Sprout Mortgage's CEO Left $87M in Wreckage. Now His Wife Has a New Lending License.

Elizabeth Strauss, wife of disgraced Sprout Mortgage CEO Michael Strauss, has founded a new mortgage company — Investor Funding Corp. — based in Irvine, California, according to public records and NMLS filings confirmed by National Mortgage News on January 30, 2026.¹ This comes while Michael Strauss remains entangled in an $87 million bankruptcy case,¹ faces personal foreclosures on two New York properties,⁴ and has been accused by a bankruptcy trustee of activities with "the hallmarks of money laundering."²

• New entity formed: Investor Funding Corp. was founded by Elizabeth Strauss in 2024, has three employees per NMLS records, and is registered in four states.¹

• Former Sprout personnel involved: Vinh Nguyen Luu, who self-identified in NMLS records as Sprout's former SVP of servicing, is among the firm's employees.¹

• Pattern repeats: Elizabeth Strauss previously co-established Smart Rate Mortgage with Michael Strauss in 2022, shortly after Sprout's collapse. That firm's license was pulled after Illinois regulators raised concerns about undisclosed background information.⁵

• Massive liabilities unresolved: Sprout's bankruptcy case has 289 active claims totaling over $87 million, with $28 million in IRS priority claims for unpaid payroll taxes.¹

• Prior SEC action: Michael Strauss previously settled fraud charges with the SEC for $2.45 million over his role as CEO of American Home Mortgage, which collapsed during the 2007 financial crisis.⁶

• Workers still unpaid: Hundreds of former Sprout employees remain without their owed backpay, and the wage case risks dismissal due to Michael Strauss's refusal to participate in legal proceedings.¹

The immediate question for the lending industry: how does an individual closely connected to an $87 million bankruptcy — with a prior pattern of establishing entities through a spouse — obtain new state licenses to originate loans?

Sources

_{1 National Mortgage News | As Sprout saga smolders, ex-CEO's wife forms new lender 
2 National Mortgage News | Suit pins Sprout failure on CEO's sketchy money moves 
3 National Mortgage News | Sprout bankruptcy embroils PNC Bank, American Express 
4 National Mortgage News | Sprout execs could be spared in messy Sprout fallout 
5 National Mortgage Professional | Illinois Suspends LO License of Ex-Sprout CEO Michael Strauss 
6 SEC | Litigation Release: Michael Strauss, Stephen Hozie and Robert Bernstein 
7 HousingWire | Did Michael Strauss, accused of fraud, just start a new mortgage company? 
8 National Mortgage Professional | Allegations of Fraud Surround Sprout Mortgage Bankruptcy 
9 National Mortgage Professional | Involuntary Bankruptcy Petition Halts Sprout Settlement 
10 Washington Examiner | Ex-American Home CEO settles with SEC for $2.45M
11 Wolters Kluwer | NMLS and mortgage lending licensing}

What Alternative Business Lenders Need to Know

Why should commercial lenders care about a residential mortgage collapse?

Let's start with the main question: Sprout was a non-QM residential lender. Many of our readers work in areas like MCA, factoring, ABL, or equipment finance, which are quite different and have their own rules. So, why is this important?

Because the entity formation pattern is the real story here — and it applies across every lending vertical.

What we're watching unfold is a textbook playbook for reconstituting lending operations through a spouse or family member after a regulatory and financial blowup. Michael Strauss presided over at least $27 million in transfers from Sprout to insider entities before the company's 2023 bankruptcy filing.² A trustee described the transaction patterns as resembling money laundering.² And yet, here we are — a new entity, registered to the same spouse, with a former Sprout executive on staff.

This is the kind of counterparty risk intelligence that alternative business lenders deal with every day. Your borrowers, your syndication partners, your correspondents — any of them could have a connected party with this kind of background. The Sprout saga is a documented case study in how bad actors reconstitute.

The entity formation pattern: a due diligence primer

Here's the timeline that every risk officer should internalize:

• July 2022: Sprout Mortgage shuts down abruptly, leaving 600+ employees without final paychecks and allegedly owing $15.5 million in unpaid payroll taxes dating to 2017.⁸

• August 2022: Smart Rate Mortgage LLC is registered in Florida — just weeks later. Elizabeth Strauss is listed as the authorized member. Michael Strauss becomes the sole loan originator.⁷

• February 2023: Illinois regulators suspend Michael Strauss's origination license after he fails to respond to inquiries about undisclosed background information. Smart Rate's license is also suspended.⁵ The license is later revoked.

• July 2023: Creditors file an involuntary bankruptcy petition against Sprout, seeking $1.3 million from unpaid mortgage purchase agreements.⁹

• February 2024: The bankruptcy trustee files a detailed complaint alleging at least $27 million was transferred from Sprout to Strauss-connected entities. Specific expenditures documented include $2.3 million for New York and Hamptons properties, $1.2 million for horse racing, $610,000 to American Express, and $69,000 in college tuition.⁸

• May 2024: PNC Bank issues subpoenas to Banc of California and Metropolitan Commercial Bank seeking to trace servicing funds. The trustee files a separate complaint against American Express for over $5 million in Sprout transfers allegedly covering Strauss's personal bills.³

• 2024: Elizabeth Strauss forms Investor Funding Corp. in Irvine, California — entity number three in the Strauss orbit.¹

• June 2025: Three former Sprout executives (Salzman, Wright, Pallante) are cleared of wrongdoing in the employee wage case. Michael Strauss continues to avoid legal proceedings and is reported facing two foreclosures in New York.⁴

• January 2026: National Mortgage News reports on Investor Funding Corp., confirming it has three employees — including a former Sprout SVP — and is licensed in four states.¹

The pattern: close one entity under a cloud of fraud allegations, open a new one through a family member, staff it with former associates, rinse, repeat. Smart Rate was entity two. Investor Funding Corp. is entity three. Each time the registered principal is Elizabeth Strauss — the same individual who previously testified to the bankruptcy trustee that she "knows very little about her own company" and that her husband "was really in control."⁸

What's the actual exposure for alternative lenders?

Three vectors of risk:

1. Direct counterparty exposure. If you're a funder, aggregator, or warehouse lender who takes whole loans or participations, new entities formed by individuals connected to fraud-tainted operations are an immediate red flag. Investor Funding Corp. is tiny today — three employees, four state licenses — but entities like this can scale quickly, particularly in correspondent or broker channels. Any lender buying paper from this entity, or from downstream brokers who originate through it, should know the full history.

2. Syndication and participation risk. In the alternative lending space, deals frequently involve multiple parties — MCA syndicators, factoring co-purchasers, ABL club deals. The question isn't whether you would knowingly partner with a Strauss-connected entity. The question is whether your syndication partners or co-lenders have done adequate background checks on their counterparties. This is second-order risk, and it's where most due diligence failures occur.

3. Borrower-level red flags. Picture this: an MCA operator gets an application from a newly formed LLC — registered to the wife of a business owner whose prior company defaulted on $400K in advances eighteen months ago, burned three syndicators, and left a trail of UCC liens. The application looks clean on its face. The principal has no personal defaults, no judgments, no regulatory actions in her own name. But the entity address matches the husband's prior business. A former employee from the defaulted company is listed as operations manager. Sound familiar? The Sprout playbook — spouse-owned entities, cross-state formations, former-associate staffing — maps directly onto the fraud patterns alternative lenders see in their own borrower pools every week. The scale is different. The mechanics are identical.

How does an $87M bankruptcy not block new licensing?

This is the structural gap that should concern every lender in the ecosystem.

The NMLS system — which governs licensing for mortgage originators — conducts background checks including criminal history reviews and credit reports on individual applicants.¹¹ But here's the gap: the system checks the applicant, not necessarily the applicant's entire network of connected parties.

Michael Strauss's origination license was revoked.⁴ He presumably cannot personally obtain a new one. But Elizabeth Strauss, as a separate individual, can apply for and receive state licenses in her own name. That's technically compliant with how the system works. Whether it's an acceptable outcome given the documented history of the Strauss-connected entities is a question state regulators should be asking themselves.

For alternative business lenders — most of whom operate outside the NMLS framework entirely — this is both a cautionary tale and a competitive intelligence point. The licensing gaps in residential lending are well-documented. In commercial alternative lending, where there often isn't a centralized licensing system at all, the gaps are wider. If a mortgage regulator with a formal background-check process can't fully prevent entity reconstitution by fraud-connected parties, what does that tell you about your own counterparty screening?

This isn't his first time through the cycle

Before Sprout, Strauss served as CEO of American Home Mortgage Investment Corp., which collapsed during the 2008 financial crisis. The SEC charged him with accounting fraud — specifically, understating loan loss reserves by tens of millions to manufacture a fictitious quarterly profit — and Strauss settled for $2.45 million with a five-year bar from serving as an officer or director of a public company.⁶ ¹⁰ Six years after the bar expired, he launched Sprout. Seven years after that, the trustee is alleging a remarkably similar pattern: siphoning funds, misleading counterparties, leaving employees and creditors holding the bag. That's the kind of background your counterparty screening should surface before you fund a deal, not after.

Operational takeaways: your Monday morning checklist

• Screen for entity networks, not just individual principals. Run UCC, NMLS, secretary of state, and PACER searches on the spouses and immediate family members of any counterparty principal with a regulatory or legal history. The Strauss playbook relies on the assumption that most screening stops at the named principal.

• Check NMLS Consumer Access. Even if you're in commercial lending, NMLS Consumer Access is a free, public tool that reveals employment histories, regulatory actions, and licensing status for anyone who has ever held a mortgage originator license. A five-minute search on a potential counterparty or their associates can reveal disqualifying history.

• Watch for geographic shifts. Sprout was Long Island-based. Smart Rate was Jacksonville, Florida. Investor Funding Corp. is Irvine, California. Cross-state entity formation is a standard technique to complicate regulatory oversight, since each state's licensing authority operates independently.

• Flag former-employee clustering. When a new entity staffs up primarily with employees from a collapsed or fraud-tainted predecessor, that's a pattern worth investigating. One former colleague is normal career progression. Multiple former colleagues from a company whose CEO is accused of money laundering is a risk signal.

1-Minute Video: Why Most Lenders Get California Entity Verification Wrong

California's Franchise Tax Board and Secretary of State can each suspend a business independently

creating three distinct suspension types. Most lenders treat them all the same way in their routing logic, and that's costing them fundable deals.

In this short, we break down:

• Why Suspended-FTB should go to manual review, not auto-decline

• Why Suspended-FTB/SOS is an immediate decline

• How SB 362 (effective January 2026) changes your documentation requirements

Full guide with status tables, routing frameworks, and ROI breakdowns:

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