After raising $100 million, AI fintech LoanSnap is sued, fined, evicted

AI mortgage startup LoanSnap is facing an avalanche of lawsuits from creditors and has been kicked out of its Southern California headquarters, leaving employees worried about the company’s future, TechCrunch has learned.

LoanSnap, founded by serial entrepreneurs Karl Jacob and Allan Carroll, has raised about $100 million in funding since its seed round in 2017, with $90 million of that raised between 2021 and 2023, according to PitchBook. Investors include Richard Branson’s Virgin Group, Chainsmokers’ Mantis Ventures, Baseline Ventures and Reid Hoffman, LoanSnap says. The startup also took on about $12 million in debt, PitchBook estimates.

Despite the capital it has raised, LoanSnap has been sued by at least seven creditors since December 2022, including Wells Fargo, who collectively claim the startup owes them more than $2 million. LoanSnap has also been fined by state and federal agencies and nearly lost its license to operate in Connecticut, according to legal documents obtained by TechCrunch.

Although LoanSnap hasn’t shut down yet, according to two employees, the atmosphere inside the company is tense as workers wait for the company’s future to be clarified. Between December 2023 and at least January 2024, the company missed payroll and the number of employees decreased. At its peak, LoanSnap employed more than 100. After layoffs and downsizing, that number has dwindled to fewer than 50, according to the source.

“The current state is the result of terrible leadership, overspending on futility and institutional investors falling for the charming facade that Karl can present,” one former employee, who asked to remain anonymous for fear of retribution, told TechCrunch. The identity of the person is known to TechCrunch.

Given the extent of the company’s problems starting in 2021, the situation begs the question of why investors didn’t pour money into the company until 2023 — and what will happen next.

Reid Hoffman could not be reached for comment and his office declined comment. (LoanSnap is not an investment by Greylock Partners, the VC firm confirmed). Virgin Group, Mantis VC and Baseline Ventures also did not respond to requests for comment.

Jacob and Carroll, who are LoanSnap CEO and CTO, did not respond to multiple requests for comment over several days, via email and text. LoanSnap’s press line deferred to the CEO on the matter and declined to comment.

Creditors sue, agencies fine LoanSnap

In 2021, LoanSnap issued nearly 1,300 loans totaling nearly $500 million, according to data filed with federal regulators — both records for a startup. By 2023, LoanSnap reported to the Consumer Financial Protection Bureau (CFPB) that it only approved 122 loans in the year (although the data may not be final).

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Despite the record number of loans, trouble was already brewing in 2021. Legal documents show that in May 2021, the same month that LoanSnap announced its $30 million Series B with investors like Hoffman, the US Department of Housing and Urban Development to review mortgage lenders has entered into settlement agreement with the company. Although LoanSnap pleaded not guilty, the agency alleged that it violated Federal Housing Administration (FHA) requirements by failing to notify the FHA of an operating loss that exceeded 20% of its net worth at the end of fiscal quarter 2019. It agreed to pay a $25,000 fine.

At least from 2021 three complaints were filed against LoanSnap with the Better Business Bureau, and the company now has an F rating. Those complaints allege the startup charged nonrefundable fees and then failed to close loans on time or failed to pay taxes from escrow accounts. In addition, in four complaints filed with the Consumer Financial Protection Bureau reviewed by TechCrunch, consumers accused LoanSnap of selling a paid-off loan to another lender instead of closing it properly, misleading consumers about mortgage approval and shorting escrow accounts.

Between December 2022 and May 2024, at least seven creditors sued LoanSnap, and the company went through at least three CFOs, the source said. In late 2022, Steve Anderson of Baseline Ventures stepped down from the board, according to a person familiar with the matter.

Four lawsuits were filed by suppliers who claimed the startup had fallen behind or completely stopped making contractual payments for services. LoanSnap has yet to file a formal response to any of these lawsuits, according to public records.

For example, Wells Fargo filed a lawsuit in August 2023 for $431,000, alleging that the loan she purchased from LoanSnap violated the bank’s debt-to-income ratio policy. Because LoanSnap defaulted on the lawsuit (meaning it didn’t respond on time), the judge ordered LoanSnap to pay.

In mid-2023, LoanSnap faced an investigation by the California Department of Financial Protection and Innovation stemming from a complaint filed against it, and the company was fending off a threat of a lawsuit from at least one investor, according to records reviewed by TechCrunch. (A spokesman for the California Department of Financial Protection said it «does not comment on investigations or even confirm or deny their existence.»)

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Then 2024 brought more legal problems. In January, the Connecticut Department of Banking alleged the company engaged in «systemic unlicensed mortgage lending» activity by employing unlicensed people. One employee told TechCrunch that the company was eager to hire those without much mortgage experience, with the idea of ​​training them so they could one day get their licenses.

Connecticut also alleged that LoanSnap violated the Fair Credit Reporting Act, the SAFE Act and the Fair Lending Act, among other state laws, and threatened to revoke its license. Ultimately, LoanSnap paid a fine of $75,000 pleaded not guilty and promised not to use unlicensed people for jobs as mortgage loan officers in the state.

«It’s a really big deal for them to threaten that,» said Andrew Narod, a partner in the banking and financial services group at the Bradley law firm. But Narod noted that the settlement was not «particularly onerous,» adding, «Pay $75,000 and stop doing illegal things, which frankly should have been the business model from the beginning.»

In February, LoanSnap was sued by a landlord in Costa Mesa, who claimed the company had stopped paying rent and owed nearly $405,000. When LoanSnap didn’t respond to the lawsuit, a judge ruled it in default, and the landlord was granted permission in mid-May to evict LoanSnap, according to to court filings. (LoanSnap had a second office in San Francisco, though it’s unclear if that office is still in use.)

A new lawsuit was filed in May. The tax firm that loaned $5 million to LoanSnap states that LoanSnap has stopped making payments and owes more than $900,000.

Another VC invests millions in 2023

Many of those lawsuits were filed in late 2023. But even before then, internal problems were clear: LoanSnap’s finances were in trouble, according to the FHA settlement; it went through layoffs; complaints have been filed with the BBB and CFPB; and a well-known Silicon VC, internal sources say, has resigned from the board.

However, in July 2023, LoanSnap raised another $19 million in venture funding from new investor Forté Ventures. (Forté Ventures did not respond to a request for comment).

One employee attributes the company’s fundraising success to CEO Jacob.

Jacob has the kind of resume that attracts Valley VCs, having founded and exited multiple startups since 1997, when he sold a company called Dimension X to Microsoft. His LoanSnap bio proudly states that he has «raised 23 rounds of funding» and «generated hundreds of millions of dollars in investor returns.» His co-founder Carroll also had more success. He is a former Microsoft research engineer who launched three previous startups and sold two of them.

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But many questions remain, such as where all the millions raised by LoanSnap went. The employees we spoke to have no answers. When times were good in 2021 and the workforce was at its peak, Jacob chipped in with expenses like authorizing an expensive holiday party at an open bar for 2021 employees at a beach resort. One year he gave away Meta portals to employees and hosted a party in Denver for the Web3 ETH event.

The company also operated two offices, both in high-rent areas. The rent in Costa Mesa (from which he was evicted) was about $55,000 a month, and the San Francisco office was charging at least $30,000 a month, according to court documents obtained by TechCrunch.

Employees were told that the multimillion-dollar Newport Beach townhouse where Jacob and Carroll stayed while visiting the Costa Mesa office was also owned by the company. LoanSnap hosted its 2022 holiday party there.

Despite all the now obvious problems, LoanSnap is still earning public accolades from investors, media and industry players.

In mid-May, Newsweek included LoanSnap on its list of America’s Best Online Lenders, and one of its VCs, True Ventures, welcomed the startup on LinkedIn to turn on. In the same month, LoanSnap and Visa announced that LoanSnap has joined Visa’s fintech program that helps startups use their payment programs.

And just last month, LoanSnap has announced that it has entered in Nvidia’s free program Inception, which gives advantages to AI startups. One former employee called these recent announcements strange, as the company seems to be trying to turn around or move on as if nothing is wrong.

«It’s really not hard to find numerous lawsuits and complaints, some of which are from government agencies, with a quick Google search,» the employee said, wondering how Nvidia and Visa let LoanSnap into their programs.

True Ventures and Visa did not respond to our request for comment. Nvidia declined to comment.

Meanwhile, employees who haven’t quit yet feel stuck, unsure if some version of the company will rise from the ashes.

«No communication, no accountability,» the employee said. «It makes people nervous.»

#raising #million #fintech #LoanSnap #sued #fined #evicted

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