Months prior, Flagstar sued the defunct lender for "wrongful conduct" of defaulting on a $60 million warehouse line. It was asking for $21 million in damages.

If given the green light, the settlement authorizes Flagstar to deduct money from Hometown's collateral accounts. 

A little over $350,000 will land directly into Flagstar's pocket to extinguish debt owed, while the remaining $270,000 will go back to Hometown, after accounting for any outstanding obligations the mortgage lender has with Flagstar under their loan agreement. This payment will fully satisfy the bank's claims, documents show.

The remaining debt owed to Flagstar was likely settled by the bank taking possession of and selling the mortgage loans held and serviced by Hometown.

Under the warehouse loan agreement signed in 2020, Flagstar was granted a first priority lien on specific assets of Hometown. This included control over all of Hometown's pledged mortgage loans, which came into effect if Hometown failed to repay its outstanding balance.

"As of the petition date, Flagstar had liquidated a sufficient number of the pledged mortgage loans and had applied those proceeds against the obligations owed by the debtor as allowed by the loan agreement," the bank wrote Aug. 22 in a filing.

Depending on the bankruptcy court's approval of the settlement, both parties will file a dismissal—without prejudice—of the lawsuit that Flagstar originally filed in November 2023. A hearing on the matter is scheduled for September 25, 2024.Flagstar did not immediately respond to comment Wednesday. Billy Taylor, the CEO of Hometown Lenders, could not be reached.

In June 2023, branch managers and employees spoke out about the troubles brewing at the shop. Employees painted a picture of managerial chaos inside the company, in which bills went unpaid, paychecks were sent out irregularly and some vendors started pulling the plug on providing services, such as credit checks

Flagstar itself started noticing in late August 2023 that Hometown stopped meeting its obligations, after which a notice of default was issued.

Numerous attempts to contact Hometown and Taylor were unsuccessful, so Flagstar, on Oct. 25, accelerated the revolving note making the $20 million "immediately due and payable" and terminated its warehouse line with the lender. Weeks later, Flagstar sued Hometown.

A number of suits also were filed by former employees accusing Hometown of failing to reimburse them for expenses and commission.

Almost half a year later, embattled mortgage company Hometown Lenders filed for Chapter 11 bankruptcy protection in June, revealing debts of at least $40 million to parties including lenders and vendors. 

CEO Billy Taylor in a case filing blamed his firm's downfall on rising interest rates that decimated borrower and investor demand for home loans. Hometown's revenue fell by 70% in recent years as it laid off employees and shuttered branches. It shut down business operations last October.