A Fintech Billionaire’s Consumer Loans Come Under Fire In Alabama

JUL 25, 2019 | REPUBLISHED BY LIT: JUL 16, 2021

Last year, Tiffany Baker woke to the smell of sewage spilling under her home in Eastaboga, Alabama. Baker called in a local outfit, American Plumbing and Septic Service, which gave her an estimate of $13,000 for a new tank and field lines.

The cost of the job ballooned to $28,000, which Baker found expensive given that the house was worth only $70,000 and had just one bathroom.

The plumber on site, however, arranged for two loans totaling $28,000 in the names of Baker and her husband that were facilitated by a company called GreenSky, according to an affidavit Baker would later file in court.

Baker’s husband later called APSS to stop the work but was told the money from the loan had already been used.

“I don’t work, so I don’t know how I was approved,”

Baker would later say.

“I was in total shock and felt pressured by everything. … I didn’t think I had a choice.”

The work done by APSS turned out to be in violation of state law and regulations—and grossly overpriced. Baker was not the only homeowner in northeastern Alabama who had problems with the plumbing company.

Last year Alabama attorney general Steve Marshall sued APSS, claiming it preyed on seniors as old as 96 living in rural areas through false advertisements and delivered services that were “often unlicensed and dangerous.”

The plumbing outfit used “intimidation to manipulate consumers,” state lawyers say. Alabama’s attorney general did not name GreenSky in his action against APSS, but state lawyers claimed there was evidence that some consumers who obtained GreenSky loans either did not authorize them or did not receive the interest rates promised by APSS.

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Alabama judge Brian Howell shut down APSS in October and suspended debt collection efforts on the loans, finding that APSS’ marketing of GreenSky-facilitated loans violated Alabama’s consumer fraud law.

In March 2019, Jeffrey Schneider, a receiver appointed by Judge Howell, filed a report concluding that the 188 GreenSky-facilitated loans marketed by APSS in 2017 and 2018 “were improperly obtained and should be invalidated.”

“GreenSky made plumbers with no banking training or experience its de facto loan officers,” Schneider wrote. “GreenSky became responsible for the wrongful acts.”

GreenSky has in a court filing denied Schneider’s accusations and said it did not engage in any inappropriate behavior. In a statement, GreenSky says it had resolved most of the APSS consumer complaints it had received to the satisfaction of borrowers until Schneider blocked the company from communicating with borrowers.

GreenSky said APSS had been in business for 30 years and had an A+ rating from the Better Business Bureau at the time of its enrollment in the GreenSky merchant program. GreenSky says APSS was a good contractor that turned bad and that only 5% of its business was connected to GreenSky-facilitated loans, totaling $1.14 million.

“There was no evidence to support the claim that it was a fraudulent business,” GreenSky said, adding that the average age of the borrowers of APSS’ GreenSky-facilitated loans was 56. GreenSky said it terminated the partnership in July 2018, prior to the Alabama attorney general’s action, as it received an increasing number of severe consumer complaints.

GreenSky is one of the nation’s biggest financial technology companies, and its innovative, hassle-free approach to financing home repairs and renovations has made its cofounder and CEO, David Zalik, 45, a billionaire. Based in Atlanta, GreenSky has arranged $17 billion of loans, mostly for home improvement projects, for 2.5 million consumers.

Through its smartphone app, GreenSky acts as a digital middleman, facilitating loans that are funded mostly by five banks and marketed by 16,000 contractors.

The company, which is not a lender itself, also services the loans.

The fees GreenSky charged consumers, contractors and banks helped the company earn $128 million in 2018 on revenues of $415 million.

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Last year, GreenSky conducted an initial public offering, selling shares at $23 each and raising $874 million, which mostly went to the company’s pre-IPO owners and insiders.

Zalik has pocketed $860 million or so from the IPO and a loan GreenSky took out before it. He owns 35% of the company, which had a recent market capitalization of $2.4 billion.

GreenSky says Zalik would not have gone ahead with the IPO had he known the stock would perform badly.

Once a bright star among fintech companies, GreenSky has seen its shares plunge by 44% as short-sellers have swarmed.

In May, Regions Financial, one of GreenSky’s five biggest bank lending partners, indicated it would not renew its funding commitment to GreenSky later this year, causing part of the stock slump even though GreenSky maintained that it had nine bank partners that had committed $11.8 billion to the company’s lending program.

Other large lenders, according to Greensky’s lastest financial disclosures, include BMO Harris Bank, Fifth Third Bank, SunTrust Bank and Synovus.

As Forbes magazine put it in a 2017 profile of Zalik, GreenSky’s financial technology model is robust because it transfers a lot of the risk and work to banks and contractors.

Forbes noted that there are also potential conflicts given that the contractors pitching the loans also receive the proceeds, detailing cases of unhappy borrowers, such as one couple rebuilding a New Jersey beach home who saw a contractor increase their loan amount and run off before completing the work.

According to a response to a Freedom of Information Act request filed by Forbes, the Federal Trade Commission says it has received 200 consumer complaints, mostly from the Better Business Bureau, about GreenSky in the past two years. GreenSky says a mere 0.008% of its consumer customers have complained to the company and that its analysis of the complaints received by the FTC shows GreenSky has resolved the vast majority them to the the benefit of borrowers.

Two years ago, in 2017, Zalik told Forbes GreenSky had ways to deal with “bad apple” contractors, including a vetting process and review of contractors’ history of complaints, resulting in only 60% of contractors being approved as GreenSky merchants. GreenSky says it takes corrective action when, on occasion, one of the 16,000 merchants on its platform violates its rules.

Still, in 2017, then New Jersey attorney general Christopher Porrino reached a $160,000 settlement with GreenSky

to resolve consumer complaints that included homeowners not being aware of GreenSky home improvement loans being taken out in their names and GreenSky holding consumers liable for loans in cases where no home improvement work had been performed.

Under the deal, GreenSky agreed to change some of its business practices in New Jersey, like beefing up its due diligence of GreenSky’s merchant contractors to make sure they have, for example, active state licenses or registrations where they conduct business.

In a report filed in Alabama state court, Jeffrey Schneider, the court-appointed receiver, said the APSS plumbers were motivated to maximize repair charges and that the amount of the loans sought were often authorized for significantly higher amounts than requested.

“This entire business model is fundamentally flawed as designed and as executed,” Schneider wrote. “GreenSky outsources its responsibilities as a lender to APSS (and its plumbers), which had a payment structure that encouraged its plumbers to use GreenSky loans whenever possible and for as high an amount as possible. GreenSky engaged in no oversight of APSS’s practices at all, and extended loans without any supporting documentation.”

GreenSky vigorously refutes Schneider’s characterization and describes his accusations as unsubstantiated.

Gerry Benjamin, GreenSky’s chief administrative officer and vice chairman, says under GreenSky’s program, consumers are not economically responsible for merchant fraud, with GreenSky incurring all fraud losses.

He says GreenSky contractually must make the lending bank whole on any loan where a merchant contractor is unable to refute a consumer fraud complaint.

Benjamin points out that APSS was only one of GreenSky’s 16,000 merchant contractor partners and that GreenSky is now using machine learning and artificial intelligence to increase diligence on contractors, detect fraud and root out problems.

“If there is a fraud loss, we eat it, so we are really motivated,” says Benjamin. “We take this seriously, it comes right out of our pocket.”

Still, in one court-filed affidavit, Fred Pope, who lives in Alexandria, Alabama, claimed that a $2,587 GreenSky loan charge was generated as a result of his signature being forged by APSS.

Pope had called APSS in November 2017 to pump his septic tank, but the APSS crew determined he needed a new septic system, then busted a hole in a field line, left two holes in Pope’s yard, and never returned.

Pope paid another contractor $5,000 to complete the job and clean up the mess. He received paperwork from GreenSky on a loan linked to the APSS work a few weeks later.

“I was shocked by this because I never requested a loan,” Pope said in his court-filed affidavit.

“Because I refused to make payments on this loan, GreenSky turned me over to collections and has damaged my credit.”

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— LawsInTexas (@lawsintexasusa) July 14, 2021

In another APSS case, Schneider reported, GreenSky reported negative information to the credit agencies about an 85-year-old woman who did not understand she had authorized a loan at all. The woman was under the impression that her insurance company was paying for the work performed and visited her insurer’s local office to inquire about the payments. Schneider obtained audio recordings of calls between the woman and GreenSky customer service representatives, who were “forceful with her,” Schneider said. “It was obvious . . . she was hearing impaired and had no understanding of the nature of the transaction,” Schneider wrote.

Schneider claims he found major problems with GreenSky loans involving other senior citizens, including one who was suffering from cancer and called GreenSky to advise that APSS had “torn up his house.” The man “had no understanding of what the terms of his loan were—either as to the interest rate or duration of repayment,” Schneider said.

GreenSky points a finger at the Alabama attorney general and Schneider, the court-appointed receiver, saying their actions have prevented GreenSky from resolving outstanding consumer complaints. GreenSky says it resolved all seven APSS-related consumer complaints it received in 2017 to the benefit of borrowers and resolved all 13 complaints it had from APSS customers from January 2018 to the middle of May 2018. GreenSky terminated APSS from its program in July 2018 after it received more serious complaints.

GreenSky says in total it resolved 25 of 35 APSS consumer complaints it received to the satisfaction of borrowers before the state of Alabama got involved, but “the company’s strong track record of consumer advocacy was materially hindered by the actions of the Alabama Attorney General.” GreenSky has received 24 additional complaints since then that it says are “directly related to actions of the Alabama Attorney General,” and blames Schneider, the receiver, for hindering GreenSky’s ability to help them by not allowing GreenSky to communicate with consumers who borrowed money under the GreenSky program.

APSS is not the only merchant contractor to partner with GreenSky that has come under scrutiny from law enforcement. In January, police in Cape Coral, Florida, raided the offices of Bruno Total Home Performance and carted away documents from the air-conditioning contractor after receiving dozens of consumer complaints. Florida attorney general Ashley Moody has an ongoing criminal investigation into Bruno Total Home, says Kylie Mason, Moody’s press secretary.

One homeowner, Lance Henderson, sued GreenSky in January, alleging GreenSky facilitated a $15,950 loan in his name without his approval from Fifth Third Bank, with the proceeds going to Bruno Total Home. GreenSky says it has not been served and, as a result, has not responded to the lawsuit.

GreenSky stopped facilitating financing for Bruno Total Home this year prior to the police raid. GreenSky says it has received 127 consumer complaints related to Bruno Total Home, which was a large contractor, and has resolved 118 of them to the satisfaction of the borrowers, leaving nine remaining open matters.