AI FinTech company LoanSnap faces lawsuit, fine, and eviction after $100 Million fundraising

LoanSnap is an AI mortgage startup that is facing more legal challenges from creditors, the possibility of losing its license, and layoffs, which makes its future uncertain, even though it has a lot of investor support.

Many creditors are suing LoanSnap, an AI mortgage startup, and they have forced the company out of its Southern California headquarters. This has made employees worry about the future of the company. Karl Jacob and Allan Carroll, both experienced business owners, started LoanSnap. The company has raised about $100 million since its seed round in 2017, with $90 million coming in between 2021 and 2023, according to PitchBook. LoanSnap says that investors include Reid Hoffman, Paul Allen, the Chainsmokers’ Mantis Ventures, and Richard Branson’s Virgin Group. PitchBook says the company also borrowed about $12 million.

Despite raising funds, at least seven creditors have sued LoanSnap since December 2022. These creditors, including Wells Fargo, say the startup owes them more than $2 million. In addition, both state and federal governments have fined LoanSnap and nearly revoked its license to operate in Connecticut. Two employees say that even though LoanSnap hasn’t shut down yet, the mood inside the company is scary as people wait for clarity on the future of the business. The company missed at least one payroll between December 2023 and January 2024, and the number of employees has been going down. More than 100 people worked for LoanSnap at its peak. According to a source, the number has dropped to less than 50 following layoffs and employees leaving the company.

“The current state is a result of bad leadership, overspending on useless things, and institutional investors falling for Karl’s charming front,” stated a former employee who wished to remain anonymous out of fear of retaliation. Because the company has had so many problems since 2021, it makes you wonder why investors kept putting money into it until 2023 and what will happen next.  No one could reach Reid Hoffman for comment, and his office declined to comment. Greylock Partners does not have a stake in LoanSnap. We also asked Virgin Group, Mantis VC, and Baseline Ventures for comments, but they didn’t answer.

When asked for comments several times over several days by email and text, LoanSnap’s CEO, Jacob, and CTO, Carroll, did not respond. LoanSnap’s press line stated that they would let the CEO handle the situation without saying anything else.

According to information that LoanSnap filed with federal regulators, the company made almost 1,300 loans worth a total of $500 million in 2021. LoanSnap told the Consumer Financial Protection Bureau (CFPB) in 2023 that it had only made 122 loans that year, but this information may not be accurate. In 2021, there were a record number of loans, but trouble was already starting to form. Legal records show that the U.S. Department of Housing and Urban Development Mortgagee Review Board reached a settlement agreement with LoanSnap in May 2021. This was the same month that the company announced its $30 million Series B round of funding with investors such as Hoffman. LoanSnap didn’t say it did anything wrong, but the agency said it broke rules set by the Federal Housing Administration (FHA) by not telling the FHA about an operating loss that was more than 20% of its net worth at the end of the fiscal 2019 quarter. It has agreed to pay a fine of $25,000.

Since 2021, the Better Business Bureau has received at least three complaints about LoanSnap. The company now has an F rating. The complaints allege that the startup imposed unrecoverable fees, failed to timely close loans, and failed to pay taxes from an escrow account. Consumers scrutinized four complaints sent to the Consumer Financial Protection Bureau, alleging that LoanSnap improperly sold a paid-in-full loan to another lender, misled customers about mortgage approvals, and emptied escrow accounts.
At least seven creditors sued LoanSnap between December 2022 and May 2024, and a source says the company had at least three CFOs. A person who knows about the situation says that Steve Anderson of Baseline Ventures quit the board near the end of 2022.

Legal Troubles Mount for LoanSnap: Lawsuits and Investigations

Four of the lawsuits were from service providers who said the startup had fallen behind on payments or stopped paying for services altogether. Public records show that LoanSnap has not yet formally responded to any of these lawsuits.

For example, Wells Fargo sued LoanSnap for $431,000 in August 2023, saying that a loan it bought from LoanSnap broke the bank’s rules about the ratio of income to debt. The judge told LoanSnap to pay because it “defaulted” on the lawsuit, which means it didn’t respond in time. The California Department of Financial Protection and Innovation began investigating LoanSnap in mid-2023 due to a complaint. At least one investor was also threatening to sue the company. The California Department of Financial Protection wouldn’t say anything about the investigations, not even to confirm or deny that they were happening.

In 2024, the company faced additional legal issues. Connecticut’s Department of Banking revealed in January that the company was recruiting unlicensed individuals for “systemic unlicensed mortgage loan” work. A worker expressed the company’s eagerness to hire individuals lacking mortgage experience, providing them with training and eventual licenses. The state of Connecticut also said that LoanSnap broke the Fair Credit Reporting Act, the SAFE Act, and the Fair Lending Act, among other laws, and threatened to take away its license. People not licensed by LoanSnap and who paid a $75,000 fine without admitting guilt would no longer be able to perform mortgage loan officer work in the state.

Andy Narod, a partner in the Banking and Financial Services Practice Group at the law firm Bradley, said, “That’s a really big deal for them to say.” Narod said the settlement wasn’t “particularly onerous,” and he added, “Pay $75,000 and stop doing illegal things, which, to be honest, should have been the business model from the start.”

In February, the Costa Mesa landlord sued LoanSnap, claiming the company had stopped paying rent and owed nearly $405,000. When LoanSnap didn’t respond to the suit, the judge said it had defaulted on the complaint. Court records indicate that the landlord received permission to evict LoanSnap in mid-May. Although LoanSnap maintained a second office in San Francisco, its continued use remains unclear. A new suit was introduced in May. A tax company that gave LoanSnap a $5 million loan says that LoanSnap stopped paying and now owes more than $900,000.