Lenders Target a New Subprime Market
From an office near New York’s Times Square, workers at World Business Lenders call truckers, contractors, and florists across the country, pitching loans with annual interest rates as high as 125 percent. When borrowers can’t pay, the company seizes their vehicles and assets, sometimes sending them into bankruptcy, according to more than two dozen former employees and clients. World Business specializes in subprime business lending—or “alternative” lending, as its practitioners prefer to call it—making high interest loans to small companies that have trouble borrowing elsewhere. The industry has swelled to more than $3 billion in loans a year, estimates Marc Glazer, chief executive officer of Business Financial Services, a subprime lender in Coral Springs, Fla. That’s twice the volume of small loans guaranteed annually by the Small Business Administration.
Loans to businesses are largely unregulated and not subject to the federal rules that protect individual borrowers. “This is the new predatory lending,” says 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.”
Maher and Tamer Kasem, a father and son who sell cigarettes and cosmetics to corner stores in Brooklyn, N.Y., and Philadelphia, are typical customers. They borrowed from World Business in December to keep their business afloat after being rejected by a bank and turned down for a hurricane recovery loan to cover damage from Hurricane Sandy. A saleswoman initially talked about an unsecured $45,000 loan, they say. They ended up borrowing $12,500 to be repaid over six months with $144.73 automatically deducted from their bank account each business day, according to a contract they provided. That works out to a total of $18,236, or an annualized interest rate of about 11o percent.
Tamer and his mother, Lamis, say 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,” says Maher at his office in the Bensonhurst section of Brooklyn. “They’re slick.”
After the Kasems missed payments, World Business sued and obtained a judgment for $22,828, which included a $3,879 prepayment fee. The firm hasn’t yet foreclosed on the property, Maher Kasem says. “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 World Business, wrote in a May 21 letter. “World Business Lenders complies with all applicable laws and endeavors to ensure a positive experience for its customers.”
World Business CEO Doug Naidus, who declined to be interviewed, made his fortune selling a mortgage company he founded, MortgageIT, to Deutsche Bank just before the housing industry collapsed. The bank later paid $202 million to settle a federal lawsuit alleging that MortgageIT defrauded the Federal Housing Administration. Naidus was not a defendant in the suit. The bank also paid $12 million to settle claims alleging MortgageIT discriminated against blacks, which it denied.
Wall Street banks are helping the subprime business lending industry expand by providing funding and packaging the loans into securities that can be sold to investors, just as they did for subprime mortgages. OnDeck, a subprime business lender, borrows money from Goldman Sachs and has gotten funding from Google’s venture capital arm and PayPal co-founder Peter Thiel. OnDeck sold $175 million of notes backed by business loans in April in a deal put together by Deutsche Bank. Interest rates on the loans backing the notes ranged from 29 percent to 134 percent, according to a report from credit rater DBRS.
Andrea Gellert, a marketing executive at OnDeck, says the company has been reducing its rates and cutting off unscrupulous brokers, and that its borrowers are smart and use the money to make profitable investments. Representatives of Deutsche Bank, Goldman Sachs, Google Ventures, and Thiel declined to comment.
To avoid state usury laws that limit the interest rate on business loans, some lenders team with banks based in Utah, which doesn’t cap rates. World Business 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.
Subprime business lending is attracting veterans of high-pressure stock brokerages. World Business’s staff is trained by an ex-stockbroker who ran his own boiler room in the 1990s and avoided jail by informing on other brokers. Another World Business salesman was released from prison in 2010 after serving about a year for penny-stock fraud. Sales representatives were told to refer to “short-term capital” instead of loans and “money factors” instead of interest rates when talking to potential borrowers, according to five former employees who asked not to be identified to preserve their job prospects. One in five of World Business’s borrowers went bust last year, say two former executives familiar with the data. Marcia Horowitz, a spokeswoman for World Business at public-relations firm Rubenstein Associates, says the company explains loan terms in plain English and takes steps to ensure borrowers understand.
For subprime business lenders, “the sweet spot is someone who can limp along well enough for six months but probably isn’t going to be around much longer,” says Pinsky of Opportunity Finance Network. “They’re in the business of helping these businesses fail.”