AI mortgage startup LoanSnap is facing a flurry of lawsuits from creditors, forcing it out of its Southern California headquarters and leaving employees worried about the company's future, TechCrunch has learned.
Founded by serial entrepreneurs Carl Jacob and Alan Carroll, LoanSnap has raised about $100 million since its seed round in 2017, with $90 million of that coming between 2021 and 2023, PitchBook reported. Investors include Richard Branson's Virgin Group, The Chainsmokers' Mantis Ventures, Baseline Ventures and Reid Hoffman, according to LoanSnap. The startup also has about $12 million in debt, according to PitchBook estimates.
Despite the funds it has raised, LoanSnap has been sued by at least seven creditors, including Wells Fargo, since December 2022, who claim it is owed more than $2 million in total. According to legal documents obtained by TechCrunch, LoanSnap has been fined by state and federal agencies and was on the verge of losing its license to operate in Connecticut.
LoanSnap hasn't closed yet, but two employees said the mood inside is dire as employees wait for clear answers about the company's future. The company has missed payroll payments from December 2023 until at least January 2024, and employee numbers are shrinking. At its peak, LoanSnap had more than 100 employees. After layoffs and cuts, that number has dwindled to fewer than 50, one source said.
“The current situation is the result of terrible leadership, excessive spending on unnecessary things, and institutional investors being fooled by the glamorous facade that Karl presented,” one former employee, whose identity is known to TechCrunch and who asked not to be identified for fear of retaliation, told TechCrunch.
Given the scope of the company's problems, which began in 2021, it begs the question of why investors are still pouring money into the company in 2023 and what will happen next.
Reid Hoffman couldn't be reached for comment, and his office declined to comment. (Greylock Partners confirmed that Loansnap is not a Greylock Partners investment.) Virgin Group, Mantis VC and Baseline Ventures also did not respond to requests for comment.
Lawnsnap's CEO and CTO, Jacob and Carroll, did not respond to multiple emails and text messages seeking comment over several days. A Lawnsnap spokesperson declined to comment, referring the matter to the CEO.
Creditors Sue, Agencies Fine LoanSnap
According to data filed with federal regulators, LoanSnap originated about 1,300 loans in 2021 totaling nearly $500 million, a record for the startup. By 2023, LoanSnap reported to the Consumer Financial Protection Bureau (CFPB) that it had originated just 122 loans that year (though the data may not be final).
Despite the record number of loans, problems were already brewing in 2021. In May 2021, the same month LoanSnap announced a $30 million Series B with Hoffman and other investors, the U.S. Department of Housing and Urban Development's Mortgage Review Board entered into a settlement agreement with the company, according to legal documents. While LoanSnap did not admit to wrongdoing, the Board alleged that the company violated Federal Housing Administration (FHA) requirements by failing to notify the FHA of operating losses that exceeded 20% of its net assets at the end of the fiscal 2019 quarter. The company agreed to pay a $25,000 penalty.
At least three complaints have been filed with the Better Business Bureau against LoanSnap since 2021, and the company currently has an F rating. The complaints allege that the startup charged nonrefundable fees and then failed to pay off loans on time or pay taxes from escrow accounts. Additionally, in four complaints filed with the Consumer Financial Protection Bureau and reviewed by TechCrunch, consumers accused LoanSnap of selling fully paid loans to another lender without properly paying them off, misleading consumers about mortgage approvals, and short selling escrow accounts.
At least seven creditors sued LoanSnap between December 2022 and May 2024, according to sources, and the company replaced at least three CFOs. Near the end of 2022, Steve Anderson of Baseline Ventures resigned from the company's board, according to a person familiar with the matter.
Four of the lawsuits are from vendors who claim the startup has fallen behind on or completely stopped making contractual payments for its services. LoanSnap has not yet filed a formal response in court to any of those lawsuits, according to public records.
For example, Wells Fargo filed a $431,000 lawsuit in August 2023 alleging that loans purchased from LoanSnap violated the bank's income-debt ratio policy. After LoanSnap defaulted on the lawsuit (i.e., failed to respond in a timely manner), a judge ordered LoanSnap to pay.
In mid-2023, LoanSnap was facing an investigation by California's Department of Financial Protection and Innovation stemming from complaints against the company, and the company was fending off threats of litigation from at least one investor, according to records viewed by TechCrunch. (A spokesperson for California's Department of Financial Protection said it “does not comment on investigations, even to confirm or deny their existence.”)
And 2024 brought more legal troubles. In January, the Connecticut Department of Banking alleged that the company engaged in “coordinated unqualified mortgage” activity by hiring unlicensed people. One employee told TechCrunch that the company was keen to hire people with little mortgage experience, with the intention of training them to become certified in the future.
Connecticut also alleged that LoanSnap violated other state laws, including the Fair Credit Reporting Act, the SAFE Act, and the Fair Lending Act, and threatened to revoke the company's license. Ultimately, LoanSnap paid a $75,000 fine without admitting fault and promised not to hire unlicensed individuals as mortgage loan officers in the state.
“That's a really big thing for them to threaten,” said Andrew Narod, a partner in the banking and financial services practice group at law firm Bradley. But Narod noted that the settlement wasn't “particularly onerous,” adding, “You pay $75,000 and stop engaging in illegal conduct. And frankly, that should have been the business model from the beginning.”
In February, LoanSnap was sued by a Costa Mesa landlord who claimed the company had stopped paying rent and was owed about $405,000. When LoanSnap failed to respond to the lawsuit, a judge ruled the company had dismissed the case, and the landlord was given permission to evict LoanSnap in mid-May, according to court documents. (LoanSnap had a second office in San Francisco, but it's unclear whether that office is still in use.)
A new lawsuit was filed in May: A tax firm that loaned $5 million to LoanSnap claims that LoanSnap has stopped making payments and is now owed more than $900,000.
Another VC to invest millions in 2023
Many of those lawsuits were filed in late 2023, but even before then, internal problems were evident: LoanSnap's financial health was deteriorating, according to the FHA settlement, staff cuts had been made, complaints had been filed with the BBB and CFPB, and a well-known silicon venture capitalist had resigned from the company's board, according to inside sources.
Still, in July 2023, LoanSnap raised an additional $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 venture fundraising success to CEO Jacob.
Jacob has attracted Silicon Valley venture capitalists with a history of founding and exiting multiple startups since selling his company, Dimension X, to Microsoft in 1997. LoanSnap's profile boasts that Jacob has “raised 23 rounds of funding” and “generated hundreds of millions of dollars in investor returns.” Co-founder Carol has also had multiple successes; she is a former Microsoft research engineer who has founded three startups, selling two of them.
But many questions remain, including where all the millions of dollars LoanSnap raised went. Employees we spoke to don't have the answers. When the economy was booming and employee numbers were at their highest, Jacob made some spending moves, such as approving an expensive open-bar holiday party for employees at a beachside resort in 2021. One year, he gifted employees Meta Portals and hosted a party in Denver for the Web3 ETH event.
The company also had two offices in expensive areas: The Costa Mesa office it was evicted from was paying roughly $55,000 a month in rent, while the San Francisco office was paying at least $30,000 a month in rent, according to court documents obtained by TechCrunch.
Employees were informed that the company also owns the multimillion-dollar Newport Beach townhouse where Jacob and Carroll stayed during their visit to the Costa Mesa office, and where LawnSnap held its 2022 holiday party.
Despite its now-evident problems, LoanSnap still receives praise from investors, media, and industry insiders.
In mid-May, Newsweek magazine named LoanSnap to its list of the best online lenders in the U.S., and one of its venture capital firms, True Ventures, praised the startup on LinkedIn for the selection. That same month, LoanSnap and Visa announced that LoanSnap had joined Visa's fintech program to help startups access Visa's payments program.
Then last month, LoanSnap announced it had joined Nvidia's free Inception program, which benefits AI startups.One former employee said the recent announcement was odd because it seems the company is either trying to reverse course or move forward as if nothing is wrong.
“It's really easy to do a quick Google search and find numerous lawsuits and complaints, including some from government agencies,” the employee said, wondering how Nvidia and Visa got LoanSnap into the program.
True Ventures and Visa did not respond to requests for comment. Nvidia declined to comment.
Meanwhile, employees who haven't yet quit feel stuck, unsure whether the company will bounce back in any form.
“There's no communication, there's no accountability,” the employee said. “And that makes people feel uneasy.”