AI fintech LoanSnap, after raising $100 million, now faces lawsuits, fines, and eviction.

Tue Jun 4, 2024 - 9:42am GMT+0000

AI mortgage startup LoanSnap is currently grappling with numerous lawsuits from creditors and has been evicted from its headquarters in Southern California, leaving its employees concerned about the company’s future, TechCrunch has learned.

Background and Funding

LoanSnap, founded by serial entrepreneurs Karl Jacob and Allan Carroll, has raised approximately $100 million in funding since its 2017 seed round, with $90 million secured between 2021 and 2023, according to PitchBook. The investors include prominent names like Richard Branson’s Virgin Group, the Chainsmokers’ Mantis Ventures, Baseline Ventures, and Reid Hoffman. Additionally, the startup incurred around $12 million in debt, estimates PitchBook.

Despite this substantial capital, LoanSnap has been embroiled in legal issues since December 2022. At least seven creditors, including Wells Fargo, have sued the company, alleging unpaid debts exceeding $2 million. Furthermore, LoanSnap has been fined by state and federal agencies and nearly lost its license to operate in Connecticut, according to legal documents obtained by TechCrunch.

Legal Challenges and Operational Struggles

While LoanSnap has not officially shut down, the atmosphere within the company is described as harrowing by employees who await clarity on its future. Between December 2023 and January 2024, the company missed payroll, leading to a significant reduction in headcount from over 100 employees at its peak to fewer than 50.

One former employee, speaking anonymously due to fear of retaliation, blamed the current state on poor leadership, overspending, and investors being misled by Jacob’s charm.

Lawsuits and Fines Overview

Since 2021, LoanSnap has faced multiple legal and regulatory challenges. Notably:

In May 2021, the U.S. Department of Housing and Urban Development Mortgagee Review Board settled with LoanSnap over alleged violations of Federal Housing Administration (FHA) requirements, resulting in a $25,000 fine.
At least three complaints have been filed against LoanSnap with the Better Business Bureau (BBB), leading to an F rating. Complaints include charging non-refundable fees without closing loans timely and failing to pay taxes from escrow accounts.
Four complaints filed with the Consumer Financial Protection Bureau (CFPB) accuse LoanSnap of selling paid-in-full loans to other lenders instead of closing them out properly.
Between December 2022 and May 2024, at least seven creditors sued LoanSnap. Additionally, the company went through at least three CFOs during this period. In late 2022, Baseline Ventures’ Steve Anderson stepped down from the board.

Among the notable lawsuits, Wells Fargo filed a lawsuit in August 2023 for $431,000, alleging that a loan it purchased from LoanSnap violated the bank’s income-to-debt-ratio policies. Due to LoanSnap’s failure to respond timely, the judge ordered the company to pay the amount. In January 2024, Connecticut’s Department of Banking alleged systemic unlicensed mortgage loan activity and other violations, resulting in a $75,000 fine and restrictions on employing unlicensed individuals. By February 2024, the company’s Costa Mesa landlord sued for nearly $405,000 in unpaid rent, leading to an eviction order when LoanSnap did not answer the suit. In May 2024, a tax company alleged LoanSnap owed more than $900,000 on a defaulted $5 million loan.

Operational and Financial Issues

Despite these challenges, LoanSnap raised another $19 million in venture funding from Forté Ventures in July 2023. This success is attributed to CEO Jacob, who has a track record of founding and exiting multiple startups since 1997.

Internally, LoanSnap’s finances have shown signs of trouble. The FHA settlement, layoffs, and complaints to the BBB and CFPB were red flags. Additionally, high operational costs, such as $55,000 monthly rent for its Costa Mesa office and $30,000 for its San Francisco office, strained the company further.

Employees were informed that a multimillion-dollar Newport Beach townhouse, where Jacob and Carroll stayed during visits, was owned by the company. This property also hosted the 2022 holiday party.

Recent Developments and Investor Reactions

Despite its financial and legal troubles, LoanSnap has continued to receive accolades. In May, Newsweek named it among America’s Best Online Lenders, and Visa announced LoanSnap’s inclusion in its fintech program. Additionally, LoanSnap joined Nvidia’s Inception program, which supports AI startups.

However, these accolades are viewed skeptically by former employees. They find it odd that companies like Nvidia and Visa would associate with LoanSnap given its well-documented legal and financial issues.

Bullet Points: Key Issues and Timeline

Funding History: Raised $100 million since 2017, with $90 million between 2021 and 2023.
Legal Troubles: Faced at least seven lawsuits from creditors since December 2022.
Fines and Settlements: Fined by state and federal agencies; settled with HUD in May 2021 for $25,000.
Operational Issues: Missed payroll, significant layoffs, and high operational costs.
Recent Accolades: Named among America’s Best Online Lenders by Newsweek in May; joined Visa’s fintech program and Nvidia’s Inception program.
Uncertain Future

As LoanSnap navigates these turbulent times, its employees remain in a state of uncertainty. The lack of communication and accountability from the leadership adds to their anxiety. The future of the company remains unclear, with many wondering whether it can recover from its financial and legal setbacks or if it will ultimately collapse under the weight of its challenges.

The unanswered questions about the use of the millions raised and the company’s direction leave employees and observers alike concerned about what lies ahead for LoanSnap.