Fintech

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

Published

8 months ago

3 June, 2024

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

LoanSnap, founded by serial entrepreneurs Carlo Giacobbe AND Allan Carroll, has raised about $100 million in funding since its 2017 seed round, including $90 million between 2021 and 2023, according to PitchBook. Investors include Richard Branson’s Virgin Group, the Chainsmokers’ Mantis Ventures, Baseline Ventures and Reid Hoffman, LoanSnap says. Furthermore, according to PitchBook estimates, the startup has incurred debts of around $12 million.

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

Although LoanSnap has not yet closed its doors, according to two employees, the atmosphere inside the company is harrowing as workers await clarity on the company’s future. Between December 2023 and at least January 2024, the company lost payroll and decreased headcount. At its peak, LoanSnap employed more than 100 people. After layoffs and attrition, that number has dropped to fewer than 50, according to one source.

“The current state is the result of terrible leadership, unnecessary overspending, and institutional investors who fall for the charming façade Karl can put up,” one former employee, who asked to remain anonymous out of fear, told TechCrunch of retaliation. The person’s identity is known to TechCrunch.

Given the scope of the company’s problems as of 2021, the situation raises the question of why investors poured money into the company well into 2023 — and what happens after that.

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

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

Creditors sue, agencies fine LoanSnap

In 2021, LoanSnap made nearly 1,300 loans with a total value of nearly $500 million, according to data filed with federal regulators: both documents to boot. By 2023, LoanSnap reported to the Consumer Financial Protection Bureau (CFPB) that it made just 122 loans for the year (though the data may not be definitive).

Despite the record number of loans, trouble was already brewing in 2021. Legal documents show that in May 2021, the same month LoanSnap announced It’s a $30 million Series B with investors like Hoffman, the Mortgagee Review Board of the US Department of Housing and Urban Development has entered into an agreement settlement agreement with the company. Although LoanSnap did not admit to wrongdoing, the agency said it violated Federal Housing Administration (FHA) requirements for failing to notify the FHA of an operating loss that exceeded 20% of its fiscal quarter-end net assets 2019. 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 that the startup charged nonrefundable fees and then failed to close loans in a timely manner or pay fees from an account escrow. Additionally, in four complaints filed with the Consumer Financial Protection Bureau and reviewed by TechCrunch, consumers accused LoanSnap of selling a fully paid loan to another lender instead of properly closing it, misleading consumers about mortgage approval and shorting escrow accounts as a guarantee.

Between December 2022 and May 2024, at least seven creditors sued LoanSnap and the company approached at least three CFOs, a source says. In late 2022, Steve Anderson of Baseline Ventures resigned from the board, according to someone familiar with the matter.

Four of the lawsuits came from sellers who claimed the startup had fallen behind or completely stopped making contractual payments for services. LoanSnap has not yet filed a formal response with the courts for any of these lawsuits, according to public records.

For example, Wells Fargo presented a cause in August 2023 for $431,000, alleging that a loan purchased from LoanSnap violated the bank’s income-to-debt ratio policies. Because LoanSnap failed to comply with the lawsuit (meaning it did not respond in a timely manner), the judge ordered LoanSnap to pay.

As of mid-2023, LoanSnap was facing a California Department of Financial Protection and Innovation investigation stemming from a complaint filed against it, and the company was fending off threatened litigation from at least one investor, according to documents viewed by TechCrunch. (A spokesperson for the California Department of Financial Protection said it “does not comment on investigations even to confirm or deny their existence.”)

Then, 2024 brought more legal problems. In January, the Connecticut Department of Banking presumed the company was participating in the “unlicensed systemic mortgage lending” business by employing unlicensed individuals. One employee told TechCrunch that the company was eager to hire people without much mortgage experience, with the idea of training them so they could one day get licenses.

Connecticut also alleged that LoanSnap violated the Fair Credit Reporting Act, the SAFE Act and the Fair Lending Act, among other state statutes, and threatened to revoke its license. Ultimately, LoanSnap he paid a fine of $75,000 without admitting guilt and vowed not to use unlicensed individuals for mortgage loan officer work 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 Practice Group at law firm Bradley. But Narod noted that the deal was not “particularly onerous,” adding: “Pay $75,000 and stop doing illegal things, which, frankly, should have been the business model all along.”

In February LoanSnap was sued from the Costa Mesa landlord, who claimed the company had stopped paying rent and owed nearly $405,000. When LoanSnap failed to respond to the lawsuit, the judge ruled that it had failed to comply, and the landlord was given the OK to evict LoanSnap in mid-May, according to to judicial instances. (LoanSnap had a second office in San Francisco, though it’s unclear whether that office is still in use.)

A new lawsuit was filed in May. A tax firm that lent LoanSnap $5 million he claims that LoanSnap has stopped making payments and owes more than $900,000.

Another VC invests millions in 2023

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

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

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

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

But many questions remain, such as where all the millions raised by LoanSnap went. The employees we spoke to had no answers. When times were good in 2021 and headcount was at capacity, Jacob committed to expenses such as authorizing an expensive holiday party with an open bar for employees in 2021 at a beach resort. One year he gave Meta Portals to employees and threw 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 demanding at least $30,000 a month, according to court documents obtained by TechCrunch.

Employees were told that the multimillion-dollar Newport Beach home 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 problems now evident, LoanSnap is still gaining public recognition from investors, media and industry players.

In mid-May, Newsweek named LoanSnap to its list of America’s top online lenders and one of its VCs, T rue Ventures, applauded the startup on LinkedIn for inclusion. In the same month, LoanSnap and Visa announced that LoanSnap had joined Visa’s fintech program, which helps startups use its payment programs.

And just last month, LoanSnap announced that it has entered in Nvidia’s free Inception program, which offers benefits to AI startups. One former employee called these recent announcements strange, as the company appears to be trying to change direction or move forward as if nothing is wrong.

“It’s really not difficult to find numerous lawsuits and complaints, some of them from government agencies, with a quick Google search,” the employee said, wondering how Nvidia and Visa allowed LoanSnap into the programs.

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

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

“There is no communication, no accountability,” the employee said. “This makes people nervous.”

Source

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Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

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Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”