Wall Street finds new subprime with brokers pitching 125 percent loans
NEW YORK • Doug Naidus made his fortune selling a mortgage company to Deutsche Bank months before the U.S. housing market collapsed. Now he's found a way to profit from loans to business owners with bad credit.
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' World Business Lenders 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 and Google 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, Fla. That's twice the volume of small loans guaranteed by the Small Business Administration.
Naidus, 48, chief executive officer of World Business Lenders, declined to be interviewed. Marcia Horowitz, a spokeswoman at public relations firm Rubenstein Associates Inc. said the company explains loan terms in plain English and takes steps to ensure that borrowers understand.
"World Business Lenders' sales and marketing techniques, as well as the interest rates it charges and the default rates it experiences, are generally consistent with those throughout the industry," Andy Occhino, general counsel for the company, wrote in a May 21 letter. "In serving the underserved small-business community along Main Street USA, World Business Lenders complies with all applicable laws and endeavors to ensure a positive experience for its customers."
Maher and Tamer Kasem, a father and son who sell cigarettes and cosmetics to corner stores in Brooklyn and Philadelphia, are typical customers. They borrowed from World Business Lenders in December to keep their company afloat after being rejected by a bank and turned down for a hurricane-recovery loan.
A saleswoman initially talked about an unsecured $45,000 loan, they said. They had fallen further behind on bills by the time they received the final terms to borrow $12,500. The money, plus almost $1,000 in fees, was to be repaid over six months with $144.73 deducted from their bank account each business day, according to a contract they provided. That worked out to a total of $18,236 or an annualized rate, inclusive of fees, of about 110 percent.
Tamer and his mother Lamis said they signed personal guarantees that they would repay the money even if the business went bust, and the family put up a vacant lot as collateral.
"I was just wanting to get money to survive my business any way," Maher Kasem, 57, said in an interview at his office in the Bensonhurst section of Brooklyn, where he keeps boxes of fruit-flavored cigars and makeup ruined in Hurricane Sandy stacked on the crumbling tile floor. "They're slick."
World Business Lenders sued the Kasems and obtained a judgment for $22,828, which included a $3,879 prepayment fee. The firm hasn't yet foreclosed on the property, Kasem said.
Horowitz, the spokeswoman for World Business Lenders, said the company works with borrowers to avoid defaults.
"If the default cannot be cured, World Business Lenders enforces its rights under the loan documents, including the recovery of the pledged collateral," she said.
A PIECE OF THE ACTION
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.
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.
"While I am not real thrilled about some of the prices being charged, in some cases businesses need to get something done in a hurry and it makes sense," said William Dennis, who directs the research foundation at the National Federation of Independent Business. "It may not be the world's best choice, but at least it's your choice."
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, a New York-based brokerage and lender that originated $200 million in loans last year, including for OnDeck.
He said he learned to sell in the 1990s at Sterling Foster & Co. a Long Island firm where he got his friend a job interview that inspired "Boiler Room," a movie that portrayed a college dropout's foray into high-pressure stock sales. Glass said he coached actor Vin Diesel on cold-calling for the film. "A natural," Glass said.
Glass said it's a lot easier to persuade someone to take money than to spend it buying stock.
"The guys I worked with then were incredible sales guys," Glass said. "I don't really feel like we're selling now because everyone we're calling is an inbound phone call or they've filled out a form on the Internet."
Jonathan Cutler, a spokesman for New York-based OnDeck, said Yellowstone and World Business Lenders have originated less than 1 percent of the company's loans this year. OnDeck drops brokers who charge upfront fees or send a lot of deals that go bad, he said. OnDeck also doesn't require collateral.
"OnDeck customers are experienced, savvy people," said Andrea Gellert, senior vice president of marketing for the company. "Since entering the market, OnDeck has brought down pricing significantly."
AVOIDING USURY LAWS
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.
Some loan companies avoid state usury laws by partnering with banks based in Utah, which doesn't cap rates. Others say "cash advances," repaid by collecting a share of businesses' credit-card sales, aren't loans. World Business Lenders lends in only about half of U.S. states and won't make loans in New York, according to its website. The loan to the Kasems was made in Pennsylvania, where they also do business.
"It's kind of the Wild West right now," said Nick Bourke, who studies small loans for the Pew Charitable Trusts,
a research and policy group. "Online lending is raising lots of legal questions about which state law governs."
Naidus, described by colleagues as the best salesman they'd ever met, turned the brokerage he founded after graduating from Syracuse University in 1987 into one of the biggest mortgage originators in the nation. He took MortgageIT Holdings Inc. public and then arranged to sell it to Deutsche Bank in 2007 for $429 million. During the sale process, Naidus made at least $12 million selling his shares and options, and the bank agreed to hire him for $17 million in pay and guaranteed bonuses over two years, according to public filings.
Even as MortgageIT's loans went bad during the financial crisis, Naidus earned the trust of top Deutsche Bank executives. He became global head of mortgages and helped start a home-loan joint venture in Saudi Arabia.
Like other banks that bought mortgage originators, Deutsche Bank ended up bearing the cost of allegedly fraudulent loans that helped fuel the housing bubble. The Frankfurt-based lender paid $202 million in 2012 and admitted MortgageIT arranged for government insurance on ineligible loans that soured.
Deutsche Bank also paid $12 million to settle U.S. allegations that the originator imposed higher fees and interest rates on black and Hispanic applicants. It denied those claims. Naidus wasn't a defendant in any of the cases.
Naidus made colleagues at Deutsche Bank aware of his wealth, one former co-worker said. He invited his bosses to play golf at the Bridge, a country club near his summer house in the Hamptons. The club cost $750,000 to join, the Wall Street Journal reported in 2007. He also owned a duplex on the Upper East Side of Manhattan that he bought for $6.2 million in 2005, real estate records show.
Naidus founded World Business Lenders in April 2011, according to a regulatory filing. He rented the 29th floor of an office tower on West 45th Street and began reassembling his lieutenants from the mortgage company. Naidus left Deutsche Bank the following year, said Renee Calabro, a spokeswoman for the bank in New York.
The business plan sounded promising, ex-employees said. Naidus said they'd build the largest small-business lender in the country and share the wealth when he took it public. He also created a company called Palm National Partners that would make loans to Muslims structured to avoid the sharia ban on charging interest.
"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."
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.
Herman has paid for his crimes, according to his lawyer, Marty Kaplan.
"It's really like saying Bill Clinton smoked dope in college," Kaplan said. "Who cares?"
125 PERCENT INTEREST
Cold-callers said they typically got paid a draw of $1,300 a month against commission. Four former employees said Naidus impressed them during job interviews with his success and intensity. He'd meet them in his office, which he decorated with a photo of himself striking a martial-arts pose with a sword, shirtless. One ex-colleague said Naidus liked to discuss his street-fighting skills. He looked like action star Jean-Claude Van Damme, another said.
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."
Naidus took the top three salespeople at World Business Lenders to lunch each month, often choosing sushi, former colleagues said. The successful ones were given the preferred leads, people who had called in about loans. Those who didn't close deals survived on $1 pizza slices for a month or two until they were fired.
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.
"You know payday loans?" said Aleena Skinner, who worked for World Business Lenders for a few months in 2012 and is now a saleswoman for a copy-machine company. "I don't really feel like high-interest loans are in anybody's best interest."
World Business Lenders makes $1 million to $3 million a month in loans and was running at a loss as of last year because so many borrowers weren't paying, one former executive said. Naidus once joked that the business would be better off if it paid salesmen in repossessed Pontiacs, the person said.
Naidus's investors include Fahad Abdullah Al Rajhi, the son of one of the billionaire founders of Saudi Arabia's Al Rajhi Bank. Al Rajhi invested in Palm, the sharia-compliant part of the business, and brought in the Muslim scholar who blessed its practices, according to former employees.
Instead of lending, Palm buys an asset, such as a refrigerator or a pizza oven, and then leases it to the business owner. Other than that, the terms were the same. Finding Muslims to take the loans was hard, the ex-employees said. Messages left for Al Rajhi with his family's bank weren't returned.
Palm and World Business Lenders are legally separate entities and operate at arm's length, Horowitz said. Palm complies with all laws and isn't associated with the Al Rajhi family's bank, she said.
Nick Frederick, 38, a tow-truck driver in Sykesville, Md. said the Islamic lender solicited him by email and phone last year when he needed $15,000 to buy a trailer. The six-month "asset sale and lease" cost the equivalent of an annualized 96 percent interest rate, according to Frederick's contract. Frederick said a saleswoman assured him she would lower the rate in a few months and hire him to tow other people's cars.
"They were real friendly at first," he said. "I should have known better because it sounded too good to be true."
Frederick said he struggled to make the daily $166.98 payments when one of his trucks broke down, so he borrowed from his grandmother to pay off the contract early. Palm wouldn't accept his money, he said. Then without warning, he said, the company took his truck, along with a license-plate scanner and a laptop.
"I'm real close to going out of business because they're jerking me around," Frederick said. "Alls I want out of the deal is I want my property out of it, and I want my damn truck back."
With assistance from Jody Shenn and Patrick Clark in New York.Source: m.stltoday.com
Category: Payday loans