Doug Naidus, CEO of World Business Lenders, knows his efforts seem confusing.
Why is an unregulated lending company trying to help craft legislation that would regulate it? Especially a company that was recently accused of criminal activity during a state hearing?
Naidus, a former Deutsche Bank mortgage executive and 25-year veteran in the financial industry, said the answer makes sense.
He said Jersey City-based World Business Lenders — which specializes in making high-interest small-business loans and has recently begun focusing on minority communities — wants more regulation because it belongs to a sector of the financial industry that has a bad reputation.
Naidus said he has seen the industry’s transformation in the past decade, since the economic downturn, and realizes something needs to be done. And, as some who has worked at the federal level on advising on behalf of the financial sector, he feels he’s in position to do it.
“The small business loan is a problematic loan for lenders, banks — unregulated banks like ourselves, unregulated lenders like ourselves,” Naidus said.
“It’s very small. And interest is a percentage of the principal loan, so, as the loan gets smaller, the revenue gets smaller. So, you can bear fewer expenses in the process.”
A change, he said, is desperately needed.
“We can sort of get away with anything right now,” he said. “There are basically no rules.
“There’s general laws about defrauding people, and stealing from people, but, past that, your business activities can be conducted in ways that, for small business lending, that would be illegal and impermissible in virtually any other financial product.”
This train of thought may seem ironic to some.
After all, the reputation of World Business Lenders was recently called into question at a hearing of the governor’s EDA Task Force, when a former employee testified that the company falsely reported jobs numbers in order to qualify for the tax credits, and subsequently sold the tax credits to another company.
They are charges Naidus denies. (More on that later.)
Naidus said the legislation he helped craft would require licenses for lenders and brokers. He said it makes good business sense, even though it restricts the revenue potential of lenders.
First, part of the reason behind some high-interest small-business loans has to do with where the funding comes from, he said. If WBL can become a regulated entity, it opens up the doors to cheaper capital, passing on lower interest rates to customers, he said.
“So, getting a license would remove those risks and hopefully unlock the flow of cheap capital from commercial banks, which would thereby reduce the cost of capital on our product,” Naidus said.
Second, he said it legitimizes the business and helps it build credibility, allowing it to come out from under the shadows of the “loan shark” title.
Third, if and when Naidus wants to flip the company, it will have far more interest from potential buyers because of its lower risk.
“Someday, companies like ours get sold, and the potential buyer universe is limited by the lack of licensing, so those same banks, who are the likely acquirers of something like this, wouldn’t acquire,” Naidus said.
His previous experience in selling a company is a prime example.
“The last mortgage company I built, I sold for $429 million to Deutsche Bank,” he said. “That was a 7-year-old business. Things like that happen. They never get shared with disadvantaged communities. They don’t happen for disadvantaged communities. They happen for mainstream America.”
It’s a good business argument, especially for a sector that isn’t always profitable, he said.
It’s not a popular idea among his competitors, but Naidus knows it will help with one ongoing problem: weeding out the bad guys.
“In a way, the laws are not adequate (enough) to provide the most basic protections, behavioral protections,” he said.
“Convicted criminals for white collar crimes, who’ve been kicked out of the securities industry, who’ve had their insurance licenses revoked or suspended, and may have been prosecuted … for criminal fraud — they’re allowed to do this.”
They are allowed to open up shop in the unregulated alternative lending market, he said.
Naidus said businesses currently have few loan options because most other regulated lenders have more stringent restrictions, which Naidus said can be cost-prohibitive requirements for the smallest of businesses.
“They can’t walk into a commercial bank, because they won’t meet (its) standards,” he said. “And, so, they’re sort of either borrowing from credit cards or family or from the shadow bank community, which we’re a part of. And that shadow bank community needs help.
“The regulation will reduce the costs of doing business for those shadow lenders. It will also clean out the bad guys. Which is why there’s so much headwind on our proposed regulation.”
Naidus is pursuing a framework that builds on top of existing federal regulations and includes an educational provision — to ensure lenders also are professionally trained and providing proper financial advice to borrowers.
“I was involved in the GSE reform, which is Fannie and Freddie; I actually worked on the Hill on the bill under (U.S. Rep.) Barney Frank,” Naidus said.
“A significant portion of my thoughts are instructed by that work. The simplest way to describe what I imagine are three bodies of law that already exist for every financial product in America.”
- Regulation X, which is good-faith settlement charges, in which lenders have to put in writing the cost the borrows have to pay, as opposed to hiding those costs from them.
- Truth in lending, a Regulation Z act of Congress, which requires lenders to estimate the annual percentage rate and total financial cost of transactions in a format that is understandable to the customer. That includes a box for the actual percentage rate, which all of Naidus’ competitors are vehemently against.
- A variety of laws that are being widely ignored, but Naidus said are fair lending practices. Similar to the telecommunications protections act, which defines how marketers can call people on the phone, there are other predatory behavioral acts and discriminatory lending acts. There’s no reporting and there’s no governance, so people can just do what they want. The idea is to change all that.
“We’ve sort of combined those three existing ideas,” Naidus said.
“We don’t have any new ideas.”
Other regulations include background checks for lenders — especially those who have checkered pasts in the financial world.
“If they were involved in white collar criminal fraud in the past, you don’t let them do something different,” he said.
Then there’s the educational requirement for license to “practice,” such as in other parts of financial world, which also doesn’t exist.
“There is currently nothing like that,” Naidus said. “We’re not teaching anybody anything before we put them on the phone facing relatively unsophisticated borrowers.”
All of these idea raises one big question: Why should anyone trust the CEO of a company that has came under fire for potentially skirting regulations, has an interest in fashioning regulations that fit his current model of business and is openly admitting to help lay the foundation for such regulations?
“People should be skeptical about it,” Naidus said.
“And, there’s two ways I think people will react to what ought to be, and not, the rightful skepticism. One way is to just point the finger and yell, ‘Monster,’ in ignorance. And the other way is to look at it carefully and look at what it is we’re proposing and the way in which we are behaving and the way in which we’re proposing everyone should behave, and to judge.
“Judge it on its merit and by its nature. And I think, by that standard, we’ll do very well. But I do know that we’ll have a lot of people calling us names.”
Though Naidus hopes to pursue his growth in New Jersey, his spirits were dampened by the recent hearing in which his company was highlighted as a bad player.
Naidus said the testimony of a former employee, who claimed information was falsified or tweaked in order for the company to qualify for the Economic Development Authority’s Grow New Jersey tax incentive program — which is based on job retention and creation — was false.
In documents obtained by ROI-NJ, the company filed with the EDA that it did not qualify for tax credits because its employee total fell below 180 — the total it needed to maintain to qualify — for 2017 and 2018. The company subsequently forfeited the tax credits for both years, which totaled approximately $850,000 each year.
In 2016, the company said it had 221 employees and qualified for $1.6 million in tax credits. The state Department of Treasury’s Division of Taxation approved the application WBL submitted to prove it qualified and cleared the company to receive the tax incentives.
Naidus said in a prepared statement following the hearing that the claims the former employee made were all false.
But the taste of New Jersey politics has left Naidus, who has been pursuing his legislation since late last year, wondering about engaging further in the political landscape of New Jersey.
“Three years ago, I moved World Business Lenders from Midtown Manhattan to New Jersey, in large part because of the tax incentives the state offered companies like mine to create jobs for New Jersey residents,” Naidus said.
“Since (2017), we have employed hundreds of New Jerseyans, many of them community college graduates for whom we have provided paid training programs. We have worked to help our new home state by partnering with our new neighbors to expand access to capital for communities of color and pushed for stronger regulations to protect small business owners.
“If a company like WBL, which has not only done everything right legally, but is a force for positive advocacy on behalf of underserved communities, could be unfairly maligned as part of a political food fight, I am concerned about the message this sends to other job creators who are considering moving to New Jersey.”