws of the United States or a state of the United States.

SECTION 13. Parties. This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and their respective successors and the controlling persons and other indemnified parties referred to in Sections 6 and 7 and their successors, heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Underwriters, the Company and their respective successors, and said controlling persons and other indemnified parties and their successors, heirs and legal representatives, and for the benefit of no other person or entity. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.

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SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.

SECTION 15. Effect of Headings. The Section and Exhibit headings herein are for convenience only and shall not affect the construction hereof.

SECTION 16. Definitions. As used in this Agreement, the following terms have the respective meanings set forth below:

“Applicable Time” means              (New York City time) on                     , 2020 or such other time as agreed by the Company and the Representatives.

“BHC Act Affiliate” has the meaning assigned to the term “affiliate” in, and shall be interpreted in accordance with, 12 U.S.C. § 1841(k).

“Commission” means the Securities and Exchange Commission.

“Company Documents” means (i) all Subject Instruments and (ii) all other contracts, indentures, mortgages, deeds of trust, loan or credit agreements, bonds, notes, debentures, evidences of indebtedness, swap agreements, hedging agreements, leases or other instruments or agreements to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject.

“Consents and Waivers” means all consents, approvals, waivers and amendments necessary under any of the Stockholder Documents or the Company’s charter or bylaws in connection with any of the Pre-Closing Transactions or the offering or sale of the Securities or for the Company to enter into this Agreement or to perform its obligations hereunder.

“Corporate Conversion Documents” means the certificate of conversion, certificate of incorporation and the bylaws of the Company.

“Covered Entity” means any of the following:

(i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b);

(ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or

(iii) a “covered FSI” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b).

“Default Right” has the meaning assigned to that term in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable.

“DTC” means The Depository Trust Company.

“EDGAR” means the Commission’s Electronic Data Gathering, Analysis and Retrieval System.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder.

“Existing Financing Agreements” means (i) the Master Repurchase Agreement, dated as of May 17, 2013, between Velocity Commercial Capital, LLC and Citibank, N.A., (ii) the Amended and Restated Master Repurchase Agreement, dated as of July 13, 2018, between Velocity Commercial Capital, LLC and Barclays Bank plc, (iii) the Loan and Security Agreement, dated as of September 12, 2018, between VCC Capital Source Financing, LLC and

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Pacific Western Bank, and (iv) the Credit Agreement dated as of August 29, 2019, among the Company, Velocity Commercial Capital LLC, the other guarantors party thereto, Owl Rock Capital Corporation and the lenders party thereto from time to time, each as amended, supplemented or restated, as of the date hereof, if applicable, and in each case including any promissory notes, pledge agreements, security agreements, mortgages, guarantees and other instruments or agreements entered into by the Company or any of its subsidiaries in connection therewith or pursuant thereto, in each case as amended, supplemented or restated as of the date hereof, if applicable.

“Existing Warrants” means any warrants to purchase Common Stock outstanding on the date of this Agreement.

“FINRA” means the Financial Industry Regulatory Authority, Inc. or the National Association of Securities Dealers, Inc., or both, as the context shall require.

“GAAP” means generally accepted accounting principles.

“Initial Registration Statement” means the Company’s registration statement on Form S-1 (Registration No. 333-234250), as amended (if applicable), including the Rule 430A Information from and after the time that such Rule 430A information is deemed, pursuant to Rule 430A, to be part of and included in the Initial Registration Statement.

“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433, relating to the offering of the Securities that (i) is required to be filed with the Commission by the Company, (ii) is a “road show” that is a “written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) is exempt from filing pursuant to Rule 433(d)(5)(i) because it contains a description of the Securities or of the offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).

“Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors, as evidenced by its being specified in Exhibit H hereto.

“Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.

“Lien” means any security interest, mortgage, pledge, lien, encumbrance, claim or equity.

“Lock-Up Period” means the period beginning on and including the date of this Agreement through and including the date that is the 180th day after the date of this Agreement.

“NYSE” means the New York Stock Exchange.

“OFAC” means the Office of Foreign Assets Control of the U.S. Treasury Department.

“Organizational Documents” means (a) in the case of a corporation, its charter and by-laws; (b) in the case of a limited or general partnership, its partnership certificate, certificate of formation or similar organizational document and its partnership agreement; (c) in the case of a limited liability company, its articles of organization, certificate of formation or similar organizational documents and its operating agreement, limited liability company agreement, membership agreement or other similar agreement; (d) in the case of a trust, its certificate of trust, certificate of formation or similar organizational document and its trust agreement or other similar agreement; and (e) in the case of any other entity, the organizational and governing documents of such entity.

“Pre-Pricing Prospectus” means the preliminary prospectus dated                     , 2020 relating to the Securities in the form first furnished to the Underwriters for use in connection with the offering of the Securities.

“PCAOB” means the Public Company Accounting Oversight Board (United States).

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“Pre-Closing Transactions” means, collectively, the Corporate Conversion, Stockholder Documents and the Consents and Waivers.

“Preferred Stock” means the Company’s preferred stock, par value $0.01 per share.

“preliminary prospectus” means any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) that is used in connection with the offering of the Securities that omitted the public offering price of the Securities or that was captioned “Subject to Completion”. The term “preliminary prospectus” includes, without limitation, the Pre-Pricing Prospectus.

“Registration Rights Agreement” means the Registration Rights Agreement dated                     , 2020 among the Company and the other parties thereto.

“Registration Statement” means the Initial Registration Statement; provided that, if a Rule 462(b) Registration Statement is filed with the Commission, then the term “Registration Statement” shall include such Rule 462(b) Registration Statement from and after the time of such filing, mutatis mutandis.

“Regulation S-T” means Regulation S-T of the Commission.

“Repayment Event” means any event or condition which, either immediately or with notice or passage of time or both, (i) gives the holder of any bond, note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary of the Company, or (ii) gives any counterparty (or any person acting on such counterparty’s behalf) under any swap agreement, hedging agreement or similar agreement or instrument to which the Company or any subsidiary of the Company is a party the right to liquidate or accelerate the payment obligations or designate an early termination date under such agreement or instrument, as the case may be.

“Rule 164,” “Rule 172,” “Rule 173,” “Rule 405,” “Rule 424(b),” “Rule 430A,” “Rule 433” and “Rule 462(b)” refer to such rules under the 1933 Act.

“Rule 430A Information” means the information included in the Prospectus or any amendment or supplement thereto that was omitted from the Initial Registration Statement at the time it became effective but that is deemed to be a part of the Initial Registration Statement at the time it became effective pursuant to Rule 430A.

“Rule 462(b) Registration Statement” means a registration statement filed by the Company pursuant to Rule 462(b) for the purpose of registering any of the Securities under the 1933 Act, including the documents and other information incorporated by reference therein and the Rule 430A Information.

“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder or implementing the provisions thereof.

“Stockholder Documents” means, together, the Stockholders Agreement and the Registration Rights Agreement.

“Stockholders Agreement” means the Stockholders Agreement dated                     , 2020 among the Company, Snow Phipps Group AIV L.P., Snow Phipps Group AIV (Offshore) L.P., SPG Co-Investment, L.P., Snow Phipps Group (B), L.P., Snow Phipps Group (RPV), L.P., TOBI III SPE I LLC and Christopher D. Farrar.

“Subject Instruments” means the Corporate Conversion Documents, the Existing Financing Agreements, the Existing Warrants, the Stockholder Documents and all other instruments, agreements and documents filed as exhibits to the Registration Statement pursuant to Rule 601(b)(10) of Regulation S-K of the Commission; provided that if any instrument, agreement or other document filed as an exhibit to the Registration Statement as aforesaid has been redacted or if any portion thereof has been deleted or is otherwise not included as part of such exhibit (whether pursuant to a request for confidential treatment or otherwise), the term “Subject Instruments” shall nonetheless mean such instrument, agreement or other document, as the case may be, in its entirety, including any portions thereof which shall have been so redacted, deleted or otherwise not filed.

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“Termination Event” means any event or condition which gives any person the right, either immediately or with notice or passage of time or both, to terminate or limit (in whole or in part) any Company Documents or any rights of the Company or any of its subsidiaries thereunder, including, without limitation, upon the occurrence of a change of control of the Company or other similar events.

“U.S. Special Resolution Regime” means each of (i) the Federal Deposit Insurance Act and the regulations promulgated thereunder and (ii) Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder.

“1933 Act” means the Securities Act of 1933, as amended.

“1933 Act Regulations” means the rules and regulations of the Commission under the 1933 Act.

“1934 Act” means the Securities Exchange Act of 1934, as amended.

“1934 Act Regulations” means the rules and regulations of the Commission under the 1934 Act.

“1940 Act” means the Investment Company Act of 1940, as amended.

All references in this Agreement to the Registration Statement, the Initial Registration Statement, any Rule 462(b) Registration Statement, any preliminary prospectus, the Prospectus, any Issuer Free Writing Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the version thereof filed with the Commission pursuant to EDGAR and all versions thereof delivered (physically or electronically) to the Representatives or the Underwriters.

SECTION 17. Permitted Free Writing Prospectuses. The Company represents, warrants and agrees that it has not made and, unless it obtains the prior written consent of the Representatives, it will not make, any offer relating to the Securities that constitutes or would constitute an “issuer free writing prospectus” (as defined in Rule 433) or that otherwise constitutes or would constitute a “free writing prospectus” (as defined in Rule 405) or portion thereof required to be filed with the Commission or required to be retained by the Company pursuant to Rule 433; provided that the prior written consent of the Representatives shall be deemed to have been given in respect of the Issuer General Use Free Writing Prospectuses, if any, listed on Exhibit G hereto, to any electronic road show in the form previously provided by the Company to and approved by the Representatives. Any such free writing prospectus consented to or deemed to have been consented to as aforesaid is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents, warrants and agrees that it has treated and will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, has complied and will comply with the requirements of Rule 433 applicable to any Permitted Free Writing Prospectus, including timely filing with the Commission where required, legending and record keeping. For the purposes of clarity, the parties hereto agree that all free writing prospectuses, if any, listed in Exhibit G hereto are Permitted Free Writing Prospectuses.

SECTION 18. Absence of Fiduciary Relationship. The Company acknowledges and agrees that:

(a)    each of the Underwriters is acting solely as an underwriter in connection with the sale of the Securities and no fiduciary, advisory or agency relationship between the Company, on the one hand, and any of the Underwriters, on the other hand, has been created in respect of any of the transactions contemplated by this Agreement, irrespective of whether or not any of the Underwriters has advised or is advising the Company on other matters;

(b)    the public offering price of the Securities and the price to be paid by the Underwriters for the Securities set forth in this Agreement were established by the Company following discussions and arms-length negotiations with the Representatives;

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(c)    it is capable of evaluating and understanding, and understands and accepts, the terms, risks and conditions of the transactions contemplated by this Agreement;

(d)    it is aware that the Underwriters and their respective affiliates are engaged in a broad range of transactions which may involve interests that differ from those of the Company and that none of the Underwriters has any obligation to disclose such interests and transactions to the Company by virtue of any fiduciary, advisory or agency relationship or otherwise; and

(e)    it waives, to the fullest extent permitted by law, any claims it may have against any of the Underwriters for breach of fiduciary duty or alleged breach of fiduciary duty and agrees that none of the Underwriters shall have any liability (whether direct or indirect, in contract, tort or otherwise) to it in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on its behalf or in right of it or the Company or any stockholders, employees or creditors of Company.

SECTION 19. Research Analyst Independence. The Company acknowledges that the Underwriters’ respective research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies, and that such Underwriters’ respective research analysts and research departments may hold views and make statements or investment recommendations and/or publish research reports with respect to the Company and/or the offering that differ from the views of their respective investment banking divisions. The Company hereby waives and releases, to the fullest extent permitted by applicable law, any claims that the Company may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by their respective research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Company by such Underwriters’ respective investment banking divisions. The Company acknowledges that each of the Underwriters is a full service securities firm and as such from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short positions in debt or equity securities of the Company and other entities that may be the subject of the transactions contemplated by this Agreement.

SECTION 20. Trial By Jury. The Company (on its own behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

[Signature Page Follows]

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If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters and the Company in accordance with its terms.

Very truly yours,
VELOCITY FINANCIAL, LLC
By
	Name:
	Title:

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CONFIRMED AND ACCEPTED, as of the date first

above written:

WELLS FARGO SECURITIES, LLC
By: WELLS FARGO SECURITIES, LLC
By
	Authorized Signatory

For themselves and as Representative of the Underwriters named in Exhibit A hereto.

[Signature Pages to Underwriting Agreement]

CITIBANK GLOBAL MARKETS INC.
By: CITIBANK GLOBAL MARKETS INC.
By
	Authorized Signatory

For themselves and as Representative of the Underwriters named in Exhibit A hereto.

[Signature Pages to Underwriting Agreement]

JMP SECURITIES LLC
By: JMP SECURITIES LLC
By
	Authorized Signatory

For themselves and as Representative of the Underwriters named in Exhibit A hereto.

[Signature Pages to Underwriting Agreement]

EX-2.1

Exhibit 2.1

AGREEMENT AND PLAN OF CONVERSION

This AGREEMENT AND PLAN OF CONVERSION (this “Plan of Conversion”) is made as of                     , 2020 by VELOCITY FINANCIAL, LLC, a Delaware limited liability company (the “Company”), to effect its conversion to a Delaware corporation (the “Conversion”) pursuant to Section 18-216 of the Delaware Limited Liability Company Act and Section 265 of the General Corporation Law of the State of Delaware (the “DGCL”).

Section 1    Converting Entity. The name of the converting entity is Velocity Financial, LLC, a Delaware limited liability company.

Section 2    Converted Entity. The name of the converted entity is Velocity Financial, Inc., a Delaware corporation (the “Converted Entity”).

Section 3    Effective Time of Conversion. The Conversion shall be effective upon the filing of the Certificate of Conversion in the form attached hereto as Exhibit A (the “Certificate of Conversion”) and the Certificate of Incorporation (as described in Section 4) with the Delaware Secretary of State (the “Effective Time”).

Section 4    Charter, Bylaws and Governance. At the Effective Time, the Certificate of Incorporation of the Converted Entity, in the form attached hereto as Exhibit B, filed simultaneously with the Certificate of Conversion, shall be the Certificate of Incorporation of the Converted Entity upon Conversion, until thereafter amended as provided under the DGCL. The Bylaws, in the form attached hereto as Exhibit C, shall be the Bylaws of the Converted Entity upon Conversion, until thereafter amended as provided therein. The directors and officers of the Converted Entity immediately after the Effective Time shall be as set forth on Exhibit D. The Company and, after the Effective Time, the Converted Entity and its Board of Directors shall take such actions to cause each of such individuals to be appointed as a director and/or officer, as the case may be, of the Converted Entity.

Section 5    Conversion of Limited Liability Company Interests. At the Effective Time, the outstanding limited liability company interests of the Company, by virtue of the Conversion and without further action on the part of any member of the Company, shall be automatically exchanged for capital stock of the Converted Entity as set forth on Exhibit E attached hereto and incorporated by reference herein. No certificates or scrip representing fractional shares or book-entry credit of Common Stock (as defined in Exhibit E) shall be issued upon the exchange of outstanding limited liability company interests of the Company pursuant to this Plan of Conversion. All fractional shares of Common Stock which a holder of limited liability company interests of the Company would be otherwise entitled to receive as a result of the Conversion shall be aggregated and, in lieu of any fractional share to which a holder of limited liability company interests of the Company would otherwise be entitled, such holder shall be entitled to receive an amount in cash, without interest, equal to the product of such fractional share and $[15.00].

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Section 6    Effects of Conversion. The Conversion shall have the effects set forth in Section 18-216 of the Delaware Limited Liability Company Act and Section 265 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, powers and franchises of the Company shall vest in the Converted Entity, and all debts, liabilities and duties of the Company shall become debts, liabilities and duties of the Converted Entity.

Section 7    Termination. This Plan of Conversion may be terminated and abandoned, whether before or after adoption or approval by the members of the Company or by action of the Board of Managers of the Company at any time prior to the Effective Time.

[The remainder of this page is intentionally left blank.]

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IN WITNESS WHEREOF, the Company has duly executed this Agreement and Plan of Conversion as of the      day of                     , 2020.

VELOCITY FINANCIAL, LLC
By:
	Name: Its:

EX-2.2

Exhibit 2.2

CERTIFICATE OF CONVERSION TO CORPORATION

OF

VELOCITY FINANCIAL, LLC,

a Delaware limited liability company

TO

VELOCITY FINANCIAL, INC.,

a Delaware corporation

This Certificate of Conversion to Corporation, dated as of                          , 2020 is being duly executed and filed by Velocity Financial, LLC, a Delaware limited liability company (the “LLC”), to convert the LLC to Velocity Financial, Inc., a Delaware corporation (the “Corporation”), under the Delaware Limited Liability Company Act (6 Del. C. § 18-101, et seq.) and the General Corporation Law of the State of Delaware (8 Del. C. § 101, et seq.).

1. The LLC was first formed on July 9, 2012. The LLC was first formed under the laws of the State of Delaware and was a limited liability company under the laws of the State of Delaware immediately prior to the filing of this Certificate of Conversion to Corporation.

2. The name and type of entity of the LLC immediately prior to the filing of this Certificate of Conversion to Corporation was Velocity Financial, LLC, a Delaware limited liability company.

3. The name of the Corporation as set forth in its certificate of incorporation filed in accordance with Section 265(b) of the General Corporation Law of the State of Delaware is Velocity Financial, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Conversion to Corporation as of the date first-above written.

VELOCITY FINANCIAL, LLC
By:
	Name:
	Title:

EX-3.1

Exhibit 3.1

FORM OF CERTIFICATE OF INCORPORATION

OF

VELOCITY FINANCIAL, INC.

* * * * *

The present name of the corporation is Velocity Financial, Inc. (the “Corporation”). The Corporation was incorporated by the filing of the Corporation’s Certificate of Incorporation with the Secretary of State of the State of Delaware on [•], 2020. This Certificate of Incorporation of the Corporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware and by the written consent of its stockholders in accordance with Section 228 of the General Corporation Law of the State of Delaware.

ARTICLE I

NAME

The name of the Corporation is Velocity Financial, Inc.

ARTICLE II

REGISTERED OFFICE AND AGENT

The address of the registered office of the Corporation in the State of Delaware is 251 Little Falls Drive Wilmington, Delaware 19808-1674. The name of the registered agent of the Corporation in the State of Delaware at such address is Corporation Service Company.

ARTICLE III

PURPOSE

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the General Corporation Law of the State of Delaware (the “DGCL”).

ARTICLE IV

CAPITAL STOCK

The total number of shares of all classes of stock that the Corporation shall have authority to issue is 125,000,000, which shall be divided into two classes as follows:

100,000,000 shares of common stock, par value $0.01 per share (“Common Stock”); and

25,000,000 shares of preferred stock, par value $0.01 per share (“Preferred Stock”).

I. Capital Stock.

A. Common Stock and Preferred Stock may be issued from time to time by the Corporation for such consideration as may be fixed by the board of directors of the Corporation (the “Board of Directors”). The Board of Directors is hereby expressly authorized, by resolution or resolutions, at any time and from time to time, to provide, out of the unissued shares of Preferred Stock, for one or more series of Preferred Stock and, with respect to each such series, to fix, without further stockholder approval, the designation of such series, the powers (including voting powers), preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, of such series of Preferred Stock and the number of shares of such series, which number the Board of Directors may, except where otherwise provided in the designation of such series, increase (but not above the total number of authorized shares of Preferred Stock) or decrease (but not below the number of shares of such series then outstanding). The powers, preferences and relative, participating, optional and other special rights of, and the qualifications, limitations or restrictions thereof, of each series of Preferred Stock, if any, may differ from those of any and all other series at any time outstanding.

B. Each holder of record of Common Stock, as such, shall have one vote for each share of Common Stock that is outstanding in his, her or its name on the books of the Corporation on all matters on which stockholders are entitled to vote generally. Except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock) or pursuant to the DGCL.

C. Except as otherwise required by applicable law, holders of any series of Preferred Stock shall be entitled to only such voting rights, if any, as shall expressly be granted thereto by this Certificate of Incorporation (including any certificate of designation relating to such series of Preferred Stock).

D. Subject to applicable law and the rights, if any, of the holders of any outstanding series of Preferred Stock or any class or series of stock having a preference over or the right to participate with the Common Stock with respect to the payment of dividends, dividends may be declared and paid ratably on the Common Stock out of the assets of the Corporation that are legally available for this purpose at such times and in such amounts as the Board of Directors in its discretion shall determine.

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E. Upon the dissolution, liquidation or winding up of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and subject to the rights, if any, of the holders of any outstanding series of Preferred Stock or any class or series of stock having a preference over or the right to participate with the Common Stock with respect to the distribution of assets of the Corporation upon such dissolution, liquidation or winding up of the Corporation, the holders of Common Stock shall be entitled to receive the remaining assets of the Corporation available for distribution to its stockholders ratably in proportion to the number of shares held by them.

F. The number of authorized shares of Preferred Stock or Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority in voting power of the stock of the Corporation entitled to vote thereon irrespective of the provisions of Section 242(b)(2) of the DGCL (or any successor provision thereto), and no vote of the holders of any of the Common Stock or the Preferred Stock voting separately as a class shall be required therefor, unless a vote of any such holder is required pursuant to this Certificate of Incorporation (including any certificate of designation relating to any series of Preferred Stock).

ARTICLE V

AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS

A. The Board of Directors is expressly authorized to make, alter, amend, repeal and rescind, in whole or in part, the bylaws of the Corporation (as in effect from time to time, the “Bylaws”) without the assent or vote of the stockholders in any manner not inconsistent with the laws of the State of Delaware or this Certificate of Incorporation. The affirmative vote of the holders of a majority in voting power of all the then-outstanding shares of stock of the Corporation entitled to vote thereon, voting together as a single class, shall be required in order for the stockholders of the Corporation to alter, amend, repeal or rescind, in whole or in part, any provision of this Certificate of Incorporation or to adopt any provision inconsistent therewith.

ARTICLE VI

BOARD OF DIRECTORS

A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

B. Subject to the rights granted to the holders of any one or more series of Preferred Stock and the rights granted pursuant to the Stockholders Agreement, dated on or about the date hereof, by and among the Corporation, certain Affiliates of SPG GP, LLC (together with its successors and Affiliates (as defined below), “Snow Phipps”), TOBI III SPE I LLC (together with its successors and Affiliates, “TOBI”) and the other parties named therein (as the same may be amended, supplemented, restated or otherwise modified from time to time, the “Stockholders Agreement”), the number of directors of the Corporation shall be determined from time to time by resolution adopted by the Board of Directors in accordance with the Bylaws.

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C. Subject to the rights granted to the holders of any one or more series of Preferred Stock then outstanding or the rights granted pursuant to the Stockholders Agreement, directors shall be elected annually and each director shall serve for a term of one (1) year, ending on the date of the next annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided, that the term of each such director shall continue until the election and qualification of his or her successor, subject to his or her earlier death, resignation, disqualification, or removal.

D. Subject to the rights granted to the holders of any one or more series of Preferred Stock then outstanding or the rights granted pursuant to the Stockholders Agreement, any newly-created directorship on the Board of Directors that results from an increase in the number of directors and any vacancy occurring in the Board of Directors (whether by death, resignation, retirement, disqualification, removal or other cause) shall be filled by a vote of a majority of the directors then in office, although less than a quorum, by a sole remaining director or by the stockholders. Any director elected to fill a vacancy or newly created directorship shall hold office until the next election of directors and until his or her successor shall be elected and qualified, or until his or her earlier death, resignation, retirement, disqualification or removal.

E. Any or all of the directors (other than the directors elected by the holders of any series of Preferred Stock of the Corporation, voting separately as a series or together with one or more other such series, as the case may be) may be removed at any time either with or without cause by the affirmative vote of a majority in voting power of all outstanding shares of stock of the Corporation entitled to vote thereon, voting as a single class.

F. Elections of directors need not be by written ballot unless the Bylaws shall so provide.

G. During any period when the holders of any series of Preferred Stock, voting separately as a series or together with one or more other such series, have the right to elect additional directors, then upon commencement and for the duration of the period during which such right continues: (i) the then otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions, and (ii) each such additional director shall serve until such director’s successor shall have been duly elected and qualified, or until such director’s right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to his or her earlier death, resignation, retirement, disqualification or removal. Except as otherwise provided by the Board of Directors in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate and the total authorized number of directors of the Corporation shall be reduced accordingly.

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H. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, or by the Chief Executive Officer (if then serving as a director), and otherwise as may be provided in the Bylaws.

I. The following persons are appointed as the initial directors of the Corporation, effective immediately, to serve and hold office until the first annual meeting of the stockholders, or until such persons’ successors are duly elected and qualified: Christopher D. Farrar, Daniel J. Ballen, Alan H. Mantel, John P. Pitstick, John A. Pless and Joy L. Schaefer. The mailing address of each of the initial directors of the Corporation shall be 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362.

ARTICLE VII

LIMITATION OF DIRECTOR LIABILITY

A. To the fullest extent permitted by the DGCL as it now exists or may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty owed to the Corporation or its stockholders.

B. Neither the amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation, nor, to the fullest extent permitted by the DGCL, any modification of law shall eliminate, reduce or otherwise adversely affect any right or protection of a current or former director of the Corporation existing at the time of such amendment, repeal, adoption or modification.

ARTICLE VIII

CONSENT OF STOCKHOLDERS IN LIEU OF MEETING, ANNUAL AND SPECIAL

MEETINGS OF STOCKHOLDERS

A. At any time prior to the completion of the Corporation’s initial public offering of its Common Stock, any action required or permitted to be taken at any annual or special meeting of stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the books in which proceedings of meetings of stockholders are recorded. At any time after the completion of the Corporation’s initial public offering of its Common Stock, no action shall be taken by the stockholders by written consent.

B. Except as otherwise required by law and subject to the rights of the holders of any series of Preferred Stock, special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time only by or at the direction of the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the President.

C. An annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held at such place, if any, on such date, and at such time as shall be fixed exclusively by resolution of the Board of Directors or a duly authorized committee thereof.

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ARTICLE IX

COMPETITION AND CORPORATE OPPORTUNITIES

A. In recognition and anticipation that certain directors, principals, officers, employees and/or other representatives of Snow Phipps and/or TOBI may serve as directors, officers or agents of the Corporation:

(i) each of Snow Phipps and TOBI may (a) now engage and may continue to engage, directly or indirectly, in the same or similar Business or lines of Business as those in which the Corporation, directly or indirectly, may engage and/or other business activities that overlap with or compete with those in which the Corporation, directly or indirectly, may engage, (b) develop or market any products or services that compete, directly or indirectly, with the products or services of the Corporation, (c) invest or own an interest in, or develop a business relationship with, any person or entity that (x) is engaged in the same or similar Business or lines of Business as those in which the Corporation, directly or indirectly, may engage and/or, (y) otherwise competes, directly or indirectly, with the Corporation, and (d) conduct business with any of the clients or customers of the Corporation (each, a “Competitive Opportunity”); and

(ii) the provisions of this Article IX are set forth to regulate and define the conduct of certain affairs of the Corporation with respect to certain classes or categories of opportunities as they may involve any of Snow Phipps, TOBI and their respective Affiliates and the powers, rights, duties and liabilities of the Corporation and its directors, officers and stockholders in connection therewith.

For purposes hereof, the “Business” of the Corporation is the business of originating or acquiring United States domiciled commercial, multifamily rental or mixed-use commercial/residential real estate loans and acquiring United States domiciled commercial, multifamily rental or mixed-use commercial/residential real estate owned assets related to such loans.

B. None of (i) Snow Phipps and any directors, principals, officers, employees and/or other representatives of Snow Phipps that may serve as directors, officers or agents of the Corporation, and each of their Affiliates, or (ii) TOBI and any directors, principals, officers, employees and/or other representatives of TOBI that may serve as directors, officers or agents of the Corporation, and each of their Affiliates (the Persons (as defined below) identified in clauses (i) and (ii) above being referred to, collectively, as “Identified Persons” and, individually, as an “Identified Person”) shall, to the fullest extent permitted by law, have any duty to refrain from directly or indirectly (a) engaging in any Competitive Opportunity or (b) otherwise competing with the Corporation or any of its controlled Affiliates, and, to the fullest extent permitted by law, no Identified Person shall be liable to the Corporation or its stockholders or to any controlled Affiliate of the Corporation for breach of any fiduciary duty solely by reason of the fact that such Identified Person engages in any such activities. To the fullest extent permitted by law, the Corporation hereby renounces any interest or expectancy in, or right to be offered an opportunity to participate in, any Competitive Opportunity or other corporate or business opportunity that may be a Competitive Opportunity for an Identified Person and the Corporation or any of its controlled Affiliates. In the event that any Identified Person acquires knowledge of a Competitive Opportunity or other corporate or business opportunity that may be a Competitive Opportunity for itself, herself or himself, or for its, her or his Affiliates, and for the Corporation or any of its controlled Affiliates, such Identified Person shall, to the fullest extent permitted by law, have no duty to communicate or present such opportunity to the Corporation or any of its controlled Affiliates and, to the fullest extent permitted by law, shall not be liable to the Corporation or its stockholders or to any controlled Affiliate of the Corporation for breach of any fiduciary duty as a stockholder, director or officer of the Corporation solely by reason of the fact that such Identified Person pursues or acquires such Competitive Opportunity for itself, herself or himself, or offers or directs such Competitive Opportunity to another Person.

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C. In addition to and notwithstanding the foregoing provisions of this Article IX, a business or opportunity shall not be deemed to be a potential Competitive Opportunity for the Corporation if it is an opportunity that (i) the Corporation is neither financially or legally able, nor contractually permitted to undertake, (ii) from its nature, is not in the line of the Corporation’s business or is of no practical advantage to the Corporation or (iii) is one in which the Corporation has no interest or reasonable expectancy.

D. For purposes of this Certificate of Incorporation (other than Article X), (i) “Affiliate” shall mean (a) in respect of Snow Phipps, any Person (other than the Corporation and any entity that is controlled by the Corporation) that, directly or indirectly, is controlled by Snow Phipps, controls Snow Phipps or is under common control with Snow Phipps and shall include any principal, member, director, partner, stockholder, officer, employee or other representative of any of the foregoing, including any director of the Corporation designated by Snow Phipps or one of its Affiliates as a Snow Phipps Director (as defined in the Stockholders Agreement) (b) in respect of TOBI, any Person (other than the Corporation and any entity that is controlled by the Corporation) that, directly or indirectly, is controlled by TOBI, controls TOBI or is under common control with TOBI and shall include any principal, member, director, partner, stockholder, officer, employee or other representative of any of the foregoing, including any director of the Corporation designated by TOBI or one of its Affiliates as a TOBI Director (as defined in the Stockholders Agreement) and (c) in respect of a Specified Director, any Person that, directly or indirectly, is controlled by such Specified Director (other than the Corporation and any entity that is controlled by the Corporation) and (d) in respect of the Corporation, any Person that, directly or indirectly, is controlled by the Corporation; and (ii) “Person” shall mean any individual, corporation, general or limited partnership, limited liability company, joint venture, trust, association or any other entity.

E. To the fullest extent permitted by law, any Person purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article IX.

ARTICLE X

DGCL SECTION 203 AND BUSINESS COMBINATIONS

A. The Corporation hereby expressly elects not to be governed by Section 203 of the DGCL.

B. Notwithstanding the foregoing, the Corporation shall not engage in any business combination (as defined below), at any point in time following the date of closing of the initial public offering of the Corporation’s Common Stock, at which time the Corporation’s Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act of 1934, as amended (the “Exchange Act”), with any interested stockholder (as defined below) for a period of three (3) years following the time that such stockholder became an interested stockholder, unless:

1. prior to such time, the Board of Directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, or

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2. upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock (as defined below) of the Corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (i) by persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or

3. at or subsequent to such time, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock of the Corporation that is not owned by the interested stockholder.

C. For purposes of this Article X, references to:

1. “affiliate” means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.

2. “associate,” when used to indicate a relationship with any person, means: (i) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting stock; (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person.

3. “business combination,” when used in reference to the Corporation and any interested stockholder of the Corporation, means:

(i) any merger or consolidation of the Corporation or any direct or indirect majority-owned subsidiary of the Corporation (a) with the interested stockholder, or (b) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by the interested stockholder and as a result of such merger or consolidation Section (B) of this Article X is not applicable to the surviving entity;

(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a stockholder of the Corporation, to or with the interested stockholder, whether as part of a dissolution or otherwise, of assets of the Corporation or of any direct or indirect majority-owned subsidiary of the Corporation which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Corporation determined on a consolidated basis or the aggregate market value of all the then outstanding stock of the Corporation;

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(iii) any transaction that results in the issuance or transfer by the Corporation or by any direct or indirect majority-owned subsidiary of the Corporation of any stock of the Corporation or of such subsidiary to the interested stockholder, except: (a) pursuant to the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which securities were outstanding prior to the time that the interested stockholder became such; (b) pursuant to a merger under Section 251(g) of the DGCL; (c) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into stock of the Corporation or any such subsidiary which security is distributed, pro rata to all holders of a class or series of stock of the Corporation subsequent to the time the interested stockholder became such; (d) pursuant to an exchange offer by the Corporation to purchase stock made on the same terms to all holders of said stock; or (e) any issuance or transfer of stock by the Corporation; provided, however, that in no case under items (c)-(e) of this subsection (iii) shall there be an increase in the interested stockholder’s proportionate share of the stock of any class or series of the Corporation or of the voting stock of the Corporation (except as a result of immaterial changes due to fractional share adjustments);

(iv) any transaction involving the Corporation or any direct or indirect majority-owned subsidiary of the Corporation that has the effect, directly or indirectly, of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the Corporation or of any such subsidiary that is owned by the interested stockholder, except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares of stock not caused, directly or indirectly, by the interested stockholder; or

(v) any receipt by the interested stockholder of the benefit, directly or indirectly (except proportionately as a stockholder of the Corporation), of any loans, advances, guarantees, pledges, or other financial benefits (other than those expressly permitted in subsections (i)-(iv) above) provided by or through the Corporation or any direct or indirect majority-owned subsidiary.

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4. “control,” including the terms “controlling,” “controlled by” and “under common control with,” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting stock, by contract, or otherwise. A person who is the owner of 20% or more of the outstanding voting stock of the Corporation, partnership, unincorporated association or other entity shall be presumed to have control of such entity, in the absence of proof by a preponderance of the evidence to the contrary. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting stock, in good faith and not for the purpose of circumventing this Article X, as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity.

5. “Exempt Transferee” means (A) any person that acquires (other than in an Excluded Transfer) directly from Snow Phipps or any of its affiliates or successors or TOBI or any of its affiliates or successors, ownership of voting stock of the Corporation, and is designated in writing by the transferor as an “Exempt Transferee” for the purpose of this Article X; and (B) any person that acquires (other than in an Excluded Transfer) directly from a person described in clause (A) of this definition or from any other Exempt Transferee ownership of voting stock of the Corporation, and is designated in writing by the transferor as an “Exempt Transferee” for the purpose of this Article X.

6. “Excluded Transfer” means (a) a transfer to a person that is not an affiliate of the transferor, which transfer is by gift or otherwise not for value, including a transfer by dividend or distribution by the transferor, (b) a transfer in a public offering that is registered under the Securities Act of 1933, as amended (the “Securities Act”), (c) a transfer to one or more broker-dealers or their affiliates pursuant to a firm commitment purchase agreement for an offering that is exempt from registration under the Securities Act, (d) a transfer made through the facilities of a registered securities exchange or automated inter-dealer quotation system and (e) a transfer made in compliance with the manner of sale limitations of Rule 144(f) under the Securities Act or any successor rule or provision.

7. “interested stockholder” means any person (other than the Corporation or any direct or indirect majority-owned subsidiary of the Corporation) that (i) is the owner of 15% or more of the outstanding voting stock of the Corporation, or (ii) is an affiliate or associate of the Corporation and was the owner of 15% or more of the outstanding voting stock of the Corporation at any time within the three (3) year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder; and the affiliates and associates of such person; but “interested stockholder” shall not include (a) Snow Phipps, TOBI, any Exempt Transferee or any of their respective affiliates or successors or any “group”, or any member of any such group, to which such persons are a party under Rule 13d-5 of the Exchange Act, or (b) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of any action taken solely by the Corporation, provided that such

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person shall be an interested stockholder if thereafter such person acquires additional shares of voting stock of the Corporation, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested stockholder, the voting stock of the Corporation deemed to be outstanding shall include stock deemed to be owned by the person through application of the definition of “owner” below but shall not include any other unissued stock of the Corporation that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

8. “owner,” including the terms “own” and “owned,” when used with respect to any stock, means a person that individually or with or through any of its affiliates or associates:

(i) beneficially owns such stock, directly or indirectly; or

(ii) has (a) the right to acquire such stock (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; provided, however, that a person shall not be deemed the owner of stock tendered pursuant to a tender or exchange offer made by such person or any of such person’s affiliates or associates until such tendered stock is accepted for purchase or exchange; or (b) the right to vote such stock pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any stock because of such person’s right to vote such stock if the agreement, arrangement or understanding to vote such stock arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to ten (10) or more persons; or

(iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (b) of subsection (ii) above), or disposing of such stock with any other person that beneficially owns, or whose affiliates or associates beneficially own, directly or indirectly, such stock.

9. “person” means any individual, corporation, partnership, unincorporated association or other entity.

10. “stock” means, with respect to any corporation, capital stock and, with respect to any other entity, any equity interest.

11. “voting stock” means stock of any class or series entitled to vote generally in the election of directors. Every reference in this Article X to a percentage of voting stock shall refer to such percentage of the votes of such voting stock.

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ARTICLE XI

INCORPORATOR

The name and the mailing address of the incorporator is:

NAME	MAILING ADDRESS
Christopher D. Farrar	30699 Russell Ranch Road, Suite 295 Westlake Village, California 91362

All powers of the incorporator will hereby terminate upon the filing of this Certificate of Incorporation with the Secretary of State of the State of Delaware.

ARTICLE XII

MISCELLANEOUS

A. If any provision or provisions of this Certificate of Incorporation shall be held to be invalid, illegal or unenforceable as applied to any circumstance for any reason whatsoever: (i) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Certificate of Incorporation (including each portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Certificate of Incorporation (including each such portion of any paragraph of this Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to permit the Corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service or for the benefit of the Corporation to the fullest extent permitted by law.

B. Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, creditors or other constituents, (iii) any action arising pursuant to any provision of the DGCL or this Certificate of Incorporation or the Bylaws (as each may be amended and/or restated from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine, in each such case subject to said Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article XI(B). To the fullest extent permitted by law, the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the United States federal securities laws.

C. For purposes of this Certificate of Incorporation, unless the context otherwise requires, (i) references to “Articles” and “Sections” refer to articles and sections of this Certificate of Incorporation and (ii) the term “include” or “includes” means includes, without limitation, and “including” means including, without limitation.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, Velocity Financial, Inc. has caused this Certificate of Incorporation to be executed by its duly authorized officer on this [•] day of [•], 2020.

VELOCITY FINANCIAL, INC.

By:

Name: Christopher D. Farrar

Title: Chief Executive Officer

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EX-5.1

Exhibit 5.1

2475 Hanover street

Palo Alto, CA 94304

Telephone: +1-650-251-5000

Facsimile: +1-650-251-5002

Direct Dial Number E-mail Address

January 6, 2020

Velocity Financial, LLC

30699 Russell Ranch Road, Suite 295

Westlake Village, California 91362

Ladies and Gentlemen:

We have acted as counsel to Velocity Financial, LLC, a Delaware limited liability company, to be converted into Velocity Financial, Inc., a Delaware corporation (the “Company”), in connection with the Registration Statement on Form S-1 (File No. 333-234250) (the “Registration Statement”) filed by the Company with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), relating to the issuance by the Company of up to 8,337,500 shares of Common Stock, par value $0.01 per share (together with any additional shares of such stock that may be issued by the Company pursuant to Rule 462(b) (as prescribed by the Commission pursuant to the Act) in connection with the offering described in the Registration Statement, the “Shares”).

We have examined the Registration Statement, a form of the Certificate of Conversion of the Company (the “Certificate of Conversion”), a form of the Certificate of Incorporation of the Company (the “Certificate of Incorporation”) and a form of the share certificate, each of which has been filed with the Commission as an exhibit to the Registration Statement. In addition, we have examined, and have relied as to matters of fact upon, originals, or duplicates or certified or conformed copies, of such records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company and have made such other investigations as we have deemed relevant and necessary in connection with the opinions hereinafter set forth.

In rendering the opinion set forth below, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as duplicates or certified or conformed copies and the authenticity of the originals of such latter documents.

Based upon the foregoing, and subject to the qualifications, assumptions and limitations stated herein, we are of the opinion that, when the Certificate of Conversion and Certificate of Incorporation have been duly filed with the Secretary of State for the State of Delaware, and, upon payment and delivery in accordance with the applicable definitive underwriting agreement approved by the Board of Directors of the Company, the Shares will be validly issued, fully paid and nonassessable.

We do not express any opinion herein concerning any law other than the law of the State of New York and the Delaware General Corporation Law.

NEW YORK BEIJING HONG KONG HOUSTON LONDON LOS ANGELES SÃO PAULO TOKYO WASHINGTON, D.C.

We hereby consent to the filing of this opinion letter as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption “Legal Matters” in the prospectus included in the Registration Statement.

Very truly yours,

/s/ Simpson Thacher & Bartlett LLP

SIMPSON THACHER & BARTLETT LLP

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EX-10.5

Exhibit 10.5

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

1.    Purpose. The purpose of the Velocity Financial, Inc. 2020 Omnibus Incentive Plan is to provide a means through which the Company and the other members of the Company Group may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors of the Company and the other members of the Company Group can acquire and maintain an equity interest in the Company, or be paid incentive compensation, including incentive compensation measured by reference to the value of Common Stock, thereby strengthening their commitment to the welfare of the Company Group and aligning their interests with those of the Company’s stockholders.

2.    Definitions. The following definitions shall be applicable throughout the Plan.

(a)    “Absolute Share Limit” has the meaning given to such term in Section 5(b) of the Plan.

(b)    “Adjustment Event” has the meaning given to such term in Section 12(a) of the Plan.

(c)    “Affiliate” means any Person that directly or indirectly controls, is controlled by or is under common control with the Company. The term “control” (including, with correlative meaning, the terms “controlled by” and “under common control with”), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting or other securities, by contract or otherwise.

(d)    “Award” means, individually or collectively, any Incentive Stock Option, Nonqualified Stock Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Other Equity-Based Award and Cash-Based Incentive Award granted under the Plan.

(e)    “Award Agreement” means the document or documents by which each Award (other than a Cash-Based Incentive Award) is evidenced.

(f)    “Board” means the Board of Directors of the Company.

(g)    “Cash-Based Incentive Award” means an Award denominated in cash that is granted under Section 11 of the Plan.

(h)    “Cause” means, as to any Participant, unless the applicable Award Agreement states otherwise, (i) “Cause,” as defined in any employment or consulting agreement between the Participant and the Service Recipient in effect at the time of the Participant’s Termination; or (ii) in the absence of any such employment or consulting agreement (or the absence of any definition of “Cause” contained therein), the Participant’s (A) willful neglect in the performance of the Participant’s duties for the Service Recipient or willful or repeated failure or refusal to perform such duties; (B) engagement in conduct in connection with the Participant’s employment or service with the Service Recipient, which results in, or could reasonably be expected to result in, material harm to the business or reputation of the Company or any other member of the Company Group; (C) conviction of, or plea of guilty or no contest to, (I) any felony; or (II) any other crime that results in, or could reasonably be expected to result in, material harm to the business or reputation of the Company or any other member of the Company Group; (D) material violation of the written policies of the Service Recipient, including, but not limited to, those relating to sexual harassment or the disclosure or misuse of confidential information, or those set forth in the manuals or statements of policy of the Service Recipient; (E) fraud or misappropriation, embezzlement or misuse of funds or property belonging to the Company or any other member of the Company Group; or (F) act of personal dishonesty that involves personal profit in connection with the Participant’s employment or service to the Service Recipient.

(i)    “Change in Control” means:

(i)    the acquisition (whether by purchase, merger, consolidation, combination or other similar transaction) by any Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) (on a fully diluted basis) of either (A) the then outstanding shares of Common Stock, taking into account as outstanding for this purpose such Common Stock issuable upon the exercise of options or warrants, the conversion of convertible stock or debt, and the exercise of any similar right to acquire such Common Stock; or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; provided, that, for purposes of the Plan, the following acquisitions shall not constitute a Change in Control: (I) any acquisition by the Company or any Affiliate; (II) any acquisition by any employee benefit plan sponsored or maintained by the Company or any Affiliate; or (III) in respect of an Award held by a particular Participant, any acquisition by the Participant or any group of Persons including the Participant (or any entity controlled by the Participant or any group of Persons including the Participant);

(ii)    during any period of twelve (12) months, individuals who, at the beginning of such period, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board; provided, that any person becoming a director subsequent to the Effective Date, whose election or nomination for election was approved by a vote of at least two-thirds (2/3^rd) of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-12 of Regulation 14A promulgated under the Exchange Act, with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director; or

(iii)    the sale, transfer or other disposition of all or substantially all of the assets of the Company Group (taken as a whole) to any Person that is not an Affiliate of the Company.

(j)    “Code” means the Internal Revenue Code of 1986, as amended, and any successor thereto. Reference in the Plan to any section of the Code shall be deemed to include any regulations or other interpretative guidance under such section, and any amendments or successor provisions to such section, regulations or guidance.

(k)    “Committee” means the Compensation Committee of the Board or any properly delegated subcommittee thereof or, if no such Compensation Committee or subcommittee thereof exists, the Board.

(l)    “Common Stock” means the common stock of the Company, par value $0.01 per share (and any stock or other securities into which such Common Stock may be converted or into which it may be exchanged).

(m)    “Company” means Velocity Financial, Inc., a Delaware corporation, and any successor thereto.

(n)    “Company Group” means, collectively, the Company and its Subsidiaries.

(o)    “Date of Grant” means the date on which the granting of an Award is authorized, or such other date as may be specified in such authorization.

(p)    “Designated Foreign Subsidiaries” means all members of the Company Group that are organized under the laws of any jurisdiction or country other than the United States of America that may be designated by the Board or the Committee from time to time.

(q)    “Disability” means, as to any Participant, unless the applicable Award Agreement states otherwise, (i) “Disability,” as defined in any employment or consulting agreement between the Participant and the Service Recipient in effect at the time of the Participant’s Termination; or (ii) in the absence of any such employment or consulting agreement (or the absence of any definition of “Disability” contained therein), a condition entitling the Participant to receive benefits under a long-term disability plan of the Service Recipient or

other member of the Company Group in which such Participant is eligible to participate, or, in the absence of such a plan, the complete and permanent inability of the Participant by reason of illness or accident to perform the duties of the position at which the Participant was employed or served when such disability commenced. Any determination of whether Disability exists in the absence of a long-term disability plan shall be made by the Company (or its designee) in its sole and absolute discretion.

(r)    “Effective Date” means [●], 2020.

(s)    “Eligible Person” means any (i) individual employed by any member of the Company Group; provided, that no such employee covered by a collective bargaining agreement shall be an Eligible Person unless and to the extent that such eligibility is set forth in such collective bargaining agreement or in an agreement or instrument relating thereto; (ii) director or officer of any member of the Company Group; or (iii) consultant or advisor to any member of the Company Group who may be offered securities registrable pursuant to a registration statement on Form S-8 under the Securities Act, who, in the case of each of clauses (i) through (iii) above has entered into an Award Agreement or who has received written notification from the Committee or its designee that they have been selected to participate in the Plan.

(t)    “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor thereto. Reference in the Plan to any section of (or rule promulgated under) the Exchange Act shall be deemed to include any rules, regulations or other interpretative guidance under such section or rule, and any amendments or successor provisions to such section, rules, regulations or guidance.

(u)    “Exercise Price” has the meaning given to such term in Section 7(b) of the Plan.

(v)    “Fair Market Value” means, on a given date, (i) if the Common Stock is listed on a national securities exchange, the closing sales price of the Common Stock reported on the primary exchange on which the Common Stock is listed and traded on such date, or, if there are no such sales on that date, then on the last preceding date on which such sales were reported; (ii) if the Common Stock is not listed on any national securities exchange but is quoted in an inter-dealer quotation system on a last sale basis, the average between the closing bid price and ask price reported on such date, or, if there is no such sale on that date, then on the last preceding date on which a sale was reported; or (iii) if the Common Stock is not listed on a national securities exchange or quoted in an inter-dealer quotation system on a last sale basis, the amount determined by the Committee in good faith to be the fair market value of the Common Stock; provided, that, as to any Awards granted on or with a Date of Grant of the date of the pricing of the Company’s initial public offering, “Fair Market Value” shall be equal to the per share price at which the Common Stock is offered to the public in connection with such initial public offering.

(w)    “GAAP” has the meaning given to such term in Section 7(d) of the Plan.

(x)    “Immediate Family Members” has the meaning given to such term in Section 14(b) of the Plan.

(y)    “Incentive Stock Option” means an Option which is designated by the Committee as an incentive stock option as described in Section 422 of the Code and otherwise meets the requirements set forth in the Plan.

(z)    “Indemnifiable Person” has the meaning given to such term in Section 4(e) of the Plan.

(aa)    “Nonqualified Stock Option” means an Option which is not designated by the Committee as an Incentive Stock Option.

(bb)    “Non-Employee Director” means a member of the Board who is not an employee of any member of the Company Group.

(cc)    “Option” means an Award granted under Section 7 of the Plan.

(dd)    “Option Period” has the meaning given to such term in Section 7(c) of the Plan.

(ee)    “Other Equity-Based Award” means an Award that is not an Option, Stock Appreciation Right, Restricted Stock or Restricted Stock Unit, that is granted under Section 10 of the Plan and is (i) payable by delivery of Common Stock, and/or (ii) measured by reference to the value of Common Stock.

(ff)    “Participant” means an Eligible Person who has been selected by the Committee to participate in the Plan and to receive an Award pursuant to the Plan.

(gg)    “Performance Criteria” means specific levels of performance of the Company (and/or one or more of the Company’s Affiliates, divisions or operational and/or business units, business segments, administrative departments, or any combination of the foregoing) or any Participant, which may be determined in accordance with GAAP or on a non-GAAP basis including, but not limited to, one or more of the following measures: (i) terms relative to a peer group or index; (ii) basic, diluted, or adjusted earnings per share; (iii) sales or revenue; (iv) earnings before interest, taxes, and other adjustments (in total or on a per share basis); (v) cash available for distribution; (vi) basic or adjusted net income; (vii) returns on equity, assets, capital, revenue or similar measure; (viii) level and growth of dividends; (ix) the price or increase in price of Common Stock; (x) total shareholder return; (xi) total assets; (xii) growth in assets, new originations of assets, or financing of assets; (xiii) equity market capitalization; (xiv) reduction or other quantifiable goal with respect to general and/or specific expenses; (xv) equity capital raised; (xvi) mergers, acquisitions, increase in enterprise value of Affiliates, Subsidiaries, divisions or business units or sales of assets of Affiliates, Subsidiaries, divisions or business units or sales of assets; and (xvii) any combination of the foregoing. Any one or more of the Performance Criteria may be stated as a percentage of another Performance Criteria, or used on an absolute or relative basis to measure the performance of the Company and/or one or more Affiliates as a whole or any divisions or operational and/or business units, business segments, administrative departments of the Company and/or one or more Affiliates or any combination thereof, as the Committee may deem appropriate, or any of the above Performance Criteria may be compared to the performance of a selected group of comparison companies, or a published or special index that the Committee, in its sole discretion, deems appropriate, or as compared to various stock market indices.

(hh)     “Permitted Transferee” has the meaning given to such term in Section 14(b) of the Plan.

(ii)    “Person” means any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act).

(jj)    “Plan” means this Velocity Financial, Inc. 2020 Omnibus Incentive Plan, as it may be amended and/or restated from time to time.

(kk)    “Qualifying Director” means a person who is, with respect to actions intended to obtain an exemption from Section 16(b) of the Exchange Act pursuant to Rule 16b-3 under the Exchange Act, a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act.

(ll)    “Restricted Period” means the period of time determined by the Committee during which an Award is subject to restrictions, including vesting conditions.

(mm)    “Restricted Stock” means Common Stock, subject to certain specified restrictions (which may include, without limitation, a requirement that the Participant remain continuously employed or provide continuous services for a specified period of time), granted under Section 9 of the Plan.

(nn)    “Restricted Stock Unit” means an unfunded and unsecured promise to deliver shares of Common Stock, cash, other securities or other property, subject to certain restrictions (which may include, without limitation, a requirement that the Participant remain continuously employed or provide continuous services for a specified period of time), granted under Section 9 of the Plan.

(oo)    “SAR Period” has the meaning given to such term in Section 8(c) of the Plan.

(pp)    “Securities Act” means the Securities Act of 1933, as amended, and any successor thereto. Reference in the Plan to any section of (or rule promulgated under) the Securities Act shall be deemed to include any rules, regulations or other interpretative guidance under such section or rule, and any amendments or successor provisions to such section, rules, regulations or guidance.

(qq)    “Service Recipient” means, with respect to a Participant holding a given Award, the member of the Company Group by which the original recipient of such Award is, or following a Termination was most recently, principally employed or to which such original recipient provides, or following a Termination was most recently providing, services, as applicable.

(rr)    “Stock Appreciation Right” or “SAR” means an Award granted under Section 8 of the Plan.

(ss)    “Strike Price” has the meaning given to such term in Section 8(b) of the Plan.

(tt)    “Subsidiary” means, with respect to any specified Person:

(i)    any corporation, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of such entity’s voting securities (without regard to the occurrence of any contingency and after giving effect to any voting agreement or stockholders’ agreement that effectively transfers voting power) is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and

(ii)    any partnership (or any comparable foreign entity) (A) the sole general partner (or functional equivalent thereof) or the managing general partner of which is such Person or Subsidiary of such Person or (B) the only general partners (or functional equivalents thereof) of which are that Person or one or more Subsidiaries of that Person (or any combination thereof).

(uu)    “Substitute Award” has the meaning given to such term in Section 5(e) of the Plan.

(vv)    “Sub-Plans” means any sub-plan to the Plan that has been adopted by the Board or the Committee for the purpose of permitting the offering of Awards to employees of certain Designated Foreign Subsidiaries or otherwise outside the United States of America, with each such sub-plan designed to comply with local laws applicable to offerings in such foreign jurisdictions. Although any Sub-Plan may be designated a separate and independent plan from the Plan in order to comply with applicable local laws, the Absolute Share Limit and the other limits specified in Section 5(b) shall apply in the aggregate to the Plan and any Sub-Plan adopted hereunder.

(ww)    “Termination” means the termination of a Participant’s employment or service, as applicable, with the Service Recipient for any reason (including death).

3.    Effective Date; Duration. The Plan shall be effective as of the Effective Date. The expiration date of the Plan, on and after which date no Awards may be granted hereunder, shall be the tenth (10th) anniversary of the Effective Date; provided, that such expiration shall not affect Awards then outstanding, and the terms and conditions of the Plan shall continue to apply to such Awards.

4.    Administration.

(a)    General. The Committee shall administer the Plan. To the extent required to comply with the provisions of Rule 16b-3 promulgated under the Exchange Act (if the Board is not acting as the Committee under the Plan), it is intended that each member of the Committee shall, at the time such member takes any action with respect to an Award under the Plan that is intended to qualify for the exemptions provided by Rule 16b-3 promulgated under the Exchange Act, be a Qualifying Director. However, the fact that a Committee member shall fail to qualify as a Qualifying Director shall not invalidate any Award granted by the Committee that is otherwise validly granted under the Plan.

(b)    Committee Authority. Subject to the provisions of the Plan and applicable law, the Committee shall have the sole and plenary authority, in addition to other express powers and authorizations conferred on the Committee by the Plan, to (i) designate Participants; (ii) determine the type or types of Awards to be granted to a

Participant; (iii) determine the number of shares of Common Stock to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards; (iv) determine the terms and conditions of any Award; (v) determine whether, to what extent, and under what circumstances Awards may be settled in, or exercised for, cash, shares of Common Stock, other securities, other Awards or other property, or canceled, forfeited, or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent, and under what circumstances the delivery of cash, shares of Common Stock, other securities, other Awards or other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant or of the Committee; (vii) interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to, or Award granted under, the Plan; (viii) establish, amend, suspend, or waive any rules and regulations and appoint such agents as the Committee shall deem appropriate for the proper administration of the Plan; (ix) adopt Sub-Plans; and (x) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.

(c)    Delegation. Except to the extent prohibited by applicable law or the applicable rules and regulations of any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or traded, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. Without limiting the generality of the foregoing, the Committee may delegate to one or more officers of any member of the Company Group, the authority to act on behalf of the Committee with respect to any matter, right, obligation, or election which is the responsibility of, or which is allocated to, the Committee herein, and which may be so delegated as a matter of law, except with respect to grants of Awards to persons (i) who are Non-Employee Directors, or (ii) who are subject to Section 16 of the Exchange Act.

(d)    Finality of Decisions. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions under or with respect to the Plan, any Award or any Award Agreement shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon all Persons, including, without limitation, any member of the Company Group, any Participant, any holder or beneficiary of any Award, and any stockholder of the Company.

(e)    Indemnification. No member of the Board, the Committee or any employee or agent of any member of the Company Group (each such Person, an “Indemnifiable Person”) shall be liable for any action taken or omitted to be taken or any determination made with respect to the Plan or any Award hereunder (unless constituting fraud or a willful criminal act or omission). Each Indemnifiable Person shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense (including attorneys’ fees) that may be imposed upon or incurred by such Indemnifiable Person in connection with or resulting from any action, suit or proceeding to which such Indemnifiable Person may be a party or in which such Indemnifiable Person may be involved by reason of any action taken or omitted to be taken or determination made with respect to the Plan or any Award hereunder and against and from any and all amounts paid by such Indemnifiable Person with the Company’s approval, in settlement thereof, or paid by such Indemnifiable Person in satisfaction of any judgment in any such action, suit or proceeding against such Indemnifiable Person, and the Company shall advance to such Indemnifiable Person any such expenses promptly upon written request (which request shall include an undertaking by the Indemnifiable Person to repay the amount of such advance if it shall ultimately be determined, as provided below, that the Indemnifiable Person is not entitled to be indemnified); provided, that the Company shall have the right, at its own expense, to assume and defend any such action, suit or proceeding and once the Company gives notice of its intent to assume the defense, the Company shall have sole control over such defense with counsel of the Company’s choice. The foregoing right of indemnification shall not be available to an Indemnifiable Person to the extent that a final judgment or other final adjudication (in either case not subject to further appeal) binding upon such Indemnifiable Person determines that the acts, omissions or determinations of such Indemnifiable Person giving rise to the indemnification claim resulted from such Indemnifiable Person’s fraud or willful criminal act or omission or that such right of indemnification is otherwise prohibited by law or by the organizational documents of any member of the Company Group. The foregoing right of indemnification shall not be exclusive of or otherwise supersede any other rights of indemnification to which such Indemnifiable Persons may be entitled under the organizational documents of any member of the Company Group, as a matter of law, under an individual indemnification agreement or contract or otherwise, or any other power that the Company may have to indemnify such Indemnifiable Persons or hold such Indemnifiable Persons harmless.

(f)    Board Authority. Notwithstanding anything to the contrary contained in the Plan, the Board may, in its sole discretion, at any time and from time to time, grant Awards and administer the Plan with respect to any Awards. Any such actions by the Board shall be subject to the applicable rules of the securities exchange or inter-dealer quotation system on which the Common Stock is listed or quoted. In any such case, the Board shall have all the authority granted to the Committee under the Plan.

5.    Grant of Awards; Shares Subject to the Plan; Limitations.

(a)    Grants. The Committee may, from time to time, grant Awards to one or more Eligible Persons. All Awards granted under the Plan shall vest and become exercisable in such manner and on such date or dates or upon such event or events as determined by the Committee, including, without limitation, attainment of Performance Criteria.

(b)    Share Reserve and Limits. Awards granted under the Plan shall be subject to the following limitations: (i) subject to Section 12 of the Plan, no more than [●] shares of Common Stock (the “Absolute Share Limit”) shall be available for Awards under the Plan; (ii) subject to Section 12 of the Plan, no more than the number of shares of Common Stock equal to the Absolute Share Limit may be issued in the aggregate pursuant to the exercise of Incentive Stock Options granted under the Plan; and (iii) the maximum number of shares of Common Stock subject to Awards granted during a single fiscal year to any Non-Employee Director, taken together with any cash fees paid to such Non-Employee Director during the fiscal year, shall not exceed one million dollars ($1,000,000) in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for financial reporting purposes).

(c)    Share Counting. Other than with respect to Substitute Awards, to the extent that an Award expires or is canceled, forfeited, or terminated without issuance to the Participant of the full number of shares of Common Stock to which the Award related, the unissued shares will again be available for grant under the Plan. Shares of Common Stock shall be deemed to have been issued in settlement of Awards if the Fair Market Value equivalent of such shares is paid in cash in connection with such settlement; provided, that no shares shall be deemed to have been issued in settlement of a SAR or Restricted Stock Unit that provides for settlement only in cash and settles only in cash or in respect of any Cash-Based Incentive Award. In no event shall shares (i) tendered or withheld on exercise of Options or other Awards for the payment of the exercise or purchase price or withholding taxes, (ii) not issued upon the settlement of a SAR that by the terms of the Award Agreement would settle in shares of Common Stock (or could settle in shares of Common Stock), or (iii) purchased on the open market with cash proceeds from the exercise of Options, again become available for other Awards under the Plan.

(d)    Source of Shares. Shares of Common Stock issued by the Company in settlement of Awards may be authorized and unissued shares, shares held in the treasury of the Company, shares purchased on the open market or by private purchase or a combination of the foregoing.

(e)    Substitute Awards. Awards may, in the sole discretion of the Committee, be granted under the Plan in assumption of, or in substitution for, outstanding awards previously granted by an entity directly or indirectly acquired by the Company or with which the Company combines (“Substitute Awards”). Substitute Awards shall not be counted against the Absolute Share Limit; provided, that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code shall be counted against the aggregate number of shares of Common Stock available for Awards of Incentive Stock Options under the Plan. Subject to applicable stock exchange requirements, available shares under a stockholder-approved plan of an entity directly or indirectly acquired by the Company or with which the Company combines (as appropriately adjusted to reflect the acquisition or combination transaction) may be used for Awards under the Plan and shall not reduce the number of shares of Common Stock available for issuance under the Plan.

6.    Eligibility. Participation in the Plan shall be limited to Eligible Persons.

7.    Options.

(a)    General. Each Option granted under the Plan shall be evidenced by an Award Agreement, which agreement need not be the same for each Participant. Each Option so granted shall be subject to the conditions set forth in this Section 7, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement. All Options granted under the Plan shall be Nonqualified Stock Options unless the applicable Award Agreement expressly states that the Option is intended to be an Incentive Stock Option. Incentive Stock Options shall be granted only to Eligible Persons who are employees of a member of the Company Group, and no Incentive Stock Option shall be granted to any Eligible Person who is ineligible to receive an Incentive Stock Option under the Code. No Option shall be treated as an Incentive Stock Option unless the Plan has been approved by the stockholders of the Company in a manner intended to comply with the stockholder approval requirements of Section 422(b)(1) of the Code; provided, that any Option intended to be an Incentive Stock Option shall not fail to be effective solely on account of a failure to obtain such approval, but rather such Option shall be treated as a Nonqualified Stock Option unless and until such approval is obtained. In the case of an Incentive Stock Option, the terms and conditions of such grant shall be subject to, and comply with, such rules as may be prescribed by Section 422 of the Code. If for any reason an Option intended to be an Incentive Stock Option (or any portion thereof) shall not qualify as an Incentive Stock Option, then, to the extent of such nonqualification, such Option or portion thereof shall be regarded as a Nonqualified Stock Option appropriately granted under the Plan.

(b)    Exercise Price. Except as otherwise provided by the Committee in the case of Substitute Awards, the exercise price (“Exercise Price”) per share of Common Stock for each Option shall not be less than one hundred percent (100%) of the Fair Market Value of such share (determined as of the Date of Grant); provided, that, in the case of an Incentive Stock Option granted to an employee who, at the time of the grant of such Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of any member of the Company Group, the Exercise Price per share shall be no less than one hundred ten percent (110%) of the Fair Market Value per share on the Date of Grant.

(c)    Vesting and Expiration.

(i)    Options shall vest and become exercisable in such manner and on such date or dates or upon such event or events as determined by the Committee.

(ii)    Options shall expire upon a date determined by the Committee, not to exceed ten (10) years from the Date of Grant (the “Option Period”); provided, that, if the Option Period (other than in the case of an Incentive Stock Option) would expire at a time when trading in the shares of Common Stock is prohibited by the Company’s insider trading policy (or Company-imposed “blackout period”), then the Option Period shall be automatically extended until the thirtieth (30th) day following the expiration of such prohibition. Notwithstanding the foregoing, in no event shall the Option Period exceed five (5) years from the Date of Grant in the case of an Incentive Stock Option granted to a Participant who on the Date of Grant owns stock representing more than ten percent (10%) of the voting power of all classes of stock of any member of the Company Group.

(d)    Method of Exercise and Form of Payment. No shares of Common Stock shall be issued pursuant to any exercise of an Option until payment in full of the Exercise Price therefor is received by the Company and the Participant has paid to the Company an amount equal to any Federal, state, local and non-U.S. income, employment and any other applicable taxes required to be withheld. Options which have become exercisable may be exercised by delivery of written or electronic notice of exercise to the Company (or telephonic instructions to the extent provided by the Committee) in accordance with the terms of the Option accompanied by payment of the Exercise Price. The Exercise Price shall be payable: (i) in cash, check, cash equivalent and/or shares of Common Stock valued at the Fair Market Value at the time the Option is exercised (including, pursuant to procedures approved by the Committee, by means of attestation of ownership of a sufficient number of shares of Common Stock in lieu of actual issuance of such shares to the Company); provided, that such shares of Common Stock are not subject to any pledge or other security interest and have been held by the Participant for at least six (6) months (or such other period as established from time to time by the Committee in order to avoid adverse accounting treatment applying generally accepted accounting principles (“GAAP”)); or (ii) by such other method as the

Committee may permit, in its sole discretion, including, without limitation (A) in other property having a fair market value on the date of exercise equal to the Exercise Price; (B) if there is a public market for the shares of Common Stock at such time, by means of a broker-assisted “cashless exercise” pursuant to which the Company is delivered (including telephonically to the extent permitted by the Committee) a copy of irrevocable instructions to a stockbroker to sell the shares of Common Stock otherwise issuable upon the exercise of the Option and to deliver promptly to the Company an amount equal to the Exercise Price; or (C) a “net exercise” procedure effected by withholding the minimum number of shares of Common Stock otherwise issuable in respect of an Option that are needed to pay the Exercise Price. Any fractional shares of Common Stock shall be settled in cash.

(e)    Notification upon Disqualifying Disposition of an Incentive Stock Option. Each Participant awarded an Incentive Stock Option under the Plan shall notify the Company in writing immediately after the date the Participant makes a disqualifying disposition of any Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A disqualifying disposition is any disposition (including, without limitation, any sale) of such Common Stock before the later of (i) the date that is two (2) years after the Date of Grant of the Incentive Stock Option, or (ii) the date that is one (1) year after the date of exercise of the Incentive Stock Option. The Company may, if determined by the Committee and in accordance with procedures established by the Committee, retain possession, as agent for the applicable Participant, of any Common Stock acquired pursuant to the exercise of an Incentive Stock Option until the end of the period described in the preceding sentence, subject to complying with any instructions from such Participant as to the sale of such Common Stock.

(f)    Compliance With Laws, etc. Notwithstanding the foregoing, in no event shall a Participant be permitted to exercise an Option in a manner which the Committee determines would violate the Sarbanes-Oxley Act of 2002, as it may be amended from time to time, or any other applicable law or the applicable rules and regulations of the Securities and Exchange Commission or the applicable rules and regulations of any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or traded.

8.    Stock Appreciation Rights.

(a)    General. Each SAR granted under the Plan shall be evidenced by an Award Agreement. Each SAR so granted shall be subject to the conditions set forth in this Section 8, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement. Any Option granted under the Plan may include tandem SARs. The Committee also may award SARs to Eligible Persons independent of any Option.

(b)    Strike Price. Except as otherwise provided by the Committee in the case of Substitute Awards, the strike price (“Strike Price”) per share of Common Stock for each SAR shall not be less than one hundred percent (100%) of the Fair Market Value of such share (determined as of the Date of Grant). Notwithstanding the foregoing, a SAR granted in tandem with (or in substitution for) an Option previously granted shall have a Strike Price equal to the Exercise Price of the corresponding Option.

(c)    Vesting and Expiration.

(i)    A SAR granted in connection with an Option shall become exercisable and shall expire according to the same vesting schedule and expiration provisions as the corresponding Option. A SAR granted independent of an Option shall vest and become exercisable in such manner and on such date or dates or upon such event or events as determined by the Committee; provided, that, notwithstanding any such vesting dates or events, the Committee may, in its sole discretion, accelerate the vesting of any SAR at any time and for any reason.

(ii)    SARs shall expire upon a date determined by the Committee, not to exceed ten (10) years from the Date of Grant (the “SAR Period”); provided, that, if the SAR Period would expire at a time when trading in the shares of Common Stock is prohibited by the Company’s insider trading policy (or Company-imposed “blackout period”), then the SAR Period shall be automatically extended until the thirtieth (30th) day following the expiration of such prohibition.

(d)    Method of Exercise. SARs which have become exercisable may be exercised by delivery of written or electronic notice of exercise to the Company in accordance with the terms of the Award, specifying the number of SARs to be exercised and the date on which such SARs were awarded.

(e)    Payment. Upon the exercise of a SAR, the Company shall pay to the Participant an amount equal to the number of shares subject to the SAR that is being exercised multiplied by the excess of the Fair Market Value of one (1) share of Common Stock on the exercise date over the Strike Price, less an amount equal to any Federal, state, local and non-U.S. income, employment and any other applicable taxes required to be withheld. The Company shall pay such amount in cash, in shares of Common Stock valued at Fair Market Value, or any combination thereof, as determined by the Committee. Any fractional shares of Common Stock shall be settled in cash.

9.    Restricted Stock and Restricted Stock Units.

(a)    General. Each grant of Restricted Stock and Restricted Stock Units shall be evidenced by an Award Agreement. Each Restricted Stock and Restricted Stock Unit so granted shall be subject to the conditions set forth in this Section 9, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement.

(b)    Stock Certificates and Book-Entry; Escrow or Similar Arrangement. Upon the grant of Restricted Stock, the Committee shall cause a stock certificate registered in the name of the Participant to be issued or shall cause share(s) of Common Stock to be registered in the name of the Participant and held in book-entry form subject to the Company’s directions and, if the Committee determines that the Restricted Stock shall be held by the Company or in escrow rather than issued to the Participant pending the release of the applicable restrictions, the Committee may require the Participant to additionally execute and deliver to the Company (i) an escrow agreement satisfactory to the Committee, if applicable; and (ii) the appropriate stock power (endorsed in blank) with respect to the Restricted Stock covered by such agreement. If a Participant shall fail to execute and deliver (in a manner permitted under Section 14(a) of the Plan or as otherwise determined by the Committee) an agreement evidencing an Award of Restricted Stock and, if applicable, an escrow agreement and blank stock power within the amount of time specified by the Committee, the Award shall be null and void. Subject to the restrictions set forth in this Section 9, Section 14(c) of the Plan and the applicable Award Agreement, a Participant generally shall have the rights and privileges of a stockholder as to shares of Restricted Stock, including, without limitation, the right to vote such Restricted Stock. To the extent shares of Restricted Stock are forfeited, any stock certificates issued to the Participant evidencing such shares shall be returned to the Company, and all rights of the Participant to such shares and as a stockholder with respect thereto shall terminate without further obligation on the part of the Company. A Participant shall have no rights or privileges as a stockholder as to Restricted Stock Units.

(c)    Vesting. Restricted Stock and Restricted Stock Units shall vest, and any applicable Restricted Period shall lapse, in such manner and on such date or dates or upon such event or events as determined by the Committee.

(d)    Issuance of Restricted Stock and Settlement of Restricted Stock Units.

(i)    Upon the expiration of the Restricted Period with respect to any shares of Restricted Stock, the restrictions set forth in the applicable Award Agreement shall be of no further force or effect with respect to such shares, except as set forth in the applicable Award Agreement. If an escrow arrangement is used, upon such expiration, the Company shall issue to the Participant, or the Participant’s beneficiary, without charge, the stock certificate (or, if applicable, a notice evidencing a book-entry notation) evidencing the shares of Restricted Stock which have not then been forfeited and with respect to which the Restricted Period has expired (rounded down to the nearest full share). Dividends, if any, that may have been withheld by the Committee and attributable to any particular share of Restricted Stock shall be distributed to the Participant in cash or, in the sole discretion of the Committee, in shares of Common Stock having a Fair Market Value (on the date of distribution) equal to the amount of such dividends, upon the release of restrictions on such share and, if such share is forfeited, the Participant shall have no right to such dividends.

(ii)    Unless otherwise provided by the Committee in an Award Agreement or otherwise, upon the expiration of the Restricted Period with respect to any outstanding Restricted Stock Units, the Company shall issue to the Participant or the Participant’s beneficiary, without charge, one (1) share of Common Stock (or other securities or other property, as applicable) for each such outstanding Restricted Stock Unit; provided, that the Committee may, in its sole discretion, elect to (A) pay cash or part cash and part shares of Common Stock in lieu of issuing only shares of Common Stock in respect of such Restricted Stock Units; or (B) defer the issuance of shares of Common Stock (or cash or part cash and part shares of Common Stock, as the case may be) beyond the expiration of the Restricted Period if such extension would not cause adverse tax consequences under Section 409A of the Code. If a cash payment is made in lieu of issuing shares of Common Stock in respect of such Restricted Stock Units, the amount of such payment shall be equal to the Fair Market Value per share of the Common Stock as of the date on which the Restricted Period lapsed with respect to such Restricted Stock Units.

(e)    Legends on Restricted Stock. Each certificate, if any, or book entry representing Restricted Stock awarded under the Plan, if any, shall bear a legend or book entry notation substantially in the form of the following, in addition to any other information the Company deems appropriate, until the lapse of all restrictions with respect to such shares of Common Stock:

TRANSFER OF THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY IS RESTRICTED PURSUANT TO THE TERMS OF THE VELOCITY FINANCIAL, INC. 2020 OMNIBUS INCENTIVE PLAN AND A RESTRICTED STOCK AWARD AGREEMENT BETWEEN VELOCITY FINANCIAL, INC. AND PARTICIPANT. A COPY OF SUCH PLAN AND AWARD AGREEMENT IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF VELOCITY FINANCIAL, INC.

10.    Other Equity-Based Awards. The Committee may grant Other Equity-Based Awards under the Plan to Eligible Persons, alone or in tandem with other Awards, in such amounts and dependent on such conditions as the Committee shall from time to time in its sole discretion determine. Each Other Equity-Based Award granted under the Plan shall be evidenced by an Award Agreement and shall be subject to such conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement.

11.    Cash-Based Incentive Awards. The Committee may grant Cash-Based Incentive Awards under the Plan to any Eligible Person. Each Cash-Based Incentive Award granted under the Plan shall be evidenced in such form as the Committee may determine from time to time.

12.    Changes in Capital Structure and Similar Events. Notwithstanding any other provision in the Plan to the contrary, the following provisions shall apply to all Awards granted hereunder (other than Cash-Based Incentive Awards):

(a)    General. In the event of (i) any dividend (other than regular cash dividends) or other distribution (whether in the form of cash, shares of Common Stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, split-off, spin-off, combination, repurchase or exchange of shares of Common Stock or other securities of the Company, issuance of warrants or other rights to acquire shares of Common Stock or other securities of the Company, or other similar corporate transaction or event that affects the shares of Common Stock (including a Change in Control); or (ii) unusual or nonrecurring events affecting the Company, including changes in applicable rules, rulings, regulations or other requirements, that the Committee determines, in its sole discretion, could result in substantial dilution or enlargement of the rights intended to be granted to, or available for, Participants (any event in (i) or (ii), an “Adjustment Event”), the Committee shall, in respect of any such Adjustment Event, make such proportionate substitution or adjustment, if any, as it deems equitable, to any or all of (A) the Absolute Share Limit, or any other limit applicable under the Plan with respect to the number of Awards which may be granted hereunder; (B) the number of shares of Common Stock or other securities of the Company (or number and kind of other securities or other property) which may be issued in respect of Awards or with respect to which Awards may be granted under the Plan or any Sub-Plan; and (C) the terms of any outstanding Award, including, without limitation, (I) the number of shares of Common Stock or other securities of the Company (or number and kind of other securities or other property) subject to outstanding Awards or to which outstanding Awards relate; (II) the Exercise Price or Strike Price with respect to any Award; or

(III) any applicable performance measures (including, without limitation, Performance Criteria); provided, that, in the case of any “equity restructuring” (within the meaning of the Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor pronouncement thereto)), the Committee shall make an equitable or proportionate adjustment to outstanding Awards to reflect such equity restructuring.

(b)    Change in Control. Without limiting the foregoing, in connection with any Change in Control, the Committee may, in its sole discretion, provide for any one or more of the following:

(i)    substitution or assumption of Awards, or to the extent that the surviving entity (or Affiliate thereof) of such Change in Control does not substitute or assume the Awards, full acceleration of vesting of, exercisability of, or lapse of restrictions on, as applicable, any Awards; provided, that, with respect to any performance-vested Awards, any such acceleration of vesting, exercisability, or lapse of restrictions shall be based on actual performance through the date of such Change in Control; and

(ii)    cancellation of any one or more outstanding Awards and payment to the holders of such Awards that are vested as of such cancellation (including, without limitation, any Awards that would vest as a result of the occurrence of such event but for such cancellation or for which vesting is accelerated by the Committee in connection with such event pursuant to clause (i) above), the value of such Awards, if any, as determined by the Committee (which value, if applicable, may be based upon the price per share of Common Stock received or to be received by other stockholders of the Company in such event), including, without limitation, in the case of an outstanding Option or SAR, a cash payment in an amount equal to the excess, if any, of the Fair Market Value (as of a date specified by the Committee) of the shares of Common Stock subject to such Option or SAR over the aggregate Exercise Price or Strike Price of such Option or SAR (it being understood that, in such event, any Option or SAR having a per share Exercise Price or Strike Price equal to, or in excess of, the Fair Market Value of a share of Common Stock subject thereto may be canceled and terminated without any payment or consideration therefor).

For purposes of clause (i) above, an award will be considered granted in substitution of an Award if it has an equivalent value (as determined consistent with clause (ii) above) with the original Award, whether designated in securities of the acquiror in such Change in Control transaction (or an Affiliate thereof), or in cash or other property (including in the same consideration that other stockholders of the Company receive in connection with such Change in Control transaction), and retains the vesting schedule applicable to the original Award.

Payments to holders pursuant to clause (ii) above shall be made in cash or, in the sole discretion of the Committee, in the form of such other consideration necessary for a Participant to receive property, cash, or securities (or combination thereof) as such Participant would have been entitled to receive upon the occurrence of the transaction if the Participant had been, immediately prior to such transaction, the holder of the number of shares of Common Stock covered by the Award at such time (less any applicable Exercise Price or Strike Price).

(c)    Other Requirements. Prior to any payment or adjustment contemplated under this Section 12, the Committee may require a Participant to (i) represent and warrant as to the unencumbered title to the Participant’s Awards; (ii) bear such Participant’s pro rata share of any post-closing indemnity obligations, and be subject to the same post-closing purchase price adjustments, escrow terms, offset rights, holdback terms, and similar conditions as the other holders of Common Stock, subject to any limitations or reductions as may be necessary to comply with Section 409A of the Code; and (iii) deliver customary transfer documentation as reasonably determined by the Committee.

(d)    Fractional Shares. Any adjustment provided under this Section 12 may provide for the elimination of any fractional share that might otherwise become subject to an Award.

(e)    Binding Effect. Any adjustment, substitution, determination of value or other action taken by the Committee under this Section 12 shall be conclusive and binding for all purposes.

13.    Amendments and Termination.

(a)    Amendment and Termination of the Plan. The Board or Committee may amend, alter, suspend, discontinue, or terminate the Plan or any portion thereof at any time; provided, that no such amendment, alteration, suspension, discontinuance or termination shall be made without stockholder approval if (i) such approval is necessary to comply with any regulatory requirement applicable to the Plan (including, without limitation, as necessary to comply with any rules or regulations of any securities exchange or inter-dealer quotation system on which the securities of the Company may be listed or quoted) or for changes in GAAP to new accounting standards; (ii) it would materially increase the number of securities which may be issued under the Plan (except for increases pursuant to Sections 5 or 12 of the Plan); or (iii) it would materially modify the requirements for participation in the Plan; provided, further, that any such amendment, alteration, suspension, discontinuance or termination that would materially and adversely affect the rights of any Participant or any holder or beneficiary of any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant, holder or beneficiary. Notwithstanding the foregoing, no amendment shall be made to Section 13(c) of the Plan without stockholder approval.

(b)    Amendment of Award Agreements. The Committee may, to the extent consistent with the terms of the Plan and any applicable Award Agreement, waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate, any Award theretofore granted or the associated Award Agreement, prospectively or retroactively (including after a Participant’s Termination); provided, that, other than pursuant to Section 12, any such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination that would materially and adversely affect the rights of any Participant with respect to any Award theretofore granted shall not to that extent be effective without the consent of the affected Participant.

(c)    No Repricing. Notwithstanding anything in the Plan to the contrary, without stockholder approval, except as otherwise permitted under Section 12 of the Plan, (i) no amendment or modification may reduce the Exercise Price of any Option or the Strike Price of any SAR; (ii) the Committee may not cancel any outstanding Option or SAR and replace it with a new Option or SAR (with a lower Exercise Price or Strike Price, as the case may be) or other Award or cash payment that is greater than the intrinsic value (if any) of the cancelled Option or SAR; and (iii) the Committee may not take any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted.

14.    General.

(a)    Award Agreements. Each Award (other than a Cash-Based Incentive Award) under the Plan shall be evidenced by an Award Agreement, which shall be delivered to the Participant to whom such Award was granted and shall specify the terms and conditions of the Award and any rules applicable thereto, including, without limitation, the effect on such Award of the death, Disability or Termination of a Participant, or of such other events as may be determined by the Committee. For purposes of the Plan, an Award Agreement may be in any such form (written or electronic) as determined by the Committee (including, without limitation, a Board or Committee resolution, an employment agreement, a notice, a certificate or a letter) evidencing the Award. The Committee need not require an Award Agreement to be signed by the Participant or a duly authorized representative of the Company.

(b)    Nontransferability.

(i)    Each Award shall be exercisable only by such Participant to whom such Award was granted during the Participant’s lifetime, or, if permissible under applicable law, by the Participant’s legal guardian or representative. No Award may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant (unless such transfer is specifically required pursuant to a domestic relations order or by applicable law) other than by will or by the laws of descent and distribution and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance shall be void and unenforceable against any member of the Company Group; provided, that the designation of a beneficiary shall not constitute an assignment, alienation, pledge, attachment, sale, transfer or encumbrance.

(ii)    Notwithstanding the foregoing, the Committee may, in its sole discretion, permit Awards (other than Incentive Stock Options) to be transferred by a Participant, without consideration, subject to such rules as the Committee may adopt consistent with any applicable Award Agreement to preserve the purposes of the Plan, to (A) any person who is a “family member” of the Participant, as such term is used in the instructions to Form S-8 under the Securities Act or any successor form of registration statement promulgated by the Securities and Exchange Commission (collectively, the “Immediate Family Members”); (B) a trust solely for the benefit of the Participant and the Participant’s Immediate Family Members; (C) a partnership or limited liability company whose only partners or stockholders are the Participant and the Participant’s Immediate Family Members; or (D) a beneficiary to whom donations are eligible to be treated as “charitable contributions” for federal income tax purposes (each transferee described in clauses (A), (B), (C) and (D) above is hereinafter referred to as a “Permitted Transferee”); provided, that the Participant gives the Committee advance written notice describing the terms and conditions of the proposed transfer and the Committee notifies the Participant in writing that such a transfer would comply with the requirements of the Plan.

(iii)    The terms of any Award transferred in accordance with clause (ii) above shall apply to the Permitted Transferee and any reference in the Plan, or in any applicable Award Agreement, to a Participant shall be deemed to refer to the Permitted Transferee, except that (A) Permitted Transferees shall not be entitled to transfer any Award, other than by will or the laws of descent and distribution; (B) Permitted Transferees shall not be entitled to exercise any transferred Option unless there shall be in effect a registration statement on an appropriate form covering the shares of Common Stock to be acquired pursuant to the exercise of such Option if the Committee determines, consistent with any applicable Award Agreement, that such a registration statement is necessary or appropriate; (C) neither the Committee nor the Company shall be required to provide any notice to a Permitted Transferee, whether or not such notice is or would otherwise have been required to be given to the Participant under the Plan or otherwise; and (D) the consequences of a Participant’s Termination under the terms of the Plan and the applicable Award Agreement shall continue to be applied with respect to the Participant, including, without limitation, that an Option shall be exercisable by the Permitted Transferee only to the extent, and for the periods, specified in the Plan and the applicable Award Agreement.

(c)    Dividends and Dividend Equivalents. The Committee may, in its sole discretion, provide a Participant as part of an Award with dividends, dividend equivalents, or similar payments in respect of Awards, payable in cash, shares of Common Stock, other securities, other Awards or other property, on a current or deferred basis, on such terms and conditions as may be determined by the Committee in its sole discretion, including, without limitation, payment directly to the Participant, withholding of such amounts by the Company subject to vesting of the Award or reinvestment in additional shares of Common Stock, Restricted Stock or other Awards. Without limiting the foregoing, unless otherwise provided in the Award Agreement, any dividend otherwise payable in respect of any share of Restricted Stock that remains subject to vesting conditions at the time of payment of such dividend shall be retained by the Company and remain subject to the same vesting conditions as the share of Restricted Stock to which the dividend relates.

(d)    Tax Withholding.

(i)    A Participant shall be required to pay to the Company or one or more of its Subsidiaries, as applicable, an amount in cash (by check or wire transfer) equal to the aggregate amount of any income, employment and/or other applicable taxes that are statutorily required to be withheld in respect of an Award. Alternatively, the Company or any of its Subsidiaries may elect, in its sole discretion, to satisfy this requirement by withholding such amount from any cash compensation or other cash amounts owing to a Participant.

(ii)    Without limiting the foregoing, the Committee may (but is not obligated to), in its sole discretion, permit or require a Participant to satisfy, all or any portion of the minimum income, employment and/or other applicable taxes that are statutorily required to be withheld with respect to an Award by (A) the delivery of shares of Common Stock (which are not subject to any pledge or other security interest) that have been both held by the Participant and vested for at least six (6) months (or such other period as established from time to time by the Committee in order to avoid adverse accounting treatment under

applicable accounting standards) having an aggregate Fair Market Value equal to such minimum statutorily required withholding liability (or portion thereof); or (B) having the Company withhold from the shares of Common Stock otherwise issuable or deliverable to, or that would otherwise be retained by, the Participant upon the grant, exercise, vesting or settlement of the Award, as applicable, a number of shares of Common Stock with an aggregate Fair Market Value equal to an amount, subject to clause (iii) below, not in excess of such minimum statutorily required withholding liability (or portion thereof).

(iii)    The Committee has full discretion to allow Participants to satisfy, in whole or in part, any additional income, employment and/or other applicable taxes payable by them with respect to an Award by electing to have the Company withhold from the shares of Common Stock otherwise issuable or deliverable to, or that would otherwise be retained by, a Participant upon the grant, exercise, vesting or settlement of the Award, as applicable, shares of Common Stock having an aggregate Fair Market Value that is greater than the applicable minimum required statutory withholding liability (but such withholding may in no event be in excess of the maximum statutory withholding amount(s) in a Participant’s relevant tax jurisdictions).

(e)    Data Protection. By participating in the Plan or accepting any rights granted under it, each Participant consents to the collection and processing of personal data relating to the Participant so that the Company and its Affiliates can fulfill their obligations and exercise their rights under the Plan and generally administer and manage the Plan. This data will include, but may not be limited to, data about participation in the Plan and shares offered or received, purchased, or sold under the Plan from time to time and other appropriate financial and other data (such as the date on which the Awards were granted) about the Participant and the Participant’s participation in the Plan.

(f)    No Claim to Awards; No Rights to Continued Employment; Waiver. No employee of any member of the Company Group, or other Person, shall have any claim or right to be granted an Award under the Plan or, having been selected for the grant of an Award, to be selected for a grant of any other Award. There is no obligation for uniformity of treatment of Participants or holders or beneficiaries of Awards. The terms and conditions of Awards and the Committee’s determinations and interpretations with respect thereto need not be the same with respect to each Participant and may be made selectively among Participants, whether or not such Participants are similarly situated. Neither the Plan nor any action taken hereunder shall be construed as giving any Participant any right to be retained in the employ or service of the Service Recipient or any other member of the Company Group, nor shall it be construed as giving any Participant any rights to continued service on the Board. The Service Recipient or any other member of the Company Group may at any time dismiss a Participant from employment or discontinue any consulting relationship, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or any Award Agreement. By accepting an Award under the Plan, a Participant shall thereby be deemed to have waived any claim to continued exercise or vesting of an Award or to damages or severance entitlement related to non-continuation of the Award beyond the period provided under the Plan or any Award Agreement, except to the extent of any provision to the contrary in any written employment contract or other agreement between the Service Recipient and/or any member of the Company Group and the Participant, whether any such agreement is executed before, on or after the Date of Grant.

(g)    International Participants. With respect to Participants who reside or work outside of the United States of America, the Committee may, in its sole discretion, amend the terms of the Plan and create or amend Sub-Plans or amend outstanding Awards with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant or any member of the Company Group.

(h)    Designation and Change of Beneficiary. Each Participant may file with the Committee a written designation of one or more Persons as the beneficiary or beneficiaries, as applicable, who shall be entitled to receive the amounts payable with respect to an Award, if any, due under the Plan upon the Participant’s death. A Participant may, from time to time, revoke or change the Participant’s beneficiary designation without the consent of any prior beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Participant’s death, and in no event shall it be effective as of a date prior to such receipt. If no beneficiary designation is filed by a Participant, the beneficiary shall be deemed to be the Participant’s spouse or, if the Participant is unmarried at the time of death, the Participant’s estate.

(i)    Termination. Except as otherwise provided in an Award Agreement, unless determined otherwise by the Committee at any point following such event: (i) neither a temporary absence from employment or service due to illness, vacation or leave of absence (including, without limitation, a call to active duty for military service through a Reserve or National Guard unit) nor a transfer from employment or service with one Service Recipient to employment or service with another Service Recipient (or vice-versa) shall be considered a Termination; and (ii) if a Participant undergoes a Termination of employment, but such Participant continues to provide services to the Company Group in a non-employee capacity, such change in status shall not be considered a Termination for purposes of the Plan. Further, unless otherwise determined by the Committee, in the event that any Service Recipient ceases to be a member of the Company Group (by reason of sale, divestiture, spin-off or other similar transaction), unless a Participant’s employment or service is transferred to another entity that would constitute a Service Recipient immediately following such transaction, such Participant shall be deemed to have suffered a Termination hereunder as of the date of the consummation of such transaction.

(j)    No Rights as a Stockholder. Except as otherwise specifically provided in the Plan or any Award Agreement, no Person shall be entitled to the privileges of ownership in respect of shares of Common Stock which are subject to Awards hereunder until such shares have been issued or delivered to such Person.

(k)    Government and Other Regulations.

(i)    The obligation of the Company to settle Awards in shares of Common Stock or other consideration shall be subject to all applicable laws, rules, and regulations, and to such approvals by governmental agencies as may be required. Notwithstanding any terms or conditions of any Award to the contrary, the Company shall be under no obligation to offer to sell or to sell, and shall be prohibited from offering to sell or selling, any shares of Common Stock pursuant to an Award unless such shares have been properly registered for sale pursuant to the Securities Act with the Securities and Exchange Commission or unless the Company has received an opinion of counsel (if the Company has requested such an opinion), satisfactory to the Company, that such shares may be offered or sold without such registration pursuant to an available exemption therefrom and the terms and conditions of such exemption have been fully complied with. The Company shall be under no obligation to register for sale under the Securities Act any of the shares of Common Stock to be offered or sold under the Plan. The Committee shall have the authority to provide that all shares of Common Stock or other securities of any member of the Company Group issued under the Plan shall be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the Plan, the applicable Award Agreement, the Federal securities laws, or the rules, regulations and other requirements of the Securities and Exchange Commission, any securities exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted and any other applicable Federal, state, local or non-U.S. laws, rules, regulations and other requirements, and, without limiting the generality of Section 9 of the Plan, the Committee may cause a legend or legends to be put on certificates representing shares of Common Stock or other securities of any member of the Company Group issued under the Plan to make appropriate reference to such restrictions or may cause such Common Stock or other securities of any member of the Company Group issued under the Plan in book-entry form to be held subject to the Company’s instructions or subject to appropriate stop-transfer orders. Notwithstanding any provision in the Plan to the contrary, the Committee reserves the right to, at any time, add any additional terms or provisions to any Award granted under the Plan that the Committee, in its sole discretion, deems necessary or advisable in order that such Award complies with the legal requirements of any governmental entity to whose jurisdiction the Award is subject.

(ii)    The Committee may cancel an Award or any portion thereof if it determines, in its sole discretion, that legal or contractual restrictions and/or blockage and/or other market considerations would make the Company’s acquisition of shares of Common Stock from the public markets, the Company’s issuance of Common Stock to the Participant, the Participant’s acquisition of Common Stock from the Company and/or the Participant’s sale of Common Stock to the public markets, illegal, impracticable or inadvisable. If the Committee determines to cancel all or any portion of an Award in accordance with the foregoing, the Company shall, subject to any limitations or reductions as may be necessary to comply with

Section 409A of the Code, (A) pay to the Participant an amount equal to the excess of (I) the aggregate Fair Market Value of the shares of Common Stock subject to such Award or portion thereof canceled (determined as of the applicable exercise date, or the date that the shares would have been vested or issued, as applicable); over (II) the aggregate Exercise Price or Strike Price (in the case of an Option or SAR, respectively) or any amount payable as a condition of issuance of shares of Common Stock (in the case of any other Award). Such amount shall be delivered to the Participant as soon as practicable following the cancellation of such Award or portion thereof, or (B) in the case of Restricted Stock, Restricted Stock Units or Other Equity-Based Awards, provide the Participant with a cash payment or equity subject to deferred vesting and delivery consistent with the vesting restrictions applicable to such Restricted Stock, Restricted Stock Units or Other Equity-Based Awards, or the underlying shares in respect thereof.

(l)    No Section 83(b) Elections Without Consent of Company. No election under Section 83(b) of the Code or under a similar provision of law may be made unless expressly permitted by the terms of the applicable Award Agreement or by action of the Company in writing prior to the making of such election. If a Participant, in connection with the acquisition of shares of Common Stock under the Plan or otherwise, is expressly permitted to make such election and the Participant makes the election, the Participant shall notify the Company of such election within ten (10) days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to Section 83(b) of the Code or other applicable provision.

(m)    Payments to Persons Other Than Participants. If the Committee shall find that any Person to whom any amount is payable under the Plan is unable to care for the Participant’s affairs because of illness or accident, or is a minor, or has died, then any payment due to such Person or the Participant’s estate (unless a prior claim therefor has been made by a duly appointed legal representative) may, if the Committee so directs the Company, be paid to the Participant’s spouse, child, relative, an institution maintaining or having custody of such Person, or any other Person deemed by the Committee to be a proper recipient on behalf of such Person otherwise entitled to payment. Any such payment shall be a complete discharge of the liability of the Committee and the Company therefor.

(n)    Nonexclusivity of the Plan. Neither the adoption of the Plan by the Committee nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Committee or Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of equity-based awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases.

(o)    No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between any member of the Company Group, on the one hand, and a Participant or other Person, on the other hand. No provision of the Plan or any Award shall require the Company, for the purpose of satisfying any obligations under the Plan, to purchase assets or place any assets in a trust or other entity to which contributions are made or otherwise to segregate any assets, nor shall the Company be obligated to maintain separate bank accounts, books, records or other evidence of the existence of a segregated or separately maintained or administered fund for such purposes. Participants shall have no rights under the Plan other than as unsecured general creditors of the Company, except that insofar as they may have become entitled to payment of additional compensation by performance of services, they shall have the same rights as other service providers under general law.

(p)    Reliance on Reports. Each member of the Committee and each member of the Board shall be fully justified in acting or failing to act, as the case may be, and shall not be liable for having so acted or failed to act in good faith, in reliance upon any report made by the independent public accountant of any member of the Company Group and/or any other information furnished in connection with the Plan by any agent of the Company or the Committee or the Board, other than himself or herself.

(q)    Relationship to Other Benefits. No payment under the Plan shall be taken into account in determining any benefits under any pension, retirement, profit sharing, group insurance or other benefit plan of the Company except as otherwise specifically provided in such other plan or as required by applicable law.

(r)    Governing Law. The Plan shall be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. EACH PARTICIPANT WHO ACCEPTS AN AWARD IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY SUIT, ACTION, OR OTHER PROCEEDING INSTITUTED BY OR AGAINST SUCH PARTICIPANT IN RESPECT OF THE PARTICIPANT’S RIGHTS OR OBLIGATIONS HEREUNDER.

(s)    Severability. If any provision of the Plan or any Award or Award Agreement is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be construed or deemed stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.

(t)    Obligations Binding on Successors. The obligations of the Company under the Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or upon any successor corporation or organization succeeding to substantially all of the assets and business of the Company.

(u)    Section 409A of the Code.

(i)    Notwithstanding any provision of the Plan to the contrary, it is intended that the provisions of the Plan comply with Section 409A of the Code, and all provisions of the Plan shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A of the Code. Each Participant is solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on or in respect of such Participant in connection with the Plan (including any taxes and penalties under Section 409A of the Code), and neither the Service Recipient nor any other member of the Company Group shall have any obligation to indemnify or otherwise hold such Participant (or any beneficiary) harmless from any or all of such taxes or penalties. With respect to any Award that is considered “deferred compensation” subject to Section 409A of the Code, references in the Plan to “termination of employment” (and substantially similar phrases) shall mean “separation from service” within the meaning of Section 409A of the Code. For purposes of Section 409A of the Code, each of the payments that may be made in respect of any Award granted under the Plan is designated as a separate payment.

(ii)    Notwithstanding anything in the Plan to the contrary, if a Participant is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, no payments in respect of any Awards that are “deferred compensation” subject to Section 409A of the Code and which would otherwise be payable upon the Participant’s “separation from service” (as defined in Section 409A of the Code) shall be made to such Participant prior to the date that is six (6) months after the date of such Participant’s “separation from service” or, if earlier, the date of the Participant’s death. Following any applicable six (6) month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A of the Code that is also a business day.

(iii)    Unless otherwise provided by the Committee in an Award Agreement or otherwise, in the event that the timing of payments in respect of any Award (that would otherwise be considered “deferred compensation” subject to Section 409A of the Code) would be accelerated upon the occurrence of (A) a Change in Control, no such acceleration shall be permitted unless the event giving rise to the Change in Control satisfies the definition of a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation pursuant to Section 409A of the Code; or (B) a Disability, no such acceleration shall be permitted unless the Disability also satisfies the definition of “Disability” pursuant to Section 409A of the Code.

(v)    Clawback/Repayment. All Awards shall be subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply with (i) any clawback, forfeiture or other similar policy adopted by

the Board or the Committee and as in effect from time to time; and (ii) applicable law. Further, to the extent that the Participant receives any amount in excess of the amount that the Participant should otherwise have received under the terms of the Award for any reason (including, without limitation, by reason of a financial restatement, mistake in calculations or other administrative error), the Participant shall be required to repay any such excess amount to the Company.

(w)    Right of Offset. The Company will have the right to offset against its obligation to deliver shares of Common Stock (or other property or cash) under the Plan or any Award Agreement any outstanding amounts (including, without limitation, travel and entertainment or advance account balances, loans, repayment obligations under any Awards, or amounts repayable to the Company pursuant to tax equalization, housing, automobile or other employee programs) that the Participant then owes to any member of the Company Group and any amounts the Committee otherwise deems appropriate pursuant to any tax equalization policy or agreement. Notwithstanding the foregoing, if an Award is “deferred compensation” subject to Section 409A of the Code, the Committee will have no right to offset against its obligation to deliver shares of Common Stock (or other property or cash) under the Plan or any Award Agreement if such offset could subject the Participant to the additional tax imposed under Section 409A of the Code in respect of an outstanding Award.

(x)    Expenses; Titles and Headings. The expenses of administering the Plan shall be borne by the Company Group. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

EX-10.6

Exhibit 10.6

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AWARD NOTICE

Participant has been granted a stock option to purchase shares of Common Stock with the terms set forth in this Award Notice, and subject to the terms and conditions of the Plan and the Nonqualified Stock Option Agreement to which this Award Notice is attached. Capitalized terms used and not defined in this Award Notice will have the meanings set forth in the Nonqualified Stock Option Agreement and the Plan. [In the event the IPO is not consummated within thirty (30) days following the Date of Grant this Award Notice shall be null and void and of no further force or effect].

Participant Name	Number of Shares Subject to Option	Exercise Price per Share	Vesting Schedule	Date of Grant
[______]	[______] Shares	[______]	[__]% vests on each of the first [three (3)] anniversaries of the Date of Grant	[______]

Vesting of the Option as specified in the chart above is subject to Participant’s continued employment or service through the applicable vesting date. If the number of Shares is not evenly divisible by [three (3)], then no fractional Share will vest and the installments will be as equal as possible with the smaller installment(s) vesting first. Each such right of purchase will be cumulative and will continue, unless sooner exercised or terminated as herein provided, during the remaining period of the Option Period.

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

This Nonqualified Stock Option Agreement, effective as of the Date of Grant (as defined below), is between Velocity Financial, Inc., a Delaware corporation (together with its successors and assigns, the “Company”), and the individual listed in the Award Notice as the “Participant”. Capitalized terms have the meaning set forth in Section 1, or, if not otherwise defined herein, in the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (as it may be amended, the “Plan”).

1. Definitions. The following terms have the following meanings for purposes of this Agreement:

(a) “Agreement” means this Nonqualified Stock Option Agreement including (unless the context otherwise requires) the Award Notice.

(b) “Award Notice” means the notice pursuant to which Participant was granted the Option.

(c) “Exercise Price” means the “Exercise Price” listed in the Award Notice.

(d) “Date of Grant” means the “Date of Grant” listed in the Award Notice.

(e) “IPO” means the initial public offering of Velocity Financial, Inc.

(f) “Officer” means “officer” as defined under Rule 16a-1(f) of the Exchange Act.

(g) “Participant” means the “Participant” listed in the Award Notice.

(h) “Restrictive Covenant Violation” means Participant’s breach of any covenant regarding confidential information and trade secrets, solicitation of the Company Group’s employees, ownership of intellectual property, nondisparagement or any other restrictive covenant in favor of the Company Group applicable to or agreed to by Participant.

(i) “Shares” means the number of shares of Common Stock listed in the Award Notice as “Number of Shares Subject to Option”, as adjusted in accordance with the Plan.

2. Grant of Option.

(a) Effective as of the Date of Grant, the Company hereby irrevocably grants to Participant the right and option (the “Option”) to purchase all or any part of the Shares, subject to and in accordance with the terms, conditions and restrictions set forth in the Plan, the Award Notice, and this Agreement. The Option will vest in accordance with the schedule set forth on the Award Notice. Any fractional Share underlying the Option shall be settled in cash within two and one-half (2¹⁄₂) months from the Date of Grant.

(b) The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

(c) This Agreement will be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated hereby by reference). In the event of any conflict between one or more of this Agreement, the Award Notice and the Plan, the Plan will govern this Agreement and the Award Notice, and this Agreement (to the extent not in conflict with the Plan) will govern the Award Notice.

3. Exercise Price. The price at which Participant will be entitled to purchase the Shares upon the exercise of the Option will be the Exercise Price per Share, subject to adjustment as provided in Section 11.

4. Exercisability of Option. The Option will become vested and exercisable in accordance with the schedule set forth on the Award Notice.

5. Duration of Option. The Option will be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Date of Grant (the “Option Period”); provided, that the Option may be earlier terminated as provided in Section 7.

6. Manner of Exercise and Payment.

(a) Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written or electronic notice to the Company in the manner prescribed in Section 7(d) of the Plan and as otherwise set forth by the Committee from time to time. Such notice will set forth the number of Shares in respect of which the Option is being exercised and will be signed by the person or persons exercising the Option. In the event the Company has designated an Award Administrator (as defined below), the Option may also be exercised by giving notice (including through electronic means) in accordance with the procedures established from time to time by the Award Administrator. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part, provided that partial exercise will be for whole Shares only.

(b) Upon exercise of the Option pursuant to Section 6(a), unless otherwise determined by the Committee, the Company will withhold a number of Shares otherwise deliverable to Participant to pay (i) the full purchase price for the Shares in respect of which the Option is being exercised and (ii) an amount necessary to satisfy applicable U.S. and non-U.S. Federal, state or local tax or other withholding requirements, if any (“Withholding Taxes”) in accordance with Section 14(d) of the Plan (or, if Participant is subject to Section 16 of the Exchange Act at such time, such amount which would not result in adverse consequences under

GAAP), unless otherwise agreed to in writing by Participant and the Company. The number of Shares to be withheld or otherwise used for payment will be calculated using the closing price per Share on the New York Stock Exchange (or other principal exchange on which the Shares then trade) on the date of determination, and will be rounded up to the nearest whole Share.

(c) Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Sections 6(a) and 6(b) relating to the Shares in respect of which the Option is being exercised, the Company will, subject to the Plan and this Agreement, take such action as may be necessary to effect the transfer to Participant of the number of Shares as to which such exercise was effective.

(d) Participant will not be deemed to be the holder of, or to have any of the rights and privileges of a stockholder of the Company (including the right to vote or receive dividends) in respect of, Shares purchased upon exercise of the Option until (i) the Option has been exercised pursuant to the terms of this Agreement and Participant has paid the full purchase price for the number of Shares in respect of which the Option was exercised and any applicable Withholding Taxes and (ii) the Company has issued the Shares in connection with such exercise. Notwithstanding the foregoing, unless otherwise determined by the Committee, Participant may otherwise elect to make all or a portion of such payments in cash, check, cash equivalent, and/or Shares, or as provided in Section 14(d) of the Plan.

7. Termination of Employment or Service.

(a) Subject to Section 7(c) below, in the event that Participant’s employment or service with the Company Group terminates for any reason, any unvested portion of the Option will be forfeited and all of Participant’s rights under this Agreement will terminate as of the effective date of Termination (the “Termination Date”) (unless otherwise provided for by the Committee in accordance with the Plan).

(b) If Participant’s employment or service is terminated by the Company Group for Cause or by Participant when grounds existed for Cause at the time thereof, the vested and unvested portions of the Option will terminate as of the Termination Date.

(c) In the event (i) Participant’s employment or service with the Company Group is terminated by the Company due to death or Disability, the vested portion of the Option will remain exercisable for one (1) year thereafter (but in no event beyond the Option Period) or (ii) Participant’s employment or service with the Company Group is terminated for any other reason (subject to Section 7(b)), the vested portion of the Option will remain exercisable for ninety (90) days thereafter (but in no event beyond the Option Period); provided, that, in each case, the Option Period will expire immediately upon the occurrence of a Restrictive Covenant Violation.

(d) Participant’s rights with respect to the Option will not be affected by any change in the nature of Participant’s employment or service so long as Participant continues to be an employee or service provider of the Company Group. Whether (and the circumstances under which) employment or service has terminated and the determination of the Termination Date for the purposes of this Agreement will be determined by the Committee (or, with respect to any Participant who is not a director or Officer, its designee, whose good faith determination will be final, binding and conclusive; provided, that such designee may not make any such determination with respect to the designee’s own employment or service for purposes of the Option).

8. Restrictions on Transfer. Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the Option or Participant’s right under the Option to receive Shares, other than to Permitted Transferees as may be permitted by the Committee from time to time in accordance with applicable laws and Section 14(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Option shall terminate and become of no further effect.

[FOR IPO GRANTS: Participant further hereby agrees that Participant shall, without further action on the part of Participant, be bound by the provisions of the lock-up letter executed by the executive officers of the Company to the same extent as if Participant had directly executed such lock-up letter himself or herself. Such lock-up letter will provide that Participant shall not, subject to specified exceptions, dispose of or hedge any shares of Common Stock of the Company or securities convertible into or exchangeable for shares of Common Stock of the Company during the period from the date of the final prospectus relating to the IPO and continuing through the date one hundred eighty (180) days after the date of such prospectus, except with the prior written consent of the representatives of the underwriters.]

9. Repayment of Proceeds; Clawback Policy. The Option and all proceeds related to the Option are subject to the clawback and repayment terms set forth in Section 14(v) and 14(w) of the Plan and the Company’s clawback policy, as in effect from time to time, to the extent Participant is a director or Officer. In addition, if a Restrictive Covenant Violation occurs or the Company discovers after Participant’s Termination that grounds existed for Cause at the time thereof, then Participant will be required, in addition to any other remedy available (on a non-exclusive basis), to pay to the Company, within ten (10) business days of the Company’s request to Participant therefor, an amount equal to the excess, if any, of (a) the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) Participant received upon the sale or other disposition of, or distributions in respect of, the Option and any Shares acquired in respect thereof over (b) the aggregate Cost (if any) of such Shares. For purposes of this Agreement, “Cost” means, in respect of any Share, the Exercise Price, to the extent paid by Participant for such Share, as proportionately adjusted for all subsequent distributions on the Shares and other recapitalizations and less the amount of any distributions made with respect to the Share pursuant to the Company’s organizational documents; provided, that Cost may not be less than zero (0). Any reference in this Agreement to grounds existing for a Termination for Cause will be determined without regard to any notice period, cure period, or other procedural delay or event required prior to a finding of or Termination for Cause.

10. No Right to Continued Employment or Engagement. Neither the Plan nor this Agreement nor Participant’s receipt of the Option hereunder will impose any obligation on the Company Group to continue the employment or engagement of Participant. Further, the Company Group may at any time terminate the employment or engagement of Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.

11. Adjustments. The terms of this Agreement, including, without limitation, (a) the number of Shares subject to the Option and (b) the Exercise Price specified herein, will be subject to adjustment in accordance with Section 12 of the Plan.

12. Award Subject to Plan. The Option granted hereunder is subject to the Plan and the terms of the Plan are hereby incorporated into this Agreement. By accepting the Option, Participant acknowledges that Participant has received and read the Plan and agrees to be bound by the terms, conditions, and restrictions set forth in the Plan, this Agreement, and the Company’s policies, as in effect from time to time, relating to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

13. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement will not be affected by such holding and will continue in full force in accordance with their terms.

14. Governing Law; Venue; Language. This Agreement will be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. Any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference), or any judgment entered by any court in respect of any thereof, will be brought in any court of competent jurisdiction in the State of Delaware or the State of California, and each of Participant, the Company, and any Permitted Transferees who hold a portion of the Option pursuant to a valid assignment, hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding, or judgment. Each of Participant, the Company, and any Permitted Transferees who hold a portion of the Option pursuant to a valid assignment hereby irrevocably waives (a) any objections which it may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or the State of California, (b) any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum and (c) any right to a jury trial. If Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern. Participant acknowledges that Participant is sufficiently proficient in English to understand the terms and conditions of this Agreement.

15. Successors in Interest. Any successor to the Company will have the benefits of the Company under, and be entitled to enforce, this Agreement. Likewise, Participant’s legal representative will have the benefits of Participant under, and be entitled to enforce, this Agreement. All obligations imposed upon Participant and all rights granted to the Company under this Agreement will be final, binding and conclusive upon Participant’s heirs, executors, administrators and successors.

16. Data Privacy Acknowledgement.

(a) General. Participant hereby explicitly and unambiguously acknowledges and agrees to the collection, use and transfer, in electronic or other form, of Participant’s personal data as described in this Agreement and any other Option grant materials by and among, as applicable, Participant’s employer or contracting party (the “Employer”) and the Company for the exclusive purpose of implementing, administering and managing Participant’s participation in the Plan. Participant understands that the Company may hold certain personal information about Participant, including, but not limited to, Participant’s name, home address, email address and telephone number, work location and phone number, date of birth, social insurance number, passport or other identification number, salary, nationality, job title, hire date, any shares of stock or directorships held in the Company, details of all awards or any other entitlement to shares awarded, cancelled, exercised, vested, unvested or outstanding in Participant’s favor, for the purpose of implementing, administering and managing Participant’s participation in the Plan (“Personal Data”).

(b) Use of Personal Data; Retention. Participant understands that Personal Data may be transferred to Fidelity or any other third parties assisting in the implementation, administration and management of the Plan, now or in the future, that these recipients may be located in Participant’s country or elsewhere, and that a recipient’s country may have different data privacy laws and protections than Participant’s country. Participant understands that Participant may request a list with the names and addresses of any potential recipients of the Personal Data by contacting Participant’s local human resources representative. Participant authorizes the recipients to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the purposes of implementing, administering and managing Participant’s participation in the Plan. Participant understands that Personal Data will be held only as long as is necessary to implement, administer and manage Participant’s participation in the Plan. Participant understands that Participant may, at any time, view Personal Data, request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Participant’s local human resources representative.

(c) Withdrawal of Consent. Participant understands that Participant is providing the consents herein on a purely voluntary basis. If Participant does not consent, or if Participant later seeks to revoke Participant’s consent, Participant’s employment status or service with the Employer will not be affected; the only consequence of Participant’s refusing or withdrawing Participant’s consent is that the Company would not be able to grant options or other equity awards to Participant or administer or maintain such awards. Therefore, Participant understands that refusing or withdrawing Participant’s consent may affect Participant’s ability to participate in the Plan. For more information on the consequences of Participant’s refusal to consent or withdrawal of consent, Participant understands that Participant may contact Participant’s local human resources representative.

17. Prior Agreements; Restrictive Covenants. Participant agrees that, unless Participant has previously executed the Confidentiality, Non-Interference and Invention Assignment Agreement, Participant is required, as a condition to the grant of the Option, to execute and return to the Company a copy of the Confidentiality, Non-Interference and Invention Assignment Agreement attached hereto as Appendix A (the restrictive covenants contained in the Confidentiality, Non-Interference and Invention Assignment Agreement are referred to in this Agreement as the “Restrictive Covenants”). Participant acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the Restrictive Covenants would be inadequate and the Company Group would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. For the avoidance of doubt, the Restrictive Covenants contained in the Confidentiality, Non-Interference and Invention Assignment Agreement are in addition to, and not in lieu of, any other restrictive covenants or similar covenants or agreements between Participant and the Company Group. For purposes of this Agreement, “Restrictive Covenant Violation” shall include Participant’s breach of any of the Restrictive Covenants or any similar provision applicable to Participant.

18. Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement and the grant of the Option evidenced hereby, Participant expressly acknowledges that (a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be suspended or terminated by the Company at any time to the extent permitted by the Plan; (b) the grant of the Option is exceptional, voluntary and occasional and it does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted in the past; (c) all determinations with respect to future option grants, if any, including the grant date, the number of Shares granted, the exercise price and the exercise date or dates, will be at the sole discretion of the Company; (d) Participant’s participation in the Plan is voluntary and not a condition of employment or service, and Participant may decline to accept the Option without adverse consequences to Participant’s continued employment or service relationship with the Company Group; (e) the value of the Option is an extraordinary item that is outside the scope of Participant’s employment or service contract, if any, and nothing can or must automatically be inferred from such employment or service contract or its consequences; (f) Options and any Shares acquired under the Plan, and the income from and value of same, are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, Participant waives any claim on such basis and, for the avoidance of doubt, the Option will not constitute an “acquired right” under the applicable law of any jurisdiction; (g) if the underlying Shares do not increase in value, the Option will have no value; (h) if Participant exercises the Option and acquires Shares, the value of such Shares may increase or decrease in value, even below the Exercise Price; and (i) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, Participant understands, acknowledges and agrees that Participant will have no rights to compensation or damages related to Option proceeds in consequence of Participant’s Termination for any reason whatsoever and whether or not in breach of contract.

19. Award Administrator. The Company may from time to time designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration and management of the Plan and any Options granted thereunder, including by sending award notices on behalf of the Company to Participants, and by facilitating through electronic means acceptance of Agreement by Participants and Option exercises by Participants.

20. Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.

21. Electronic Delivery and Acceptance. This Agreement may be executed electronically and in counterparts. The Company may, in its sole discretion, decide to deliver any documents related to the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.

22. Acceptance and Agreement by Participant; Forfeiture upon Failure to Accept. Participant’s rights under the Option will lapse ninety (90) days from the Date of Grant, and the Option will be forfeited on such date if Participant will not have accepted this Agreement by such date. For the avoidance of doubt, Participant’s failure to accept this Agreement will not affect Participant’s continuing obligations under any other agreement between the Company and Participant.

23. No Advice Regarding Grant. Notwithstanding anything herein to the contrary, Participant acknowledges and agrees that the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of the underlying Shares. Participant is hereby advised to consult with Participant’s own personal tax, legal and financial advisors regarding Participant’s participation in the Plan before taking any action related to the Plan.

24. Imposition of Other Requirements. The Company reserves the right to impose other requirements on Participant’s participation in the Plan, on the Option and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

25. Waiver. Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement will not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by Participant or any other participant in the Plan.

26. Notices. Any notice necessary under this Agreement shall be addressed to the Company in care of its Corporate Secretary at the principal executive office of the Company and to Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

[Signature Page Follows]

VELOCITY FINANCIAL, INC.

Name: [______]

Title: [______]

Acknowledged and Agreed

as of the date first written above:

Participant Signature

EX-10.7

Exhibit 10.7

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AWARD NOTICE

Participant has been granted a stock option to purchase shares of Common Stock with the terms set forth in this Award Notice, and subject to the terms and conditions of the Plan and the Nonqualified Stock Option Agreement to which this Award Notice is attached. Capitalized terms used and not defined in this Award Notice will have the meanings set forth in the Nonqualified Stock Option Agreement and the Plan. In the event the IPO is not consummated within thirty (30) days following the Date of Grant this Award Notice shall be null and void and of no further force or effect.

Participant Name	Number of Shares Subject to Option	Exercise Price per Share	Vesting Schedule	Date of Grant
[            ]	[            ] Shares	[            ]	1/3rd vests on each of the first three (3) anniversaries of the Date of Grant, subject to Participant’s continued service with the Service Recipient on each applicable vesting date. All unvested Shares subject to the Option shall become fully vested and exercisable upon a Change in Control.	[            ]

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

This Nonqualified Stock Option Agreement, effective as of the Date of Grant (as defined below), is between Velocity Financial, Inc., a Delaware corporation (together with its successors and assigns, the “Company”), and the individual listed in the Award Notice as the “Participant”. Capitalized terms have the meaning set forth in Section 1, or, if not otherwise defined herein, in the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (as it may be amended, the “Plan”).

1.    Definitions. The following terms have the following meanings for purposes of this Agreement:

(a) “Agreement” means this Nonqualified Stock Option Agreement including (unless the context otherwise requires) the Award Notice.

(b)    “Award Notice” means the notice pursuant to which Participant was granted the Option.

(c)    “Exercise Price” means the “Exercise Price” listed in the Award Notice.

(d)    “Date of Grant” means the “Date of Grant” listed in the Award Notice.

(e)    “IPO” means the initial public offering of Velocity Financial, Inc.

(f)    “Officer” means “officer” as defined under Rule 16a-1(f) of the Exchange Act.

(g)    “Participant” means the “Participant” listed in the Award Notice.

(h)    “Shares” means the number of shares of Common Stock listed in the Award Notice as “Number of Shares Subject to Option”, as adjusted in accordance with the Plan.

2.    Grant of Option.

(a)    Effective as of the Date of Grant, the Company hereby irrevocably grants to Participant the right and option (the “Option”) to purchase all or any part of the Shares, subject to and in accordance with the terms, conditions and restrictions set forth in the Plan, the Award Notice, and this Agreement. The Option will vest in accordance with the schedule set forth on the Award Notice. Any fractional Share underlying the Option shall be settled in cash within two and one-half (2¹⁄₂) months from the Date of Grant.

(b)    The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

(c)    This Agreement will be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated hereby by reference). In

the event of any conflict between one or more of this Agreement, the Award Notice and the Plan, the Plan will govern this Agreement and the Award Notice, and this Agreement (to the extent not in conflict with the Plan) will govern the Award Notice.

3.    Exercise Price. The price at which Participant will be entitled to purchase the Shares upon the exercise of the Option will be the Exercise Price per Share, subject to adjustment as provided in Section 11.

4.    Exercisability of Option. The Option will become vested and exercisable in accordance with the schedule set forth on the Award Notice.

5.    Duration of Option. The Option will be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Date of Grant (the “Option Period”); provided, that the Option may be earlier terminated as provided in Section 7.

6.    Manner of Exercise and Payment.

(a)    Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written or electronic notice to the Company in the manner prescribed in Section 7(d) of the Plan and as otherwise set forth by the Committee from time to time. Such notice will set forth the number of Shares in respect of which the Option is being exercised and will be signed by the person or persons exercising the Option. In the event the Company has designated an Award Administrator (as defined below), the Option may also be exercised by giving notice (including through electronic means) in accordance with the procedures established from time to time by the Award Administrator. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part, provided that partial exercise will be for whole Shares only.

(b)    Upon exercise of the Option pursuant to Section 6(a), unless otherwise determined by the Committee, the Company will withhold a number of Shares otherwise deliverable to Participant to pay (i) the full purchase price for the Shares in respect of which the Option is being exercised and (ii) an amount necessary to satisfy applicable U.S. and non-U.S. Federal, state or local tax or other withholding requirements, if any (“Withholding Taxes”) in accordance with Section 14(d) of the Plan (or, if Participant is subject to Section 16 of the Exchange Act at such time, such amount which would not result in adverse consequences under GAAP), unless otherwise agreed to in writing by Participant and the Company. The number of Shares to be withheld or otherwise used for payment will be calculated using the closing price per Share on the New York Stock Exchange (or other principal exchange on which the Shares then trade) on the date of determination, and will be rounded up to the nearest whole Share.

(c)    Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Sections 6(a) and 6(b) relating to the Shares in respect of which the Option is being exercised, the Company will, subject to the Plan and this Agreement, take such action as may be necessary to effect the transfer to Participant of the number of Shares as to which such exercise was effective.

(d)    Participant will not be deemed to be the holder of, or to have any of the rights and privileges of a stockholder of the Company (including the right to vote or receive dividends) in respect of, Shares purchased upon exercise of the Option until (i) the Option has been exercised pursuant to the terms of this Agreement and Participant has paid the full purchase price for the number of Shares in respect of which the Option was exercised and any applicable Withholding Taxes and (ii) the Company has issued the Shares in connection with such exercise. Notwithstanding the foregoing, unless otherwise determined by the Committee, Participant may otherwise elect to make all or a portion of such payments in cash, check, cash equivalent, and/or Shares, or as provided in Section 14(d) of the Plan.

7.    Termination of Employment or Service.

(a)    Subject to Section 7(c) below, in the event that Participant’s employment or service with the Company Group terminates for any reason, any unvested portion of the Option will be forfeited and all of Participant’s rights under this Agreement will terminate as of the effective date of Termination (the “Termination Date”) (unless otherwise provided for by the Committee in accordance with the Plan).

(b)    If Participant’s employment or service is terminated by the Company Group for Cause or by Participant when grounds existed for Cause at the time thereof, the vested and unvested portions of the Option will terminate as of the Termination Date.

(c)    In the event (i) Participant’s employment or service with the Company Group is terminated by the Company due to death or Disability, the vested portion of the Option will remain exercisable for one (1) year thereafter (but in no event beyond the Option Period) or (ii) Participant’s employment or service with the Company Group is terminated for any other reason (subject to Section 7(b)), the vested portion of the Option will remain exercisable for ninety (90) days thereafter (but in no event beyond the Option Period).

(d)    Participant’s rights with respect to the Option will not be affected by any change in the nature of Participant’s employment or service so long as Participant continues to be an employee or service provider of the Company Group. Whether (and the circumstances under which) employment or service has terminated and the determination of the Termination Date for the purposes of this Agreement will be determined by the Committee (or, with respect to any Participant who is not a director or Officer, its designee, whose good faith determination will be final, binding and conclusive; provided, that such designee may not make any such determination with respect to the designee’s own employment or service for purposes of the Option).

8.    Restrictions on Transfer. Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the Option or Participant’s right under the Option to receive Shares, other than to Permitted Transferees as may be permitted by the Committee from time to time in accordance with applicable laws and Section 14(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Option

shall terminate and become of no further effect. Participant further hereby agrees that Participant shall, without further action on the part of Participant, be bound by the provisions of the lock-up letter executed by the executive officers of the Company to the same extent as if Participant had directly executed such lock-up letter himself or herself. Such lock-up letter will provide that Participant shall not, subject to specified exceptions, dispose of or hedge any shares of Common Stock of the Company or securities convertible into or exchangeable for shares of Common Stock of the Company during the period from the date of the final prospectus relating to the IPO and continuing through the date one hundred eighty (180) days after the date of such prospectus, except with the prior written consent of the representatives of the underwriters.

9.    Repayment of Proceeds; Clawback Policy. The Option and all proceeds related to the Option are subject to the clawback and repayment terms set forth in Section 14(v) and 14(w) of the Plan and the Company’s clawback policy, as in effect from time to time, to the extent Participant is a director or Officer.

10.    No Right to Continued Employment or Engagement. Neither the Plan nor this Agreement nor Participant’s receipt of the Option hereunder will impose any obligation on the Company Group to continue the employment or engagement of Participant. Further, the Company Group may at any time terminate the employment or engagement of Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.

11.    Adjustments. The terms of this Agreement, including, without limitation, (a) the number of Shares subject to the Option and (b) the Exercise Price specified herein, will be subject to adjustment in accordance with Section 12 of the Plan.

12.    Award Subject to Plan. The Option granted hereunder is subject to the Plan and the terms of the Plan are hereby incorporated into this Agreement. By accepting the Option, Participant acknowledges that Participant has received and read the Plan and agrees to be bound by the terms, conditions, and restrictions set forth in the Plan, this Agreement, and the Company’s policies, as in effect from time to time, relating to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

13.    Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement will not be affected by such holding and will continue in full force in accordance with their terms.

14.    Governing Law; Venue; Language. This Agreement will be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. Any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference), or any judgment entered by any court in respect of any thereof, will be brought in any court of competent jurisdiction in the State of Delaware or the State of California, and each of Participant, the Company, and any Permitted Transferees who hold a portion of the Option pursuant to a valid assignment, hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding, or judgment. Each of Participant, the Company, and any Permitted Transferees who hold a portion of the Option pursuant to a valid assignment hereby irrevocably waives (a) any objections which it may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or the State of California, (b) any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum and (c) any right to a jury trial. If Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern. Participant acknowledges that Participant is sufficiently proficient in English to understand the terms and conditions of this Agreement.

15.    Successors in Interest. Any successor to the Company will have the benefits of the Company under, and be entitled to enforce, this Agreement. Likewise, Participant’s legal representative will have the benefits of Participant under, and be entitled to enforce, this Agreement. All obligations imposed upon Participant and all rights granted to the Company under this Agreement will be final, binding and conclusive upon Participant’s heirs, executors, administrators and successors.

16.    Data Privacy Acknowledgement.

(a)    General. Participant hereby explicitly and unambiguously acknowledges and agrees to the collection, use and transfer, in electronic or other form, of Participant’s personal data as described in this Agreement and any other Option grant materials by and among, as applicable, Participant’s employer or contracting party (the “Employer”) and the Company for the exclusive purpose of implementing, administering and managing Participant’s participation in the Plan. Participant understands that the Company may hold certain personal information about Participant, including, but not limited to, Participant’s name, home address, email address and telephone number, work location and phone number, date of birth, social insurance number, passport or other identification number, salary, nationality, job title, hire date, any shares of stock or directorships

held in the Company, details of all awards or any other entitlement to shares awarded, cancelled, exercised, vested, unvested or outstanding in Participant’s favor, for the purpose of implementing, administering and managing Participant’s participation in the Plan (“Personal Data”).

(b)    Use of Personal Data; Retention. Participant understands that Personal Data may be transferred to Fidelity or any other third parties assisting in the implementation, administration and management of the Plan, now or in the future, that these recipients may be located in Participant’s country or elsewhere, and that a recipient’s country may have different data privacy laws and protections than Participant’s country. Participant understands that Participant may request a list with the names and addresses of any potential recipients of the Personal Data by contacting Participant’s local human resources representative. Participant authorizes the recipients to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the purposes of implementing, administering and managing Participant’s participation in the Plan. Participant understands that Personal Data will be held only as long as is necessary to implement, administer and manage Participant’s participation in the Plan. Participant understands that Participant may, at any time, view Personal Data, request additional information about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Participant’s local human resources representative.

(c)    Withdrawal of Consent. Participant understands that Participant is providing the consents herein on a purely voluntary basis. If Participant does not consent, or if Participant later seeks to revoke Participant’s consent, Participant’s employment status or service with the Employer will not be affected; the only consequence of Participant’s refusing or withdrawing Participant’s consent is that the Company would not be able to grant options or other equity awards to Participant or administer or maintain such awards. Therefore, Participant understands that refusing or withdrawing Participant’s consent may affect Participant’s ability to participate in the Plan. For more information on the consequences of Participant’s refusal to consent or withdrawal of consent, Participant understands that Participant may contact Participant’s local human resources representative.

17.    Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement and the grant of the Option evidenced hereby, Participant expressly acknowledges that (a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be suspended or terminated by the Company at any time to the extent permitted by the Plan; (b) the grant of the Option is exceptional, voluntary and occasional and it does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted in the past; (c) all determinations with respect to future option grants, if any, including the grant date, the number of Shares granted, the exercise price and the exercise date or dates, will be at the sole discretion of the Company; (d) Participant’s participation in the Plan is voluntary and not a condition of employment or service, and Participant may decline to accept the Option without adverse consequences to Participant’s continued employment or service relationship with the Company Group; (e) the value of the Option is an extraordinary item that is outside the scope of Participant’s employment or service contract, if any, and nothing can or must automatically be inferred from such employment or service contract or its consequences; (f) Options and any Shares acquired under the Plan, and the income from and value of same, are not part of normal or expected compensation for any purpose and are not to be used

for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, Participant waives any claim on such basis and, for the avoidance of doubt, the Option will not constitute an “acquired right” under the applicable law of any jurisdiction; (g) if the underlying Shares do not increase in value, the Option will have no value; (h) if Participant exercises the Option and acquires Shares, the value of such Shares may increase or decrease in value, even below the Exercise Price; and (i) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, Participant understands, acknowledges and agrees that Participant will have no rights to compensation or damages related to Option proceeds in consequence of Participant’s Termination for any reason whatsoever and whether or not in breach of contract.

18.    Award Administrator. The Company may from time to time designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration and management of the Plan and any Options granted thereunder, including by sending award notices on behalf of the Company to Participants, and by facilitating through electronic means acceptance of Agreement by Participants and Option exercises by Participants.

19.    Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.

20.    Electronic Delivery and Acceptance. This Agreement may be executed electronically and in counterparts. The Company may, in its sole discretion, decide to deliver any documents related to the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.

21.    Acceptance and Agreement by Participant; Forfeiture upon Failure to Accept. Participant’s rights under the Option will lapse ninety (90) days from the Date of Grant, and the Option will be forfeited on such date if Participant will not have accepted this Agreement by such date. For the avoidance of doubt, Participant’s failure to accept this Agreement will not affect Participant’s continuing obligations under any other agreement between the Company and Participant.

22.    No Advice Regarding Grant. Notwithstanding anything herein to the contrary, Participant acknowledges and agrees that the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of the underlying Shares. Participant is hereby advised to consult with Participant’s own personal tax, legal and financial advisors regarding Participant’s participation in the Plan before taking any action related to the Plan.

23.    Imposition of Other Requirements. The Company reserves the right to impose other requirements on Participant’s participation in the Plan, on the Option and on any

Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

24.    Waiver. Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement will not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by Participant or any other participant in the Plan.

25.    Notices. Any notice necessary under this Agreement shall be addressed to the Company in care of its Corporate Secretary at the principal executive office of the Company and to Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

[Signature Page Follows]

VELOCITY FINANCIAL, INC.
	Name: [            ]
	Title: [            ]

Acknowledged and Agreed

as of the date first written above:

Participant Signature

EX-10.8

Exhibit 10.8

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AWARD NOTICE

Participant has been granted a stock option to purchase shares of Common Stock with the terms set forth in this Award Notice, and subject to the terms and conditions of the Plan and the Nonqualified Stock Option Agreement to which this Award Notice is attached. Capitalized terms used and not defined in this Award Notice will have the meanings set forth in the Nonqualified Stock Option Agreement and the Plan. In the event the IPO is not consummated within thirty (30) days following the Date of Grant this Award Notice shall be null and void and of no further force or effect.

Participant Name	Number of Shares Subject to Option	Exercise Price per Share	Vesting Schedule	Date of Grant
[            ]	[            ] Shares	[            ]	1/3rd vests on each of the first three (3) anniversaries of the Date of Grant, subject to Participant’s continued service with the Service Recipient on each applicable vesting date. If a Change in Control occurs and during the twelve (12) month period following such Change in Control, Participant’s employment or service is terminated by the Company Group without Cause, due to Participant’s resignation for Good Reason (as defined below), or due to death or Disability, all unvested Shares subject to the Option shall become fully vested and exercisable upon the date of Participant’s Termination. “Good Reason” shall have the meaning given to such term in any employment or consulting agreement between Participant and the Service Recipient in effect at the time of Participant’s Termination. In the absence of any such employment or consulting	[            ]

Participant Name	Number of Shares Subject to Option	Exercise Price per Share	Vesting Schedule	Date of Grant
			agreement or the absence of any definition of “Good Reason” contained therein, “Good Reason” means the occurrence of one or more of the following events arising without the express written consent of Participant, but only if Participant notifies the Service Recipient in writing of the event within sixty (60) days following the occurrence of the event, the event remains uncured after the expiration of thirty (30) days from receipt of such notice, and Participant resigns effective no later than thirty (30) days following the Service Recipient’s failure to cure the event: (i) a material diminution in Participant’s base salary or target bonus opportunity, (ii) a material diminution in Participant’s authority, duties or responsibilities, (iii) a material change in geographic location at which Participant performs services, or (iv) any material breach by the Company of this Agreement.

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

NONQUALIFIED STOCK OPTION AGREEMENT

This Nonqualified Stock Option Agreement, effective as of the Date of Grant (as defined below), is between Velocity Financial, Inc., a Delaware corporation (together with its successors and assigns, the “Company”), and the individual listed in the Award Notice as the “Participant”. Capitalized terms have the meaning set forth in Section 1, or, if not otherwise defined herein, in the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (as it may be amended, the “Plan”).

1.    Definitions. The following terms have the following meanings for purposes of this Agreement:

(a) “Agreement” means this Nonqualified Stock Option Agreement including (unless the context otherwise requires) the Award Notice.

(b)    “Award Notice” means the notice pursuant to which Participant was granted the Option.

(c)    “Exercise Price” means the “Exercise Price” listed in the Award Notice.

(d)    “Date of Grant” means the “Date of Grant” listed in the Award Notice.

(e)    “IPO” means the initial public offering of Velocity Financial, Inc.

(f)    “Officer” means “officer” as defined under Rule 16a-1(f) of the Exchange Act.

(g)    “Participant” means the “Participant” listed in the Award Notice.

(h)    “Restrictive Covenant Violation” means Participant’s breach of any covenant regarding confidential information and trade secrets, solicitation of the Company Group’s employees, ownership of intellectual property, nondisparagement or any other restrictive covenant in favor of the Company Group applicable to or agreed to by Participant.

(i)    “Shares” means the number of shares of Common Stock listed in the Award Notice as “Number of Shares Subject to Option”, as adjusted in accordance with the Plan.

2.    Grant of Option.

(a)    Effective as of the Date of Grant, the Company hereby irrevocably grants to Participant the right and option (the “Option”) to purchase all or any part of the Shares, subject to and in accordance with the terms, conditions and restrictions set forth in the Plan, the Award Notice, and this Agreement. The Option will vest in accordance with the schedule set forth on the Award Notice. Any fractional Share underlying the Option shall be settled in cash within two and one-half (2¹⁄₂) months from the Date of Grant.

(b)    The Option is not intended to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

(c)    This Agreement will be construed in accordance and consistent with, and subject to, the terms of the Plan (the provisions of which are incorporated hereby by reference). In the event of any conflict between one or more of this Agreement, the Award Notice and the Plan, the Plan will govern this Agreement and the Award Notice, and this Agreement (to the extent not in conflict with the Plan) will govern the Award Notice.

3. Exercise Price. The price at which Participant will be entitled to purchase the Shares upon the exercise of the Option will be the Exercise Price per Share, subject to adjustment as provided in Section 11.

4. Exercisability of Option. The Option will become vested and exercisable in accordance with the schedule set forth on the Award Notice.

5. Duration of Option. The Option will be exercisable to the extent and in the manner provided herein for a period of ten (10) years from the Date of Grant (the “Option Period”); provided, that the Option may be earlier terminated as provided in Section 7.

6. Manner of Exercise and Payment.

(a)    Subject to the terms and conditions of this Agreement and the Plan, the Option may be exercised by delivery of written or electronic notice to the Company in the manner prescribed in Section 7(d) of the Plan and as otherwise set forth by the Committee from time to time. Such notice will set forth the number of Shares in respect of which the Option is being exercised and will be signed by the person or persons exercising the Option. In the event the Company has designated an Award Administrator (as defined below), the Option may also be exercised by giving notice (including through electronic means) in accordance with the procedures established from time to time by the Award Administrator. Any exercisable portion of the Option or the entire Option, if then wholly exercisable, may be exercised in whole or in part, provided that partial exercise will be for whole Shares only.

(b)    Upon exercise of the Option pursuant to Section 6(a), unless otherwise determined by the Committee, the Company will withhold a number of Shares otherwise deliverable to Participant to pay (i) the full purchase price for the Shares in respect of which the Option is being exercised and (ii) an amount necessary to satisfy applicable U.S. and non-U.S. Federal, state or local tax or other withholding requirements, if any (“Withholding Taxes”) in accordance with Section 14(d) of the Plan (or, if Participant is subject to Section 16 of the Exchange Act at such time, such amount which would not result in adverse consequences under GAAP), unless otherwise agreed to in writing by Participant and the Company. The number of Shares to be withheld or otherwise used for payment will be calculated using the closing price per Share on the New York Stock Exchange (or other principal exchange on which the Shares then trade) on the date of determination, and will be rounded up to the nearest whole Share.

(c)    Upon receipt of the notice of exercise and any payment or other documentation as may be necessary pursuant to Sections 6(a) and 6(b) relating to the Shares in respect of which the Option is being exercised, the Company will, subject to the Plan and this Agreement, take such action as may be necessary to effect the transfer to Participant of the number of Shares as to which such exercise was effective.

(d)    Participant will not be deemed to be the holder of, or to have any of the rights and privileges of a stockholder of the Company (including the right to vote or receive dividends) in respect of, Shares purchased upon exercise of the Option until (i) the Option has been exercised pursuant to the terms of this Agreement and Participant has paid the full purchase price for the number of Shares in respect of which the Option was exercised and any applicable Withholding Taxes and (ii) the Company has issued the Shares in connection with such exercise. Notwithstanding the foregoing, unless otherwise determined by the Committee, Participant may otherwise elect to make all or a portion of such payments in cash, check, cash equivalent, and/or Shares, or as provided in Section 14(d) of the Plan.

7. Termination of Employment or Service.

(a)    Subject to Section 7(c) below, in the event that Participant’s employment or service with the Company Group terminates for any reason, any unvested portion of the Option will be forfeited and all of Participant’s rights under this Agreement will terminate as of the effective date of Termination (the “Termination Date”) (unless otherwise provided for by the Committee in accordance with the Plan).

(b)    If Participant’s employment or service is terminated by the Company Group for Cause or by Participant when grounds existed for Cause at the time thereof, the vested and unvested portions of the Option will terminate as of the Termination Date.

(c)    In the event (i) Participant’s employment or service with the Company Group is terminated by the Company due to death or Disability, the vested portion of the Option will remain exercisable for one (1) year thereafter (but in no event beyond the Option Period) or (ii) Participant’s employment or service with the Company Group is terminated for any other reason (subject to Section 7(b)), the vested portion of the Option will remain exercisable for ninety (90) days thereafter (but in no event beyond the Option Period); provided, that, in each case, the Option Period will expire immediately upon the occurrence of a Restrictive Covenant Violation.

(d)    Participant’s rights with respect to the Option will not be affected by any change in the nature of Participant’s employment or service so long as Participant continues to be an employee or service provider of the Company Group. Whether (and the circumstances under which) employment or service has terminated and the determination of the Termination Date for the purposes of this Agreement will be determined by the Committee (or, with respect to any Participant who is not a director or Officer, its designee, whose good faith determination will be final, binding and conclusive; provided, that such designee may not make any such determination with respect to the designee’s own employment or service for purposes of the Option).

8. Restrictions on Transfer. Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the Option or Participant’s right under the Option to receive Shares, other than to Permitted Transferees as may be permitted by the Committee from time to time in accordance with applicable laws and Section 14(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the Option shall terminate and become of no further effect. Participant further hereby agrees that Participant shall, without further action on the part of Participant, be bound by the provisions of the lock-up letter executed by the executive officers of the Company to the same extent as if Participant had directly executed such lock-up letter himself or herself. Such lock-up letter will provide that Participant shall not, subject to specified exceptions, dispose of or hedge any shares of Common Stock of the Company or securities convertible into or exchangeable for shares of Common Stock of the Company during the period from the date of the final prospectus relating to the IPO and continuing through the date one hundred eighty (180) days after the date of such prospectus, except with the prior written consent of the representatives of the underwriters.

9. Repayment of Proceeds; Clawback Policy. The Option and all proceeds related to the Option are subject to the clawback and repayment terms set forth in Section 14(v) and 14(w) of the Plan and the Company’s clawback policy, as in effect from time to time, to the extent Participant is a director or Officer. In addition, if a Restrictive Covenant Violation occurs or the Company discovers after Participant’s Termination that grounds existed for Cause at the time thereof, then Participant will be required, in addition to any other remedy available (on a non-exclusive basis), to pay to the Company, within ten (10) business days of the Company’s request to Participant therefor, an amount equal to the excess, if any, of (a) the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) Participant received upon the sale or other disposition of, or distributions in respect of, the Option and any Shares acquired in respect thereof over (b) the aggregate Cost (if any) of such Shares. For purposes of this Agreement, “Cost” means, in respect of any Share, the Exercise Price, to the extent paid by Participant for such Share, as proportionately adjusted for all subsequent distributions on the Shares and other recapitalizations and less the amount of any distributions made with respect to the Share pursuant to the Company’s organizational documents; provided, that Cost may not be less than zero (0). Any reference in this Agreement to grounds existing for a Termination for Cause will be determined without regard to any notice period, cure period, or other procedural delay or event required prior to a finding of or Termination for Cause.

10. No Right to Continued Employment or Engagement. Neither the Plan nor this Agreement nor Participant’s receipt of the Option hereunder will impose any obligation on the Company Group to continue the employment or engagement of Participant. Further, the Company Group may at any time terminate the employment or engagement of Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.

11. Adjustments. The terms of this Agreement, including, without limitation, (a) the number of Shares subject to the Option and (b) the Exercise Price specified herein, will be subject to adjustment in accordance with Section 12 of the Plan.

12. Award Subject to Plan. The Option granted hereunder is subject to the Plan and the terms of the Plan are hereby incorporated into this Agreement. By accepting the Option, Participant acknowledges that Participant has received and read the Plan and agrees to be bound by the terms, conditions, and restrictions set forth in the Plan, this Agreement, and the Company’s policies, as in effect from time to time, relating to the Plan. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.

13. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be unenforceable or invalid for any reason, the remaining provisions of this Agreement will not be affected by such holding and will continue in full force in accordance with their terms.

14. Governing Law; Venue; Language. This Agreement will be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. Any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference), or any judgment entered by any court in respect of any thereof, will be brought in any court of competent jurisdiction in the State of Delaware or the State of California, and each of Participant, the Company, and any Permitted Transferees who hold a portion of the Option pursuant to a valid assignment, hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding, or judgment. Each of Participant, the Company, and any Permitted Transferees who hold a portion of the Option pursuant to a valid assignment hereby irrevocably waives (a) any objections which it may now or hereafter have to the laying of the venue of any suit, action, or proceeding

arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or the State of California, (b) any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum and (c) any right to a jury trial. If Participant has received a copy of this Agreement (or the Plan or any other document related hereto or thereto) translated into a language other than English, such translated copy is qualified in its entirety by reference to the English version thereof, and in the event of any conflict the English version will govern. Participant acknowledges that Participant is sufficiently proficient in English to understand the terms and conditions of this Agreement.

15. Successors in Interest. Any successor to the Company will have the benefits of the Company under, and be entitled to enforce, this Agreement. Likewise, Participant’s legal representative will have the benefits of Participant under, and be entitled to enforce, this Agreement. All obligations imposed upon Participant and all rights granted to the Company under this Agreement will be final, binding and conclusive upon Participant’s heirs, executors, administrators and successors.

16. Data Privacy Acknowledgement.

(a)    General. Participant hereby explicitly and unambiguously acknowledges and agrees to the collection, use and transfer, in electronic or other form, of Participant’s personal data as described in this Agreement and any other Option grant materials by and among, as applicable, Participant’s employer or contracting party (the “Employer”) and the Company for the exclusive purpose of implementing, administering and managing Participant’s participation in the Plan. Participant understands that the Company may hold certain personal information about Participant, including, but not limited to, Participant’s name, home address, email address and telephone number, work location and phone number, date of birth, social insurance number, passport or other identification number, salary, nationality, job title, hire date, any shares of stock or directorships held in the Company, details of all awards or any other entitlement to shares awarded, cancelled, exercised, vested, unvested or outstanding in Participant’s favor, for the purpose of implementing, administering and managing Participant’s participation in the Plan (“Personal Data”).

(b)    Use of Personal Data; Retention. Participant understands that Personal Data may be transferred to Fidelity or any other third parties assisting in the implementation, administration and management of the Plan, now or in the future, that these recipients may be located in Participant’s country or elsewhere, and that a recipient’s country may have different data privacy laws and protections than Participant’s country. Participant understands that Participant may request a list with the names and addresses of any potential recipients of the Personal Data by contacting Participant’s local human resources representative. Participant authorizes the recipients to receive, possess, use, retain and transfer the Personal Data, in electronic or other form, for the purposes of implementing, administering and managing Participant’s participation in the Plan. Participant understands that Personal Data will be held only as long as is necessary to implement, administer and manage Participant’s participation in the Plan. Participant understands that Participant may, at any time, view Personal Data, request additional information

about the storage and processing of Personal Data, require any necessary amendments to Personal Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing Participant’s local human resources representative.

(c)    Withdrawal of Consent. Participant understands that Participant is providing the consents herein on a purely voluntary basis. If Participant does not consent, or if Participant later seeks to revoke Participant’s consent, Participant’s employment status or service with the Employer will not be affected; the only consequence of Participant’s refusing or withdrawing Participant’s consent is that the Company would not be able to grant options or other equity awards to Participant or administer or maintain such awards. Therefore, Participant understands that refusing or withdrawing Participant’s consent may affect Participant’s ability to participate in the Plan. For more information on the consequences of Participant’s refusal to consent or withdrawal of consent, Participant understands that Participant may contact Participant’s local human resources representative.

17. Prior Agreements; Restrictive Covenants. Participant agrees that, unless Participant has previously executed the Confidentiality, Non-Interference and Invention Assignment Agreement, Participant is required, as a condition to the grant of the Option, to execute and return to the Company a copy of the Confidentiality, Non-Interference and Invention Assignment Agreement attached hereto as Appendix A (the restrictive covenants contained in the Confidentiality, Non-Interference and Invention Assignment Agreement are referred to in this Agreement as the “Restrictive Covenants”). Participant acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the Restrictive Covenants would be inadequate and the Company Group would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. For the avoidance of doubt, the Restrictive Covenants contained in the Confidentiality, Non-Interference and Invention Assignment Agreement are in addition to, and not in lieu of, any other restrictive covenants or similar covenants or agreements between Participant and the Company Group. For purposes of this Agreement, “Restrictive Covenant Violation” shall include Participant’s breach of any of the Restrictive Covenants or any similar provision applicable to Participant.

18. Limitation on Rights; No Right to Future Grants; Extraordinary Item of Compensation. By accepting this Agreement and the grant of the Option evidenced hereby, Participant expressly acknowledges that (a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be suspended or terminated by the Company at any time to the extent permitted by the Plan; (b) the grant of the Option is exceptional, voluntary and occasional and it does not create any contractual or other right to receive future grants of options, or benefits in lieu of options, even if options have been granted in the past; (c) all determinations with respect to future option grants, if any, including the grant date, the number of Shares granted, the exercise price and the exercise date or dates, will be at the sole discretion of the Company; (d) Participant’s participation in the Plan is voluntary and not a condition of employment or service, and Participant may decline to accept the Option without adverse consequences to Participant’s continued

employment or service relationship with the Company Group; (e) the value of the Option is an extraordinary item that is outside the scope of Participant’s employment or service contract, if any, and nothing can or must automatically be inferred from such employment or service contract or its consequences; (f) Options and any Shares acquired under the Plan, and the income from and value of same, are not part of normal or expected compensation for any purpose and are not to be used for calculating any severance, resignation, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments, Participant waives any claim on such basis and, for the avoidance of doubt, the Option will not constitute an “acquired right” under the applicable law of any jurisdiction; (g) if the underlying Shares do not increase in value, the Option will have no value; (h) if Participant exercises the Option and acquires Shares, the value of such Shares may increase or decrease in value, even below the Exercise Price; and (i) the future value of the underlying Shares is unknown and cannot be predicted with certainty. In addition, Participant understands, acknowledges and agrees that Participant will have no rights to compensation or damages related to Option proceeds in consequence of Participant’s Termination for any reason whatsoever and whether or not in breach of contract.

19. Award Administrator. The Company may from time to time designate a third party (an “Award Administrator”) to assist the Company in the implementation, administration and management of the Plan and any Options granted thereunder, including by sending award notices on behalf of the Company to Participants, and by facilitating through electronic means acceptance of Agreement by Participants and Option exercises by Participants.

20. Book Entry Delivery of Shares. Whenever reference in this Agreement is made to the issuance or delivery of certificates representing one or more Shares, the Company may elect to issue or deliver such Shares in book entry form in lieu of certificates.

21. Electronic Delivery and Acceptance. This Agreement may be executed electronically and in counterparts. The Company may, in its sole discretion, decide to deliver any documents related to the Plan by electronic means. Participant hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.

22. Acceptance and Agreement by Participant; Forfeiture upon Failure to Accept. Participant’s rights under the Option will lapse ninety (90) days from the Date of Grant, and the Option will be forfeited on such date if Participant will not have accepted this Agreement by such date. For the avoidance of doubt, Participant’s failure to accept this Agreement will not affect Participant’s continuing obligations under any other agreement between the Company and Participant.

23. No Advice Regarding Grant. Notwithstanding anything herein to the contrary, Participant acknowledges and agrees that the Company is not providing any tax, legal or financial advice, nor is the Company making any recommendations regarding Participant’s participation in the Plan, or Participant’s acquisition or sale of the underlying Shares. Participant is hereby advised to consult with Participant’s own personal tax, legal and financial advisors regarding Participant’s participation in the Plan before taking any action related to the Plan.

24. Imposition of Other Requirements. The Company reserves the right to impose other requirements on Participant’s participation in the Plan, on the Option and on any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require Participant to sign any additional agreements or undertakings that may be necessary to accomplish the foregoing.

25. Waiver. Participant acknowledges that a waiver by the Company of breach of any provision of this Agreement will not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by Participant or any other participant in the Plan.

26. Notices. Any notice necessary under this Agreement shall be addressed to the Company in care of its Corporate Secretary at the principal executive office of the Company and to Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

[Signature Page Follows]

VELOCITY FINANCIAL, INC.

    Name: [            ]

    Title:   [            ]

Acknowledged and Agreed

as of the date first written above:

Participant Signature

Appendix A

CONFIDENTIALITY, NON-INTERFERENCE, AND INVENTION ASSIGNMENT AGREEMENT

As a condition of receiving a grant of stock options to purchase shares of common stock of Velocity Financial, Inc. (the “Company”), and in consideration of my continued employment or service with the Company Group (as defined below), I agree to the terms and conditions of this Confidentiality, Non-Interference, and Invention Assignment Agreement (the “Restrictive Covenant Agreement”), dated [                    ].

Section 1.    Definitions.

For purposes of this Restrictive Covenant Agreement:

(a)    “Company Group” means, collectively, the Company and its Subsidiaries.

(b)    “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust (charitable or non-charitable), unincorporated organization, or other form of business entity.

(c)    “Post-Termination Restricted Period” means the period commencing on the Termination Date and ending on the twelve (12) month anniversary of the Termination Date.

(d)    “Subsidiary” means, with respect to any specified Person: (i) any corporation, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of such entity’s voting securities (without regard to the occurrence of any contingency and after giving effect to any voting agreement or stockholders’ agreement that effectively transfers voting power) is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (ii) any partnership (or any comparable foreign entity) (A) the sole general partner (or functional equivalent thereof) or the managing general partner of which is such Person or Subsidiary of such Person or (B) the only general partners (or functional equivalents thereof) of which are that Person or one or more Subsidiaries of that Person (or any combination thereof).

(e)    “Termination” means the termination of my employment or service, as applicable, with the Company Group for any reason (including death).

(f)    “Termination Date” means the effective date of Termination.

Section 2.    Confidential Information.

(a)    Company Group Information. I acknowledge that, during the course of my employment or service with the Company Group, I will have access to information about the Company Group and that my employment or service with the Company Group shall bring me into close contact with confidential and proprietary information of the Company Group. In recognition of the foregoing, I agree, at all times during the term of my employment or service with the Company Group and thereafter, to hold in confidence, and not to use, except for the benefit of the

Company Group, or to disclose to any Person without written authorization of the Company, any Confidential Information that I obtain or create. I further agree not to make copies of such Confidential Information except as authorized by the Company. I understand that “Confidential Information” means information that the Company Group has or will develop, acquire, create, compile, discover, or own, that has value in or to the business of the Company Group that is not generally known and that the Company Group wishes to maintain as confidential. I understand that Confidential Information includes, but is not limited to, any and all non-public information that relates to the actual or anticipated business and/or products, research, or development of the Company Group, or to the Company Group’s technical data, trade secrets, or know-how, including, but not limited to, research, product plans, or other information regarding the Company Group’s products or services and markets, customer lists, and customers (including, but not limited to, customers of the Company Group on whom I called or with whom I may become acquainted during the term of my employment or service), software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances, and other business information disclosed by the Company Group either directly or indirectly in writing, orally, or by drawings or inspection of premises, parts, equipment, or other property of the Company Group. Notwithstanding the foregoing, Confidential Information shall not include any of the foregoing items that have become publicly and widely known through no unauthorized disclosure by me or others who were under confidentiality obligations as to the item or items involved.

(b)    Former Employer Information. I represent that my performance of my duties and responsibilities as an employee or service provider of the Company Group has not breached and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by me in confidence or trust prior or subsequent to the commencement of my employment or service with the Company Group, and I will not disclose to any member of the Company Group, or induce any member of the Company Group to use, any developments, or confidential or proprietary information or material I may have obtained in connection with employment with any prior employer or service recipient in violation of a confidentiality agreement, nondisclosure agreement, or similar agreement with such prior employer or service recipient.

(c)    Permitted Disclosure. Nothing in this Restrictive Covenant Agreement shall prohibit or impede me from communicating, cooperating or filing a complaint with any federal, state or local governmental or law enforcement branch, agency or entity (collectively, a “Governmental Entity”) with respect to possible violations of any U.S. federal, state or local law or regulation, or otherwise making disclosures to any Governmental Entity, in each case, that are protected under the whistleblower provisions of any such law or regulation; provided that in each case such communications and disclosures are consistent with applicable law. I understand and acknowledge that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a federal, state, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. I understand and acknowledge further that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except pursuant to court order. Notwithstanding

the foregoing, under no circumstance will I be authorized to disclose any information covered by attorney-client privilege or attorney work product of any member of the Company Group without prior written consent of the Company’s Corporate Secretary or other individual designated by the Company.

Section 3.    Intellectual Property.

(a)    Assignment of Rights. If I create, invent, design, develop, contribute to or improve any works of authorship, inventions, intellectual property, materials, documents or other work product (including, without limitation, research, reports, software, databases, systems, applications, presentations, textual works, content or audiovisual materials) (“Works”), either alone or with third parties, at any time during my employment or service with the Company Group and within the scope of my employment or service and/or with the use of any the Company Group resources (“Company Works”), I agree to promptly and fully disclose same to the Company and hereby irrevocably assign, transfer and convey, to the maximum extent permitted by applicable law, all rights and intellectual property rights therein (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) to the Company to the extent ownership of any such rights does not vest originally in the Company.

(b)    Maintenance of Records. I agree to keep and maintain adequate and current written records (in the form of notes, sketches, drawings, and any other form or media requested by the Company) of all Company Works. The records will be available to and remain the sole property of the Company Group at all times. I agree not to remove such records from the Company’s place of business except as expressly permitted by Company Group policy, which may, from time to time, be revised at the sole election of the Company Group for the purpose of furthering the business of the Company Group.

(c)    Execution of Documents. I agree to take all requested actions and execute all requested documents (including any licenses or assignments required by a government contract) at the Company’s expense (but without further remuneration) to assist the Company in validating, maintaining, protecting, enforcing, perfecting, recording, patenting or registering any of the Company’s rights in the Company Works. If the Company is unable for any other reason to secure my signature on any document for this purpose, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalf and stead to execute any documents and to do all other lawfully permitted acts in connection with the foregoing.

(d)    California Labor Code. Notwithstanding the foregoing, this Section 3 is subject to the provisions of California Labor Code Sections 2870, 2871 and 2872. In accordance with Section 2870 of the California Labor Code, my obligation to assign my right, title and interest throughout the world in and to all Company Works does not apply to any Works that I developed entirely on my own time without using the Company Group’s equipment, supplies, facilities, or Confidential Information except for those Company Works that relate to either (i) the business of the Company Group at the time of conception or reduction to practice of the Work, or actual or demonstrably anticipated research or development of the Company Group or (ii) result from any work performed by me for the Company Group. A copy of California Labor Code Sections 2870, 2871 and 2872 is attached to this Restrictive Covenant Agreement as Exhibit A. I agree to disclose all Works to

the Company, even if I do not believe I am required under this Restrictive Covenant Agreement, or pursuant to California Labor Code Section 2870, to assign my interest in such Works to the Company.

Section 4.    Restrictions on Interfering.

(a)    Non-Solicitation of Employees/Contractors. During the period of my employment or service relationship with the Company and, to the maximum extent permitted by applicable law, during the Post-Termination Restricted Period, I shall not, directly or indirectly for my own account or for the account of any other Person:

i.    directly or indirectly solicit, induce or encourage any employee of the Company Group to leave the employment of the Company Group; or

ii.    directly or indirectly solicit, induce or encourage to cease to work with the Company Group any independent contractor, consultant or partner then under exclusive contract with the Company Group

; provided, that (A) the restrictions in this Section 4(a) shall not apply to my administrative assistant; and (B) clauses (i) and (ii) above shall not be violated by general solicitation not targeted at the prohibited group or by my service as a reference upon request.

(b)    Non-Disparagement. I agree that, other than with regard to employees in the good faith performance of my duties with the Company while employed by or providing services to the Company, during the period of my employment or service with the Company, and at all times thereafter, I will not make any disparaging or defamatory comments regarding any member of the Company Group or their respective current or former directors, officers, or employees in any respect. However, my obligations under this Section 4(b) shall not apply to disclosures required by applicable law, regulation, or order of a court or Governmental Entity or as are reasonably necessary to enforce my rights under any agreement with the Company Group. The obligations under this Section 4(b) shall not prevent me from testifying or responding truthfully to any request for discovery or testimony in any judicial or quasi-judicial proceeding or any governmental inquiry, investigation or other proceeding.

Section 5.    Returning Company Group Documents.

I agree that, at the time of my Termination for any reason, I will deliver to the Company (and will not keep in my possession, recreate, or deliver to anyone else) any and all Confidential Information and all other documents, materials, information, and property developed by me pursuant to my employment or service or otherwise belonging to the Company Group. I agree further that any property situated on the Company Group’s premises and owned by any member of the Company Group, including disks and other storage media, filing cabinets, and other work areas, is subject to inspection by personnel of any member of the Company Group at any time with or without notice.

Section 6.    Disclosure of Agreement.

As long as it remains in effect, I will disclose the existence of this Restrictive Covenant Agreement to any prospective employer, partner, co-venturer, investor, or lender prior to entering into an employment, consulting, partnership, or other business relationship with such person or entity.

Section 7.    Reasonableness of Restrictions.

I acknowledge and recognize the highly competitive nature of the Company’s business, that access to Confidential Information renders me special and unique within the Company’s industry, and that I will have the opportunity to develop substantial relationships with existing and prospective clients, accounts, customers, consultants, contractors, investors, and strategic partners of the Company Group during the course of and as a result of my employment or service with the Company Group. In light of the foregoing, I recognize and acknowledge that the restrictions and limitations set forth in this Restrictive Covenant Agreement are reasonable and valid in geographical and temporal scope and in all other respects and are essential to protect the value of the business and assets of the Company Group. I further acknowledge that the restrictions and limitations set forth in this agreement will not materially interfere with my ability to earn a living following my Termination and that my ability to earn a livelihood without violating such restrictions is a material condition to my employment or service with the Company Group.

Section 8.    Independence; Severability; Blue Pencil.

Each of the rights enumerated in this Restrictive Covenant Agreement shall be independent of the others and shall be in addition to and not in lieu of any other rights and remedies available to the Company Group at law or in equity. If any of the provisions of this agreement or any part of any of them is hereafter construed or adjudicated to be invalid or unenforceable, the same shall not affect the remainder of this Restrictive Covenant Agreement, which shall be given full effect without regard to the invalid portions. If any of the covenants contained herein are held to be invalid or unenforceable because of the duration of such provisions or the area or scope covered thereby, I agree that the court making such determination shall have the power to reduce the duration, scope, and/or area of such provision to the maximum and/or broadest duration, scope, and/or area permissible by law, and in its reduced form said provision shall then be enforceable.

Section 9.    Injunctive Relief.

I expressly acknowledge that any breach or threatened breach of any of the terms and/or conditions set forth in this Restrictive Covenant Agreement may result in substantial, continuing, and irreparable injury to the Company Group. Therefore, I hereby agree that, in addition to any other remedy that may be available to the Company Group, any member of the Company Group shall be entitled to seek injunctive relief, specific performance, or other equitable relief by a court of appropriate jurisdiction in the event of any breach or threatened breach of the terms of this Restrictive Covenant Agreement without the necessity of proving irreparable harm or injury as a result of such breach or threatened breach. Notwithstanding any other provision to the contrary, I acknowledge and agree that the Post-Termination Restricted Period shall be tolled during any period of violation of any of the covenants in Section 4(a) and during any other period

required for litigation during which any member of the Company Group seeks to enforce such covenants against me if it is ultimately determined that I was in breach of such covenants.

Section 10.    Cooperation.

I agree that, following my Termination, I will continue to provide reasonable cooperation to any member of the Company Group and its respective counsel in connection with any investigation, administrative proceeding, or litigation relating to any matter that occurred during my employment or service in which I was involved or of which I have knowledge. As a condition of such cooperation, the Company shall reimburse me for reasonable out-of-pocket expenses incurred at the request of the Company with respect to my compliance with this Section 10. I also agree that, in the event I am subpoenaed by any person or entity (including, but not limited to, any government agency) to give testimony or provide documents (in a deposition, court proceeding, or otherwise), that in any way relates to my employment or service with the Company Group, I will give prompt notice of such request to the Company and will make no disclosure until any member of the Company Group has had a reasonable opportunity to contest the right of the requesting person or entity to such disclosure.

Section 11.    General Provisions.

(a)    Governing Law; Waiver of Jury Trial. THE VALIDITY, INTERPRETATION, CONSTRUCTION, AND PERFORMANCE OF THIS RESTRICTIVE COVENANT AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS. BY EXECUTION OF THIS RESTRICTIVE COVENANT AGREEMENT, I HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN CONNECTION WITH ANY SUIT, ACTION, OR PROCEEDING UNDER OR IN CONNECTION WITH THIS RESTRICTIVE COVENANT AGREEMENT.

(b)    Entire Agreement. This Restrictive Covenant Agreement sets forth the entire agreement and understanding between the Company and me relating to the subject matter herein and merges all prior discussions between me and the Company; provided, that, the restrictive covenants contained in this Restrictive Covenant Agreement are in addition to, and not in lieu of, any other restrictive covenants between me and any member of the Company Group. No modification or amendment to this Restrictive Covenant Agreement, nor any waiver of any rights under this Restrictive Covenant Agreement, will be effective unless in writing signed by the party to be charged.

(c)    No Right of Continued Employment or Engagement. I acknowledge and agree that nothing contained herein shall be construed as granting me any right to continued employment or engagement by the Company Group, and the right of the Company Group to terminate my employment or engagement at any time and for any reason, with or without cause, is specifically reserved.

(d)    Successors and Assigns. This Restrictive Covenant Agreement will be binding upon my heirs, executors, administrators, and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. I expressly acknowledge and agree that this

Restrictive Covenant Agreement may be assigned by the Company without my consent to any other member of the Company Group as well as any purchaser of all or substantially all of the assets or stock of the Company, whether by purchase, merger, or other similar corporate transaction.

(e)    Survival. The provisions of this Restrictive Covenant Agreement shall survive my Termination and/or the assignment of this Restrictive Covenant Agreement by the Company to any successor in interest or other assignee.

[Signature Pages Follow]

I, [            ], have executed this Confidentiality, Non-Interference, and Invention Assignment Agreement on the respective date set forth below:

Date:
	[                    ]

	VELOCITY FINANCIAL, INC.
Date:
	By: Title:

Exhibit A

California Labor Code Sections 2870, 2871 and 2872

SECTION 2870

(a)    Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the employer.

(b)    To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

SECTION 2871

No employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Nothing in this article shall be construed to forbid or restrict the right of an employer to provide in contracts of employment for disclosure, provided that any such disclosures be received in confidence, of all of the employee’s inventions made solely or jointly with others during the term of his or her employment, a review process by the employer to determine such issues as may arise, and for full title to certain patents and inventions to be in the United States, as required by contracts between the employer and the United States or any of its agencies.

SECTION 2872

If an employment agreement entered into after January 1, 1980 contains a provision requiring the employee to assign or offer to assign any of his or her rights in any invention to his or her employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention which qualifies fully under the provisions of Section 2870. In any suit or action arising thereunder, the burden of proof shall be on the employee claiming the benefits of its provisions.

EX-10.9

Exhibit 10.9

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT GRANT AND AGREEMENT

Director Grant

This Restricted Stock Unit Grant and Agreement (this “Agreement”), is made effective as of the date (the “Date of Grant”) set forth on the signature page attached hereto (the “Signature Page”), by and between Velocity Financial, Inc., a Delaware corporation (together with its successors and assigns, the “Company”) and the participant identified on the Signature Page (“Participant”).

RECITALS:

WHEREAS, the Company has adopted the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (as it may be amended, the “Plan”), the terms of which Plan are incorporated herein by reference and made a part of this Agreement, and capitalized terms not otherwise defined herein shall have the same meaning as in the Plan; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the Restricted Stock Units provided for herein to Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows:

1. Grant of Restricted Stock Units.

(a) Grant. The Company hereby grants to Participant on the Date of Grant, on the terms and conditions hereinafter set forth in this Agreement, the number of Restricted Stock Units set forth on the Signature Page (the “RSU Award”), subject to adjustment as set forth in the Plan and this Agreement.

(b) Vesting. Subject to Participant’s continued service with the Company Group through the applicable vesting date, the RSU Award shall vest and become exercisable with respect to one hundred percent (100%) of the Restricted Stock Units on the first (1^st) anniversary of the date specified as the “Vesting Start Date” on the Signature Page; provided, that if a Change in Control occurs prior to the applicable vesting date and Participant remains in continued service with the Company Group on the effective date of such Change in Control, all then-unvested Restricted Stock Units shall become fully vested immediately prior to the effective time of such Change in Control. Upon a Termination for any reason, all unvested Restricted Stock Units shall be forfeited for no consideration. Any Restricted Stock Unit which has become vested in accordance with the foregoing shall be referred to as a “Vested Restricted Stock Unit”, and any Restricted Stock Unit which is not a Vested Restricted Stock Unit, an “Unvested Restricted Stock Unit”.

(c) Settlement of Restricted Stock Units.

(i) Vested Restricted Stock Units shall be settled as soon as reasonably practicable following the vesting of such Vested Restricted Stock Units (and, in any event, no later than the date which is two and one-half (2 ¹⁄₂) months following the end of the calendar year in which the Vested Restricted Stock Units vested).

(ii) Upon the settlement of a Vested Restricted Stock Unit, the Company shall pay to Participant an amount equal to one share of Common Stock. As determined by the Committee, the Company shall pay such amount in (x) cash, (y) shares of Common Stock or (z) any combination thereof. Any fractional shares of Common Stock may be settled in cash, at the Committee’s election.

(iii) Notwithstanding anything in this Agreement to the contrary, the Company shall not have any obligation to issue or transfer any shares of Common Stock as contemplated by this Agreement unless and until such issuance or transfer complies with all relevant provisions of law. As a condition to the settlement of any portion of the RSU Award evidenced by this Agreement, Participant may be required to deliver certain documentation to the Company.

(iv) Repayment of Proceeds; Clawback. The RSU Award and all proceeds related to the RSU Award are subject to the clawback and repayment terms set forth in Sections 14(v) and 14(w) of the Plan and the Company’s clawback policy, as in effect from time to time, to the extent Participant is a director or officer. If Participant’s service with the Company Group is terminated by the Company for Cause or the Company Group discovers after Participant’s Termination that grounds for a Termination for Cause existed at the time thereof, then Participant shall be required to pay to the Company, within ten (10) business days of the Company’s request to Participant therefor, an amount equal to the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) Participant received either in cash in respect of the settlement of Restricted Stock Units, or upon the sale or other disposition of, or dividends or distributions in respect of, Common Stock acquired upon the settlement of the RSU Award. Any reference in this Agreement to grounds existing for a Termination for Cause shall be determined without regard to any notice period, cure period or other procedural delay or event required prior to finding of, or Termination for, Cause. The foregoing remedy shall not be exclusive.

(v) Legend. To the extent applicable, all book entries (or certificates, if any) representing the shares of Common Stock delivered to Participant as contemplated by Section 1(c) above shall be subject to the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such shares of Common Stock are listed, and any applicable Federal or state laws, and the Company may cause notations to be made next to the book entries (or a legend or legends put on certificates, if any) to make appropriate reference to such restrictions. Any such book entry notations (or legends on certificates, if any) shall include a description to the effect of any restrictions.

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2. No Right to Continued Engagement. Neither the Plan nor this Agreement nor Participant’s receipt of the Restricted Stock Units hereunder shall impose any obligation on the Company Group to continue the engagement of Participant. Further, the Company Group may at any time terminate the engagement of Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.

3. Restrictions on Transfer; Lock-up. Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the RSU Award, other than to Permitted Transferees as may be permitted by the Committee from time to time in accordance with applicable laws and Section 14(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the RSU Award, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the RSU Award shall terminate and become of no further effect.

[FOR IPO GRANTS: Participant further hereby agrees that by acquiring shares of Common Stock under the RSU Award, Participant shall, without further action on the part of Participant, be bound by the provisions of the lock-up letter executed by the executive officers of the Company to the same extent as if Participant had directly executed such lock-up letter himself or herself. Such lock-up letter will provide that Participant shall not, subject to specified exceptions, dispose of or hedge any shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock during the period from the date of the final prospectus relating to the initial public offering of the Company and continuing through the date one-hundred eighty (180) days after the date of such prospectus, except with the prior written consent of the representatives of the underwriters.]

4. Withholding. Participant may be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of the Restricted Stock Units, their grant or vesting or any payment or transfer with respect to the Restricted Stock Units at the minimum applicable statutory rates, and to take such action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes.

5. Securities Laws; Cooperation. Upon the vesting of any Unvested Restricted Stock Units, Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws, the Plan or this Agreement. Participant further agrees to cooperate with the Company in taking any action reasonably necessary or advisable to consummate the transactions contemplated by this Agreement.

6. Notices. Any notice necessary under this Agreement shall be addressed to the Company in care of its Corporate Secretary at the principal executive office of the Company and to Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

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7. Choice of Law; Jurisdiction; Venue. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. Any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference), or any judgment entered by any court in respect of any thereof, shall be brought in any court of competent jurisdiction in the State of Delaware or the State of California, and each of Participant, the Company, and any Permitted Transferees who hold Restricted Stock Units pursuant to a valid assignment, hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding, or judgment. Each of Participant, the Company, and any Permitted Transferees who hold Restricted Stock Units pursuant to a valid assignment hereby irrevocably waives (a) any objections which it may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or the State of California, (b) any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum and (c) any right to a jury trial.

8. RSU Award Subject to Plan; Amendment. By entering into this Agreement, Participant agrees and acknowledges that Participant has received and read a copy of the Plan. The Restricted Stock Units granted hereunder are subject to the Plan. The terms and provisions of the Plan, as it may be amended from time to time, are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate this Agreement, but no such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination shall materially adversely affect the rights of Participant hereunder without the consent of Participant.

9. Section 409A. It is intended that the Restricted Stock Units granted hereunder shall be exempt from Section 409A of the Code pursuant to the “short-term deferral” rule applicable to such section, as set forth in the regulations or other guidance published by the Internal Revenue Service thereunder.

[Signature Page Follows]

4

IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Date of Grant.

VELOCITY FINANCIAL, INC.

Name: [______]

Title:   [______]

Date of Grant:	[______]
Number of Restricted Stock Units Granted:	[______]
Vesting Start Date:	[______]

Acknowledged and Agreed

as of the date first written above:

Participant Signature

EX-10.10

Exhibit 10.10

VELOCITY FINANCIAL, INC.

2020 OMNIBUS INCENTIVE PLAN

RESTRICTED STOCK UNIT GRANT AND AGREEMENT

This Restricted Stock Unit Grant and Agreement (this “Agreement”), is made effective as of the date (the “Date of Grant”) set forth on the signature page attached hereto (the “Signature Page”), by and between Velocity Financial, Inc., a Delaware corporation (together with its successors and assigns, the “Company”) and the participant identified on the Signature Page (“Participant”).

RECITALS:

WHEREAS, the Company has adopted the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (as it may be amended, the “Plan”), the terms of which Plan are incorporated herein by reference and made a part of this Agreement, and capitalized terms not otherwise defined herein shall have the same meaning as in the Plan; and

WHEREAS, the Committee has determined that it would be in the best interests of the Company and its stockholders to grant the Restricted Stock Units provided for herein to Participant pursuant to the Plan and the terms set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows:

1. Grant of Restricted Stock Units.

(a) Grant. The Company hereby grants to Participant on the Date of Grant, on the terms and conditions hereinafter set forth in this Agreement, the number of Restricted Stock Units set forth on the Signature Page (the “RSU Award”), subject to adjustment as set forth in the Plan and this Agreement.

(b) Vesting. Subject to Participant’s continued service with the Company Group through the applicable vesting date, the RSU Award shall vest and become exercisable with respect to [●] percent ([●]%) of the Restricted Stock Units on each anniversary of the date specified as the “Vesting Start Date” on the Signature Page for [●] years thereafter. Upon a Termination for any reason, all unvested Restricted Stock Units shall be forfeited for no consideration. Any Restricted Stock Unit which has become vested in accordance with the foregoing shall be referred to as a “Vested Restricted Stock Unit”, and any Restricted Stock Unit which is not a Vested Restricted Stock Unit, an “Unvested Restricted Stock Unit”.

(c) Settlement of Restricted Stock Units.

(i) Vested Restricted Stock Units shall be settled as soon as reasonably practicable following the vesting of such Vested Restricted Stock Units (and, in any event, no later than the date which is two and one-half (2 ¹⁄₂) months following the end of the calendar year in which the Vested Restricted Stock Units vested).

(ii) Upon the settlement of a Vested Restricted Stock Unit, the Company shall pay to Participant an amount equal to one share of Common Stock. As determined by the Committee, the Company shall pay such amount in (x) cash, (y) shares of Common Stock or (z) any combination thereof. Any fractional shares of Common Stock may be settled in cash, at the Committee’s election.

(iii) Notwithstanding anything in this Agreement to the contrary, the Company shall not have any obligation to issue or transfer any shares of Common Stock as contemplated by this Agreement unless and until such issuance or transfer complies with all relevant provisions of law. As a condition to the settlement of any portion of the RSU Award evidenced by this Agreement, Participant may be required to deliver certain documentation to the Company.

(iv) Repayment of Proceeds; Clawback. The RSU Award and all proceeds related to the RSU Award are subject to the clawback and repayment terms set forth in Sections 14(v) and 14(w) of the Plan and the Company’s clawback policy, as in effect from time to time, to the extent Participant is a director or officer. If Participant’s service with the Company Group is terminated by the Company for Cause or the Company Group discovers after Participant’s Termination that grounds for a Termination for Cause existed at the time thereof, then Participant shall be required to pay to the Company, within ten (10) business days of the Company’s request to Participant therefor, an amount equal to the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) Participant received either in cash in respect of the settlement of Restricted Stock Units, or upon the sale or other disposition of, or dividends or distributions in respect of, Common Stock acquired upon the settlement of the RSU Award. Any reference in this Agreement to grounds existing for a Termination for Cause shall be determined without regard to any notice period, cure period or other procedural delay or event required prior to finding of, or Termination for, Cause. The foregoing remedy shall not be exclusive.

(v) Legend. To the extent applicable, all book entries (or certificates, if any) representing the shares of Common Stock delivered to Participant as contemplated by Section 1(c) above shall be subject to the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such shares of Common Stock are listed, and any applicable Federal or state laws, and the Company may cause notations to be made next to the book entries (or a legend or legends put on certificates, if any) to make appropriate reference to such restrictions. Any such book entry notations (or legends on certificates, if any) shall include a description to the effect of any restrictions.

2. No Right to Continued Engagement. Neither the Plan nor this Agreement nor Participant’s receipt of the Restricted Stock Units hereunder shall impose any obligation on the Company Group to continue the engagement of Participant. Further, the Company Group may at any time terminate the engagement of Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.

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3. Restrictions on Transfer; Lock-up. Participant may not assign, alienate, pledge, attach, sell or otherwise transfer or encumber the RSU Award, other than to Permitted Transferees as may be permitted by the Committee from time to time in accordance with applicable laws and Section 14(b) of the Plan. Except as otherwise provided herein, no assignment or transfer of the RSU Award, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, shall vest in the assignee or transferee any interest or right herein whatsoever, but immediately upon such assignment or transfer the RSU Award shall terminate and become of no further effect.

[FOR IPO GRANTS: Participant further hereby agrees that by acquiring shares of Common Stock under the RSU Award, Participant shall, without further action on the part of Participant, be bound by the provisions of the lock-up letter executed by the executive officers of the Company to the same extent as if Participant had directly executed such lock-up letter himself or herself. Such lock-up letter will provide that Participant shall not, subject to specified exceptions, dispose of or hedge any shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock during the period from the date of the final prospectus relating to the initial public offering of the Company and continuing through the date one-hundred eighty (180) days after the date of such prospectus, except with the prior written consent of the representatives of the underwriters.]

4. Withholding. Participant may be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of the Restricted Stock Units, their grant or vesting or any payment or transfer with respect to the Restricted Stock Units at the minimum applicable statutory rates, and to take such action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes.

5. Securities Laws; Cooperation. Upon the vesting of any Unvested Restricted Stock Units, Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws, the Plan or this Agreement. Participant further agrees to cooperate with the Company in taking any action reasonably necessary or advisable to consummate the transactions contemplated by this Agreement.

6. Notices. Any notice necessary under this Agreement shall be addressed to the Company in care of its Corporate Secretary at the principal executive office of the Company and to Participant at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

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7. Choice of Law; Jurisdiction; Venue. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. Any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference), or any judgment entered by any court in respect of any thereof, shall be brought in any court of competent jurisdiction in the State of Delaware or the State of California, and each of Participant, the Company, and any Permitted Transferees who hold Restricted Stock Units pursuant to a valid assignment, hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding, or judgment. Each of Participant, the Company, and any Permitted Transferees who hold Restricted Stock Units pursuant to a valid assignment hereby irrevocably waives (a) any objections which it may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or the State of California, (b) any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum and (c) any right to a jury trial.

8. RSU Award Subject to Plan; Amendment. By entering into this Agreement, Participant agrees and acknowledges that Participant has received and read a copy of the Plan. The Restricted Stock Units granted hereunder are subject to the Plan. The terms and provisions of the Plan, as it may be amended from time to time, are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate this Agreement, but no such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination shall materially adversely affect the rights of Participant hereunder without the consent of Participant.

9. Section 409A. It is intended that the Restricted Stock Units granted hereunder shall be exempt from Section 409A of the Code pursuant to the “short-term deferral” rule applicable to such section, as set forth in the regulations or other guidance published by the Internal Revenue Service thereunder.

[Signature Page Follows]

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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Date of Grant.

VELOCITY FINANCIAL, INC.

Name: [______]

Title:   [______]

Date of Grant:	[______]
Number of Restricted Stock Units Granted:	[______]
Vesting Start Date:	[______]

Acknowledged and Agreed

as of the date first written above:

Participant Signature

EX-10.11

Exhibit 10.11

TO: [            ]

Velocity Financial, Inc.

30699 Russell Ranch Road, Suite 295

Westlake Village, CA 91362

[DATE]

As you may know, Velocity Financial, Inc., a Delaware corporation (the “Company”) has filed a registration statement in respect of its common stock with the Securities and Exchange Commission in anticipation of a sale of shares of common stock to the public (if consummated, the “IPO”). On [DATE], Velocity Financial, LLC (the “LLC Entity”) converted into the Company. In connection with such conversion, the LLC Entity exchanged your then outstanding limited liability company interests in the LLC Entity consisting of Class B Units (the “Units”) for shares of common stock (“Shares”) of the Company (the “Exchange”).

What you received in exchange for your Units.

You received Shares in exchange for your Units. These Shares are the same class of shares that will become publicly traded following the IPO and will be subject to restrictions on transfer and vesting as described below. As was the case with the Units, the Shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), and accordingly, may not be sold or transferred except pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption therefrom. For example, an exemption from registration will be available if a sale or transfer of the Shares complies with all of the applicable conditions of Rule 144 under the Securities Act. In such case, Shares may be resold publicly without registration. It is expected that Rule 144 will become available for resale of the Shares upon expiration of the transfer restrictions described below.

The number of Shares you received in exchange for your Units.

The number of Shares you received was determined by dividing the aggregate value of your Units immediately prior to the Exchange, based on the distribution priorities applicable to the Units and the valuation of such Units by the LLC Entity, in each case, calculated by the LLC Entity pursuant to the Fourth Amended and Restated Limited Liability Company Agreement of Velocity Financial, LLC, dated December 19, 2016 (as amended from time to time, the “LLC Agreement”), by the price at which Shares were initially offered to the public in connection with the IPO, which is $[            ] per Share (the “IPO Price”). The number of Shares that you received is set forth on the Company’s signature page to the attached Restricted Stock Grant and Agreement, which signature page also indicates the number of such Shares that are vested Shares and the number that are unvested Shares that will be subject to the Restricted Stock Grant and Agreement. The vested and unvested Shares you received in exchange for your Units were each rounded down to the nearest whole Share, and any fractional Shares will be settled in cash at a later date. You should use the information set forth on this signature page to make the election under Section 83(b) of the Internal Revenue Code of 1986, as amended, (an “83(b) Election”) that you will likely want to make with respect to the unvested Shares you received in exchange for your unvested Units. An example of a form for making an 83(b) Election is attached as Exhibit A to the Restricted Stock Grant and Agreement.

Vested and Unvested Shares.

You received partially vested and partially unvested Shares for your Units, as follows:

• The Shares you received that correlated to vested Units were fully vested upon the Exchange.

• The Shares you received that correlated to unvested Units remain subject to the same vesting terms as the original unvested Units as further described in the attached Restricted Stock Grant and Agreement.

All of the unvested Shares that you receive are subject to the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (the “Plan”) adopted by the Company in connection with the IPO and the attached Restricted Stock Grant and Agreement that you are required to execute.

Next steps.

To facilitate the IPO process, please execute the attached Restricted Stock Grant and Agreement as an acknowledgment of the Exchange of your Shares. The Restricted Stock Grant and Agreement memorializes your rights and obligations on a basis consistent with your existing Unit Grant Agreement(s) with respect to any restricted Shares that you received in the Exchange with respect to unvested Units. In addition, please review the Plan and the Restricted Stock Grant and Agreement carefully. We strongly encourage you to read these documents, and, if you have questions, consult with your legal, financial, and tax advisors about the consequences of the Exchange.

After you execute the Restricted Stock Grant and Agreement, please send a signed copy of the agreement to [            ] at [            ] and forward the original to [            ], Corporate Secretary, 30699 Russell Ranch Road, Suite 295, Westlake Village, California 91362. Please send the signed agreement no later than 12:00 p.m. (Pacific Time) on [            ], 2020.

U.S. Federal Income Tax Treatment.

The Company intends to take the position that the Exchange should not result in taxable income to you for U.S. federal income tax purposes. The Exchange should be treated, for U.S. federal income tax purposes, as a distribution to you of Shares by the Company in redemption of your Units. Your tax basis, if any, in your Units should carry over to your Shares.

Your subsequent disposition of your Shares should generally result in a capital gain (or loss) in an amount equal to the difference between the amount you realize on the disposition and your tax basis in the Shares that you have disposed of. Long-term capital gains recognized by individuals are generally eligible for reduced rates of taxation. Furthermore, the deductibility of capital losses is subject to limitations. You should consult your tax advisors regarding the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

The Shares you received were in exchange for, and superseded in all respects, the Units. Your rights and obligations under the Velocity Financial, LLC 2012 Equity Incentive Plan, your Unit Grant Agreement(s), and the LLC Agreement terminated immediately following the Exchange.

We look forward to beginning this new, exciting chapter as a public company.

Sincerely,

Christopher D. Farrar

Chief Executive Officer and President

Restricted Stock Agreement – Page 1

VELOCITY FINANCIAL, INC.

RESTRICTED STOCK GRANT AND AGREEMENT

(Replacement Award for Velocity Financial, LLC Units)

This Restricted Stock Grant and Agreement (this “Agreement”), is made effective as of the date set forth on the Company signature page (the “Signature Page”) attached hereto, by and between Velocity Financial, Inc., a Delaware corporation (together with its successors and assigns, the “Company”) and the participant identified on the Signature Page (“Participant”).

R E C I T A L S:

WHEREAS, Participant held a number of Class B Units (the “Units”) of Velocity Financial, LLC (the “LLC Entity”) specified on the Signature Page, which Units were issued pursuant to the Fourth Amended and Restated Limited Liability Company Agreement of Velocity Financial, LLC, dated December 19, 2016 (as amended from time to time, the “LLC Agreement”), the Velocity Financial, LLC 2012 Equity Incentive Plan and one or more Unit Grant Agreements;

WHEREAS, all of the Units were exchanged for shares (“Shares”) of common stock, par value $[            ], of the Company (the “Exchange”), effective prior to the consummation of the initial public offering (the “IPO”) of the common stock (the effective date of the Exchange, the “Exchange Date”);

WHEREAS, the Company has adopted the Velocity Financial, Inc. 2020 Omnibus Incentive Plan (as it may be amended, the “Plan”), the terms of which Plan are incorporated herein by reference and made a part of this Agreement, and capitalized terms not otherwise defined herein shall have the same meaning as in the Plan; and

WHEREAS, as of the Exchange Date, the Units were cancelled and ceased to be issued and outstanding and Participant received, in exchange, Shares with an equivalent value based on the IPO Price (as defined below), as described herein and otherwise subject to the terms this Agreement and the Plan.

NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth, the parties hereto agree as follows:

1.    The Shares.

(a)    Subject to the terms and conditions of the Plan and the additional terms and conditions set forth in this Agreement and effective as of the Exchange Date, the Company caused the Units to be exchanged for the number of vested Shares (the “Vested Shares”) and unvested Shares (the “Unvested Restricted Shares”) specified by the Compensation Committee of the Board of Directors of the Company (the “Committee”) on the Signature Page hereto (the Vested Shares and Unvested Restricted Shares collectively, the “Restricted Shares”).

(b)    The number of Restricted Shares was calculated by the Committee in its reasonable good faith discretion, such that (x) the intrinsic value of all such Units (calculated based on the price at which common stock is sold in the IPO (such price, the “IPO Price”), the number

Restricted Stock Agreement – Page 2

of such Shares held by the LLC Entity prior to the Exchange and the relative rights and priorities applicable to the Units under LLC Agreement immediately prior to the Exchange) were equal to the intrinsic value of all such Shares using the IPO Price, in each case as calculated by the Committee.

(c)    The Vested Shares shall not be subject to any forfeiture restrictions. The Unvested Restricted Shares shall vest and become nonforfeitable Vested Shares in accordance with Schedule I attached hereto.

(d)    If Participant’s employment or service with the Company Group is terminated at any time, all Unvested Restricted Shares shall automatically and immediately be forfeited and canceled (after giving effect to any acceleration of vesting or other terms set forth in Schedule I attached hereto).

(e)    Within ten (10) days after the Exchange Date, Participant shall provide the Company with a copy of a completed election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder in the form of Exhibit A attached hereto. Participant shall timely (within thirty (30) days of the Exchange Date) file (via certified mail, return receipt requested) such election with the Internal Revenue Service, and thereafter shall certify to the Company that Participant has made such timely filing and furnish a copy of such filing to the Company. Participant should consult Participant’s tax advisor regarding the consequences of a Section 83(b) election, as well as the receipt, vesting, holding and sale of the Restricted Shares.

(f)    Participant acknowledges that the Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and accordingly, may not be sold or transferred except pursuant to an effective registration statement under the Securities Act or pursuant to an applicable exemption therefrom.

2.    Prior Agreements; Restrictive Covenants.

(a)    Restrictive Covenants. Participant agrees that, unless Participant has previously executed the Confidentiality, Non-Interference and Invention Assignment Agreement, Participant is required, as a condition to the grant of the Shares, to execute and return to the Company a copy of the Confidentiality, Non-Interference and Invention Assignment Agreement attached hereto as Appendix A (the restrictive covenants contained in the Confidentiality, Non-Interference and Invention Assignment Agreement are referred to in this Agreement as the “Restrictive Covenants”). Participant acknowledges and agrees that the Company’s remedies at law for a breach or threatened breach of any of the Restrictive Covenants would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Participant agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. For the avoidance of doubt, the Restrictive Covenants contained in the Confidentiality, Non-Interference and Invention Assignment Agreement are in addition to, and not in lieu of, any other restrictive

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covenants or similar covenants or agreements between Participant and the Company Group. For purposes of this Agreement, “Restrictive Covenant Violation” shall include Participant’s breach of any of the Restrictive Covenants or any similar provision applicable to Participant.

(b)    Repayment of Proceeds. If a Restrictive Covenant Violation occurs or the Company discovers after Participant’s Termination that grounds existed for Cause at the time thereof, then Participant shall be required, in addition to any other remedy available (on a non-exclusive basis), to pay to the Company, within ten (10) business days’ of the Company’s request to Participant therefor, an amount equal to the excess, if any, of (i) the aggregate after-tax proceeds (taking into account all amounts of tax that would be recoverable upon a claim of loss for payment of such proceeds in the year of repayment) Participant received upon the sale or other disposition of, or distributions in respect of, (A) prior to the Exchange Date, the Units, and (B) the Shares issued to Participant on the Exchange Date over (ii) the aggregate Cost of such Shares. For purposes of this Agreement, “Cost” means, in respect of any Share, the amount paid by Participant for the Units that were exchanged for such Share, as proportionately adjusted for all subsequent distributions on the Shares and other recapitalizations and less the amount of any distributions made with respect to (x) prior to the Exchange Date, the Unit or (y) the Share pursuant to the Company’s organizational documents; provided, that Cost may not be less than zero (0). Any reference in this Agreement to grounds existing for a Termination for Cause shall be determined without regard to any notice period, cure period, or other procedural delay or event required prior to a finding of or Termination for Cause.

3.    Book Entry; Certificates. The Company shall recognize Participant’s ownership of Shares through uncertificated book entry. If elected by the Company, certificates evidencing the Shares may be issued by the Company and any such certificates shall be registered in Participant’s name on the stock transfer books of the Company promptly after the date hereof, but shall remain in the physical custody of the Company or its designee at all times prior to the later of (x) the vesting of Unvested Restricted Shares pursuant to this Agreement and (y) the expiration of any transfer restrictions set forth in this Agreement or otherwise applicable to the Shares. As soon as practicable following such time, any certificates for the Shares shall be delivered to Participant or to Participant’s legal guardian or representative along with the stock powers relating thereto. However, the Company shall not be liable to Participant for damages relating to any delays in issuing the certificates (if any) to Participant, any loss by Participant of the certificates, or any mistakes or errors in the issuance of the certificates or in the certificates themselves.

4.    Rights as a Stockholder. Participant shall be the record owner of the Shares until or unless such Shares are forfeited pursuant to the terms of this Agreement, and as record owner shall be entitled to all rights of a common stockholder of the Company, including, without limitation, voting rights with respect to the Restricted Shares and rights to dividends or other distributions; provided, that the Shares shall be subject to the limitations on transfer and encumbrance set forth in Section 7.

5.    Legend. To the extent applicable, all book entries (or certificates, if any) representing the Shares delivered to Participant as contemplated by Section 3 above shall be subject to the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws, and the Company may cause notations to be made next to the book entries (or a legend or legends put on

Restricted Stock Agreement – Page 4

certificates, if any) to make appropriate reference to such restrictions. Any such book entry notations (or legends on certificates, if any) shall include a description to the effect of the restrictions set forth in Sections 1 and 7 hereof.

6.     No Right to Continued Employment or Engagement. Neither the Plan nor this Agreement nor Participant’s receipt of the Shares hereunder shall impose any obligation on the Company Group to continue the employment or engagement of Participant. Further, the Company Group may at any time terminate the employment or engagement of such Participant, free from any liability or claim under the Plan or this Agreement, except as otherwise expressly provided herein.

7.    Assignment Restrictions; Lock-up.

(a)    The Unvested Restricted Shares may not, at any time prior to becoming vested pursuant to the terms of this Agreement, be Assigned and any such purported Assignment shall be void and unenforceable against the Company or any Affiliate; provided, that the designation of a beneficiary shall not constitute an Assignment. Participant further hereby agrees that Participant shall, without further action on the part of Participant, be bound by the provisions of the lock-up letter executed by the executive officers of the Company to the same extent as if Participant had directly executed such lock-up letter himself or herself. Such lock-up letter will provide that Participant shall not, subject to specified exceptions, dispose of or hedge any shares of common stock of the Company or securities convertible into or exchangeable for shares of common stock of the Company during the period from the date of the final prospectus relating to the IPO and continuing through the date one hundred eighty (180) days after the date of such prospectus, except with the prior written consent of the representatives of the underwriters.

(b)    “Assign” or “Assignment” shall mean (in either the noun or the verb form, including with respect to the verb form, all conjugations thereof within their correlative meanings) with respect to any security, the gift, sale, assignment, transfer, pledge, hypothecation or other disposition (whether for or without consideration, whether directly or indirectly, and whether voluntary, involuntary or by operation of law) of such security or any interest therein.

8.    Withholding. Participant may be required to pay to the Company or any Affiliate and the Company shall have the right and is hereby authorized to withhold, any applicable withholding taxes in respect of the Restricted Shares, their grant or vesting or any payment or transfer with respect to the Shares at the minimum applicable statutory rates, and to take such action as may be necessary in the opinion of the Committee to satisfy all obligations for the payment of such withholding taxes.

9.    Securities Laws; Cooperation. Upon the vesting of any Unvested Restricted Shares, Participant will make or enter into such written representations, warranties and agreements as the Committee may reasonably request in order to comply with applicable securities laws, the Plan or with this Agreement. Participant further agrees to cooperate with the Company in taking any action reasonably necessary or advisable to consummate the transactions contemplated by this Agreement.

10.    Notices. Any notice necessary under this Agreement shall be addressed to the Company in care of its Corporate Secretary at the principal executive office of the Company and to Participant

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at the address appearing in the personnel records of the Company for such Participant or to either party at such other address as either party hereto may hereafter designate in writing to the other. Any such notice shall be deemed effective upon receipt thereof by the addressee.

11.    Choice of Law; Jurisdiction; Venue. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware applicable to contracts made and performed wholly within the State of Delaware, without giving effect to the conflict of laws provisions thereof. Any suit, action or proceeding with respect to this Agreement (or any provision incorporated by reference), or any judgment entered by any court in respect of any thereof, shall be brought in any court of competent jurisdiction in the State of Delaware or the State of California, and each of Participant, the Company, and any Permitted Transferees who hold Shares pursuant to a valid Assignment, hereby submits to the exclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding, or judgment. Each of Participant, the Company, and any Permitted Transferees who hold Shares pursuant to a valid Assignment hereby irrevocably waives (a) any objections which it may now or hereafter have to the laying of the venue of any suit, action, or proceeding arising out of or relating to this Agreement brought in any court of competent jurisdiction in the State of Delaware or the State of California, (b) any claim that any such suit, action, or proceeding brought in any such court has been brought in any inconvenient forum and (c) any right to a jury trial.

12.    Shares Subject to Plan; Amendment. By entering into this Agreement, Participant agrees and acknowledges that Participant has received and read a copy of the Plan. The Shares granted hereunder are subject to the Plan. The terms and provisions of the Plan, as it may be amended from time to time, are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail. The Committee may waive any conditions or rights under, amend any terms of, or alter, suspend, discontinue, cancel or terminate this Agreement, but no such waiver, amendment, alteration, suspension, discontinuance, cancellation or termination shall materially adversely affect the rights of Participant hereunder without the consent of Participant..

13.    Other Awards. Subject to Section 2, the Shares granted in connection with the Exchange and memorialized in this Agreement are in replacement of, and supersede in all respects, the Units.

14.    LLC Entity. Participant agrees and acknowledges that, as of the Exchange Date, Participant (i) holds no Units, (ii) is no longer a member of the LLC Entity and (iii) has no surviving rights under the governing documents of the LLC Entity (including, without limitation, any plan or agreement under which Units were issued to Participant).

[Signature Page Follows]

IN WITNESS WHEREOF, Participant acknowledges and accepts the terms of this Agreement which shall be effective as of the date set forth below and countersignature by the Company.

	Participant
	Name:
Dated:

[Participant Signature Page Replacement Award for Units of Velocity Financial, LLC]

Restricted Stock Agreement – Page 2

Agreement acknowledged and confirmed:

VELOCITY FINANCIAL, INC.

By:

  Name: [                ]

  Title: [                ]

Equity Schedule

Name: [                ]

Class B Units		Shares
Number of Vested Units	Number of Unvested Units	Number of Vested Shares	Number of Unvested Restricted Shares

[Company Signature Page – Replacement Award for Units of Velocity Financial, LLC]

Restricted Stock Agreement – Page 3

Schedule I

Vesting Terms

The Unvested Restricted Shares received in exchange for Class B Units shall become Vested Shares as set forth in the table below, subject to Participant’s continuous employment or service with the Company Group through such vesting date. Any Unvested Restricted Shares that are not vested or forfeited will fully vest immediately prior to the consummation of a Change in Control.

Restricted Shares Eligible to Vest	Vesting Date
100% Vesting [Insert Number of Shares Vesting]1	[May 19, 2020 / June 30, 2020 / August 14, 2020]

¹  Note: Because 1/3 of the total units vests on each anniversary of the grant date (pursuant to the Velocity form of unit agreement), this means that for each grant, 1/3 vested in 2018 and 1/3 vested in 2019, with 1/3 of the total units currently remaining unvested. Accordingly, insert in this row the number equal to 100% of the remaining unvested units/shares.

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Appendix A

CONFIDENTIALITY, NON-INTERFERENCE, AND INVENTION ASSIGNMENT AGREEMENT

As a condition of receiving a grant of shares of common stock of Velocity Financial, Inc. (the “Company”), and in consideration of my continued employment or service with the Company Group (as defined below), I agree to the terms and conditions of this Confidentiality, Non-Interference, and Invention Assignment Agreement (the “Restrictive Covenant Agreement”), dated [                    ], 2020.

Section 1.    Definitions.

For purposes of this Restrictive Covenant Agreement:

(a)    “Company Group” means, collectively, the Company and its Subsidiaries.

(b)    “Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust (charitable or non-charitable), unincorporated organization, or other form of business entity.

(c)    “Post-Termination Restricted Period” means the period commencing on the Termination Date and ending on the twelve (12) month anniversary of the Termination Date.

(d)    “Subsidiary” means, with respect to any specified Person: (i) any corporation, association or other business entity of which more than fifty percent (50%) of the total voting power of shares of such entity’s voting securities (without regard to the occurrence of any contingency and after giving effect to any voting agreement or stockholders’ agreement that effectively transfers voting power) is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person (or a combination thereof); and (ii) any partnership (or any comparable foreign entity) (A) the sole general partner (or functional equivalent thereof) or the managing general partner of which is such Person or Subsidiary of such Person or (B) the only general partners (or functional equivalents thereof) of which are that Person or one or more Subsidiaries of that Person (or any combination thereof).

(e)    “Termination” means the termination of my employment or service, as applicable, with the Company Group for any reason (including death).

(f)     “Termination Date” means the effective date of Termination.

Section 2.    Confidential Information.

(a)    Company Group Information. I acknowledge that, during the course of my employment or service with the Company Group, I will have access to information about the Company Group and that my employment or service with the Company Group shall bring me into close contact with confidential and proprietary information of the Company Group. In recognition of the foregoing, I agree, at all times during the term of my employment or service with the

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Company Group and thereafter, to hold in confidence, and not to use, except for the benefit of the Company Group, or to disclose to any Person without written authorization of the Company, any Confidential Information that I obtain or create. I further agree not to make copies of such Confidential Information except as authorized by the Company. I understand that “Confidential Information” means information that the Company Group has or will develop, acquire, create, compile, discover, or own, that has value in or to the business of the Company Group that is not generally known and that the Company Group wishes to maintain as confidential. I understand that Confidential Information includes, but is not limited to, any and all non-public information that relates to the actual or anticipated business and/or products, research, or development of the Company Group, or to the Company Group’s technical data, trade secrets, or know-how, including, but not limited to, research, product plans, or other information regarding the Company Group’s products or services and markets, customer lists, and customers (including, but not limited to, customers of the Company Group on whom I called or with whom I may become acquainted during the term of my employment or service), software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances, and other business information disclosed by the Company Group either directly or indirectly in writing, orally, or by drawings or inspection of premises, parts, equipment, or other property of the Company Group. Notwithstanding the foregoing, Confidential Information shall not include any of the foregoing items that have become publicly and widely known through no unauthorized disclosure by me or others who were under confidentiality obligations as to the item or items involved.

(b)    Former Employer Information. I represent that my performance of my duties and responsibilities as an employee or service provider of the Company Group has not breached and will not breach any agreement to keep in confidence proprietary information, knowledge, or data acquired by me in confidence or trust prior or subsequent to the commencement of my employment or service with the Company Group, and I will not disclose to any member of the Company Group, or induce any member of the Company Group to use, any developments, or confidential or proprietary information or material I may have obtained in connection with employment with any prior employer or service recipient in violation of a confidentiality agreement, nondisclosure agreement, or similar agreement with such prior employer or service recipient.

(c)    Permitted Disclosure. Nothing in this Restrictive Covenant Agreement shall prohibit or impede me from communicating, cooperating or filing a complaint with any federal, state or local governmental or law enforcement branch, agency or entity (collectively, a “Governmental Entity”) with respect to possible violations of any U.S. federal, state or local law or regulation, or otherwise making disclosures to any Governmental Entity, in each case, that are protected under the whistleblower provisions of any such law or regulation; provided that in each case such communications and disclosures are consistent with applicable law. I understand and acknowledge that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made (i) in confidence to a federal, state, or local government official or to an attorney solely for the purpose of reporting or investigating a suspected violation of law, or (ii) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. I understand and acknowledge further that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret

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under seal, and does not disclose the trade secret, except pursuant to court order. Notwithstanding the foregoing, under no circumstance will I be authorized to disclose any information covered by attorney-client privilege or attorney work product of any member of the Company Group without prior written consent of the Company’s Corporate Secretary or other individual designated by the Company.

Section 3.    Intellectual Property.

(a)    Assignment of Rights. If I create, invent, design, develop, contribute to or improve any works of authorship, inventions, intellectual property, materials, documents or other work product (including, without limitation, research, reports, software, databases, systems, applications, presentations, textual works, content or audiovisual materials) (“Works”), either alone or with third parties, at any time during my employment or service with the Company Group and within the scope of my employment or service and/or with the use of any the Company Group resources (“Company Works”), I agree to promptly and fully disclose same to the Company and hereby irrevocably assign, transfer and convey, to the maximum extent permitted by applicable law, all rights and intellectual property rights therein (including rights under patent, industrial property, copyright, trademark, trade secret, unfair competition and related laws) to the Company to the extent ownership of any such rights does not vest originally in the Company.

(b)    Maintenance of Records. I agree to keep and maintain adequate and current written records (in the form of notes, sketches, drawings, and any other form or media requested by the Company) of all Company Works. The records will be available to and remain the sole property of the Company Group at all times. I agree not to remove such records from the Company’s place of business except as expressly permitted by Company Group policy, which may, from time to time, be revised at the sole election of the Company Group for the purpose of furthering the business of the Company Group.

(c)    Execution of Documents. I agree to take all requested actions and execute all requested documents (including any licenses or assignments required by a government contract) at the Company’s expense (but without further remuneration) to assist the Company in validating, maintaining, protecting, enforcing, perfecting, recording, patenting or registering any of the Company’s rights in the Company Works. If the Company is unable for any other reason to secure my signature on any document for this purpose, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalf and stead to execute any documents and to do all other lawfully permitted acts in connection with the foregoing.

(d)    California Labor Code. Notwithstanding the foregoing, this Section 3 is subject to the provisions of California Labor Code Sections 2870, 2871 and 2872. In accordance with Section 2870 of the California Labor Code, my obligation to assign my right, title and interest throughout the world in and to all Company Works does not apply to any Works that I developed entirely on my own time without using the Company Group’s equipment, supplies, facilities, or Confidential Information except for those Company Works that relate to either (i) the business of the Company Group at the time of conception or reduction to practice of the Work, or actual or demonstrably anticipated research or development of the Company Group or (ii) result from any work performed by me for the Company Group. A copy of California Labor Code Sections 2870, 2871 and 2872

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is attached to this Restrictive Covenant Agreement as Exhibit I. I agree to disclose all Works to the Company, even if I do not believe I am required under this Restrictive Covenant Agreement, or pursuant to California Labor Code Section 2870, to assign my interest in such Works to the Company.

Section 4.    Restrictions on Interfering.

(a)    Non-Solicitation of Employees/Contractors. During the period of my employment or service relationship with the Company and, to the maximum extent permitted by applicable law, during the Post-Termination Restricted Period, I shall not, directly or indirectly for my own account or for the account of any other Person:

i.    directly or indirectly solicit, induce or encourage any employee of the Company Group to leave the employment of the Company Group; or

ii.    directly or indirectly solicit, induce or encourage to cease to work with the Company Group any independent contractor, consultant or partner then under exclusive contract with the Company Group

; provided, that (A) the restrictions in this Section 4(a) shall not apply to my administrative assistant; and (B) clauses (i) and (ii) above shall not be violated by general solicitation not targeted at the prohibited group or by my service as a reference upon request.

(b)    Non-Disparagement. I agree that, other than with regard to employees in the good faith performance of my duties with the Company while employed by or providing services to the Company, during the period of my employment or service with the Company, and at all times thereafter, I will not make any disparaging or defamatory comments regarding any member of the Company Group or their respective current or former directors, officers, or employees in any respect. However, my obligations under this Section 4(b) shall not apply to disclosures required by applicable law, regulation, or order of a court or Governmental Entity or as are reasonably necessary to enforce my rights under any agreement with the Company Group. The obligations under this Section 4(b) shall not prevent me from testifying or responding truthfully to any request for discovery or testimony in any judicial or quasi-judicial proceeding or any governmental inquiry, investigation or other proceeding.

Section 5.    Returning Company Group Documents.

I agree that, at the time of my Termination for any reason, I will deliver to the Company (and will not keep in my possession, recreate, or deliver to anyone else) any and all Confidential Information and all other documents, materials, information, and property developed by me pursuant to my employment or service or otherwise belonging to the Company Group. I agree further that any property situated on the Company Group’s premises and owned by any member of the Company Group, including disks and other storage media, filing cabinets, and other work areas, is subject to inspection by personnel of any member of the Company Group at any time with or without notice.

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Section 6.    Disclosure of Agreement.

As long as it remains in effect, I will disclose the existence of this Restrictive Covenant Agreement to any prospective employer, partner, co-venturer, investor, or lender prior to entering into an employment, consulting, partnership, or other business relationship with such person or entity.

Section 7.    Reasonableness of Restrictions.

I acknowledge and recognize the highly competitive nature of the Company’s business, that access to Confidential Information renders me special and unique within the Company’s industry, and that I will have the opportunity to develop substantial relationships with existing and prospective clients, accounts, customers, consultants, contractors, investors, and strategic partners of the Company Group during the course of and as a result of my employment or service with the Company Group. In light of the foregoing, I recognize and acknowledge that the restrictions and limitations set forth in this Restrictive Covenant Agreement are reasonable and valid in geographical and temporal scope and in all other respects and are essential to protect the value of the business and assets of the Company Group. I further acknowledge that the restrictions and limitations set forth in this agreement will not materially interfere with my ability to earn a living following my Termination and that my ability to earn a livelihood without violating such restrictions is a material condition to my employment or service with the Company Group.

Section 8.    Independence; Severability; Blue Pencil.

Each of the rights enumerated in this Restrictive Covenant Agreement shall be independent of the others and shall be in addition to and not in lieu of any other rights and remedies available to the Company Group at law or in equity. If any of the provisions of this agreement or any part of any of them is hereafter construed or adjudicated to be invalid or unenforceable, the same shall not affect the remainder of this Restrictive Covenant Agreement, which shall be given full effect without regard to the invalid portions. If any of the covenants contained herein are held to be invalid or unenforceable because of the duration of such provisions or the area or scope covered thereby, I agree that the court making such determination shall have the power to reduce the duration, scope, and/or area of such provision to the maximum and/or broadest duration, scope, and/or area permissible by law, and in its reduced form said provision shall then be enforceable.

Section 9.    Injunctive Relief.

I expressly acknowledge that any breach or threatened breach of any of the terms and/or conditions set forth in this Restrictive Covenant Agreement may result in substantial, continuing, and irreparable injury to the Company Group. Therefore, I hereby agree that, in addition to any other remedy that may be available to the Company Group, any member of the Company Group shall be entitled to seek injunctive relief, specific performance, or other equitable relief by a court of appropriate jurisdiction in the event of any breach or threatened breach of the terms of this Restrictive Covenant Agreement without the necessity of proving irreparable harm or injury as a result of such breach or threatened breach. Notwithstanding any other provision to the contrary, I acknowledge and agree that the Post-Termination Restricted Period shall be tolled during any period of violation of any of the covenants in Section 4(a) and during any other period required for litigation during which any member of the Company Group seeks to enforce such covenants against me if it is ultimately determined that I was in breach of such covenants.

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Section 10.     Cooperation.

I agree that, following my Termination, I will continue to provide reasonable cooperation to any member of the Company Group and its respective counsel in connection with any investigation, administrative proceeding, or litigation relating to any matter that occurred during my employment or service in which I was involved or of which I have knowledge. As a condition of such cooperation, the Company shall reimburse me for reasonable out-of-pocket expenses incurred at the request of the Company with respect to my compliance with this Section 10. I also agree that, in the event I am subpoenaed by any person or entity (including, but not limited to, any government agency) to give testimony or provide documents (in a deposition, court proceeding, or otherwise), that in any way relates to my employment or service with the Company Group, I will give prompt notice of such request to the Company and will make no disclosure until any member of the Company Group has had a reasonable opportunity to contest the right of the requesting person or entity to such disclosure.

Section 11.    General Provisions.

(a)    Governing Law; Waiver of Jury Trial. THE VALIDITY, INTERPRETATION, CONSTRUCTION, AND PERFORMANCE OF THIS RESTRICTIVE COVENANT AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE UNITED STATES OF AMERICA AND THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS. BY EXECUTION OF THIS RESTRICTIVE COVENANT AGREEMENT, I HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN CONNECTION WITH ANY SUIT, ACTION, OR PROCEEDING UNDER OR IN CONNECTION WITH THIS RESTRICTIVE COVENANT AGREEMENT.

(b)    Entire Agreement. This Restrictive Covenant Agreement sets forth the entire agreement and understanding between the Company and me relating to the subject matter herein and merges all prior discussions between me and the Company; provided, that, the restrictive covenants contained in this Restrictive Covenant Agreement are in addition to, and not in lieu of, any other restrictive covenants between me and any member of the Company Group. No modification or amendment to this Restrictive Covenant Agreement, nor any waiver of any rights under this Restrictive Covenant Agreement, will be effective unless in writing signed by the party to be charged.

(c)    No Right of Continued Employment or Engagement. I acknowledge and agree that nothing contained herein shall be construed as granting me any right to continued employment or engagement by the Company Group, and the right of the Company Group to terminate my employment or engagement at any time and for any reason, with or without cause, is specifically reserved.

(d)    Successors and Assigns. This Restrictive Covenant Agreement will be binding upon my heirs, executors, administrators, and other legal representatives and will be for the benefit of the Company, its successors, and its assigns. I expressly acknowledge and agree that this

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Restrictive Covenant Agreement may be assigned by the Company without my consent to any other member of the Company Group as well as any purchaser of all or substantially all of the assets or stock of the Company, whether by purchase, merger, or other similar corporate transaction.

(e)    Survival. The provisions of this Restrictive Covenant Agreement shall survive my Termination and/or the assignment of this Restrictive Covenant Agreement by the Company to any successor in interest or other assignee.

[Signature Pages Follow]

Restricted Stock Agreement – Page 11

I, [            ], have executed this Confidentiality, Non-Interference, and Invention Assignment Agreement on the respective date set forth below:

Date:
	[                ]

	VELOCITY FINANCIAL, INC.
Date:
	By: Title:

Exhibit I to Appendix A

California Labor Code Sections 2870, 2871 and 2872

SECTION 2870

(a)    Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the employer.

(b)    To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

SECTION 2871

No employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Nothing in this article shall be construed to forbid or restrict the right of an employer to provide in contracts of employment for disclosure, provided that any such disclosures be received in confidence, of all of the employee’s inventions made solely or jointly with others during the term of his or her employment, a review process by the employer to determine such issues as may arise, and for full title to certain patents and inventions to be in the United States, as required by contracts between the employer and the United States or any of its agencies.

SECTION 2872

If an employment agreement entered into after January 1, 1980 contains a provision requiring the employee to assign or offer to assign any of his or her rights in any invention to his or her employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention which qualifies fully under the provisions of Section 2870. In any suit or action arising thereunder, the burden of proof shall be on the employee claiming the benefits of its provisions.

Exhibit A

ELECTION TO INCLUDE SHARES IN GROSS

INCOME PURSUANT TO SECTION 83(b) OF THE

INTERNAL REVENUE CODE

The undersigned acquired shares of common stock (the “Shares”) of Velocity Financial, Inc. (the “Company”) on [            ] (the “Transfer Date”).

The undersigned desires to make an election to have the Shares taxed under the provision of Section 83(b) of the Internal Revenue Code of 1986, as amended (“Code §83(b)”), at the time the undersigned acquired the Shares.

Therefore, pursuant to Code §83(b) and Treasury Regulation §1.83-2 promulgated thereunder, the undersigned hereby makes an election, with respect to the Shares (described below), to report as taxable income for calendar year 2020 the excess, if any, of the Shares’ fair market value on the Transfer Date over the acquisition price thereof.

The following information is supplied in accordance with Treasury Regulation §1.83-2(e):

1.    The name, address and social security number of the undersigned:

Name:
Address:
SSN:	-            -

2.    A description of the property with respect to which the election is being made: [                    ] Shares.

3.    The date on which the property was transferred: the Transfer Date. The taxable year for which such election is made: calendar year 2020.

4.    The restrictions to which the property is subject: The Shares are subject to time based vesting conditions. If the undersigned ceases to be employed by any of the Company or an affiliate under certain circumstances, all or a portion of the Shares may be subject to forfeiture. The Shares are also subject to transfer restrictions.

5.    The aggregate fair market value on the Transfer Date of the property with respect to which the election is being made, determined without regard to any lapse restrictions: $[            ].

6.    The aggregate amount paid for such property: $[            ].

A copy of this election has been furnished to the Corporate Secretary of the Company pursuant to Treasury Regulations §1.83-2(e)(7).

Dated:                 , 20
	Name: [                ]

EX-23.2

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Managers

Velocity Financial, LLC:

We consent to the use of our report dated March 29, 2019, except as to note 21, which is as of October 2, 2019, included herein and to the reference to our firm under the heading “Experts” in the prospectus.

/s/ KPMG LLP

Los Angeles, California

January 3, 2020

EX-99.2

Exhibit 99.2

CONSENT TO BE NAMED

Pursuant to Rule 438 under the Securities Act of 1933, as amended (the “Securities Act”), the undersigned hereby consents to be named as a person about to become a director of Velocity Financial, Inc. upon the conversion of Velocity Financial, LLC (the “Registrant”) into Velocity Financial, Inc. as described in the Registration Statement on Form S-1 of the Registrant (including any and all amendments or supplements thereto) filed with the U.S. Securities and Exchange Commission under the Securities Act.

/s/ Joy L. Schaefer

Name: Joy L. Schaefer

November 1, 2019