OnDeck Capital Inc., a lender with funding from Google’s venture-capital arm and PayPal Inc. co-founder Peter Thiel, sold $175 million of notes backed by business debt last month in a deal put together by Deutsche Bank. Interest rates on the loans ranged from 29 percent to 134 percent.
“Don’t be evil,” right Google? Since there’s nothing evil about 134% interest rates, particularly when you don’t pay taxes.
Of course, predatory lending by bailed out financial institutions is nothing new in post-financial crisis America. I covered this last year in my post: TBTF Banks Enter Payday Loan Business with 500% Interest Rates.
Naturally, Wall Street is also starting to package the loans into securities that can be sold to investors. You can’t make this stuff up.
From an office near New York’s Times Square, people trained by a veteran of Jordan Belfort’s boiler room call truckers, contractors and florists across the country pitching loans with annual interest rates as high as 125 percent, according to more than two dozen former employees and clients. When borrowers can’t pay, Naidus’s World Business Lenders LLC seizes their vehicles and assets, sometimes sending them into bankruptcy.
Naidus isn’t the only one turning to subprime business lending. Mortgage brokers and former stock salesmen looking for new ways to make fast profits are pushing the loans, which aren’t covered by federal consumer safeguards. Goldman Sachs Group Inc. and Google Inc. are among those financing his competitors, which charge similar rates.
“This is the new predatory lending,” said Mark Pinsky, president of Opportunity Finance Network, a group of lenders that help the poor. “And the predators, just as they did in the mortgage market, have gotten increasingly aggressive.”
Subprime business lending — the industry prefers to be called “alternative” — has swelled to more than $3 billion a year, estimates Marc Glazer, who has researched his competitors as head of Business Financial Services Inc., a lender in Coral Springs, Florida. That’s twice the volume of small loans guaranteed by the Small Business Administration.
Wall Street banks are helping the industry expand by lending originators money. They’re starting to package the loans into securities that can be sold to investors, just as they did for subprime-mortgage lenders.
Of course they are.
OnDeck Capital Inc., a lender with funding from Google’s venture-capital arm and PayPal Inc. co-founder Peter Thiel, sold $175 million of notes backed by business debt last month in a deal put together by Deutsche Bank. Interest rates on the loans ranged from 29 percent to 134 percent, according to a report from credit rater DBRS Ltd., which labeled most of the deal investment grade.
Representatives for Thiel, Google Ventures and Goldman Sachs, which lends money to OnDeck, declined to comment.
Brokers are popping up around the country to originate loans on behalf of lenders including OnDeck and World Business Lenders. The companies pay fees to the brokers of about $6,000 for finding people willing to take a $50,000 loan, according to current and former brokers, most of whom asked not to be identified to preserve their job prospects.
Some stock brokers have jumped to business loans after getting kicked out of the securities industry by regulators.
“Our industry is absolutely crazy,” said Steven Delgado, who left World Business Lenders last year to become an independent loan broker. “There’s lots of people who’ve been banned from brokerage. There’s no license you need to file for. It’s pretty much unregulated.”
David Glass, 39, was still on probation for insider trading when he co-founded Yellowstone Capital LLC, a New York-based brokerage and lender that originated $200 million in loans last year, including for OnDeck.
Since Aristotle condemned the “breeding of money” as the worst way to make it around 350 B.C., societies have both enacted laws against usury and devised ways to work around them. New York State instituted a 25 percent interest-rate cap after a 1965 investigation found the Genovese crime family backing a Fifth Avenue business lender that charged 5 percent a week.
“We are already helping so many entrepreneurs to realize their dreams,” Naidus said in an undated video that was posted on World Business Lenders’ website. “I can relate to every one of our customers because I am the prototype of our customer.”
“We are already helping so many entrepreneurs to realize their dreams.” You’ll see later on what sorts of dreams are being realized. What a bullshit artist this guy is.
World Business Lenders put up job listings seeking former brokers, and they came. A February orientation schedule provided by a former employee shows that training is run by Bryan Herman, who got his start under Stratton Oakmont Inc.’s Belfort, the con man portrayed in “The Wolf of Wall Street.” Herman later ran his own boiler room in the 1990s and avoided jail by informing on other brokers when he was charged with fraud in 1998, court records show. Another salesman was released from prison in 2010 after serving about a year for penny-stock fraud.
Salespeople said they were told to refer to “short-term capital” instead of loans and “money factors” instead of interest rates. Eight of them said they talked business owners into applying by saying they’d offer a good rate after reviewing bank statements.
World Business Lenders charged most people 125 percent annualized interest rates on six-month loans regardless of their situation, five former employees said. The borrowers often put up cars, houses or even livestock worth at least twice as much as the loan. About one in five were going bust as of last year, two people with knowledge of the matter said. One said that 9 percent of the loans made this year have already defaulted.
“The sweet spot is someone who can limp along well enough for six months but probably isn’t going to be around much longer,” Opportunity Finance Network’s Pinsky said. “They’re in the business of helping these businesses fail.”
Dreams being realized.
Former employees said finding qualified borrowers willing to pay their rates proved more difficult than Naidus made it sound. Six said they questioned whether their business was legal. Two others said they wondered why the company seized cars that weren’t worth enough to cover the repo man’s fee.
This story serves as a good example of the increasing polarization of American culture between those who have “access” to credit and those who don’t. While private equity firms are selling debt deals to investors in order to pay themselves dividends, and junk bonds are being sold at near record low premiums to treasuries, small businesses have no access.
The solution is loans at 125% interest rates, far more than my brother witnessed in his poor rural community when he was in the Peace Corps in Guatemala. As usual, the Fed is subsidizing the rich and leaving everyone else hanging out to dry.