Tellus, an Andreessen Horowitz-backed fintech company that claims it can offer people higher yields on their savings balances by using that money to fund certain U.S. single-family-home loans, is under scrutiny by the U.S. government.
On May 2, as first reported by Barron’s, U.S. Senator Sherrod Brown, chairman of the Senate Banking, Housing, and Urban Affairs Committee, wrote a letter to FDIC Chairman Martin Gruenberg expressing concerns about Tellus’s claims. In that letter, Brown pressed the FDIC to review Tellus’s business practices “to ensure that customers are protected from financial fraud and abuse.” He said an article published early last month by Barron’s raised “several red flags.”
Brown also wrote to Tellus’s CEO and Chief Technology Officer Jeromee Johnson outlining his concerns and requested more information on their business practices.
Like the majority of fintech startups, Tellus is not actually a bank but instead partners with banks to offer banking services to consumers. While the company was founded in 2016, it only emerged from stealth last year after raising $16 million in seed funding last year led by Andreessen Horowitz. According to Barron’s (which cited records filed in Santa Clara County, California), an Andreessen Horowitz general partner, Connie Chan, earlier wed Tellus co-founder Rocky Lee. She filed a marriage dissolution/divorce lawsuit in 2021. It is not clear if the pair is still married. It is also unclear which partner from a16z led the round.
Tellus’s business model is unique, and risky. It targets existing home owners who wish to upgrade to larger homes without selling the homes they live in, which makes it difficult for them to receive approval for loans by traditional mortgage lenders.
Last November, Lee told TechCrunch that Tellus’s interest rates are typically 200 basis points higher than the standard conforming mortgage. For example, in today’s market if a loan’s rate is 7%, Tellus will charge 9% — a premium because it claims it’s offering to lend money to American single-family-home borrowers “in prime cities” who would otherwise not be able to get such loans. Because it is using its retail customers’ savings deposits to fund these loans at a higher yield, Tellus makes its money on the spread of what it’s paying out in interest versus what it’s charging its borrowers.
The model is exactly what has Brown concerned. If home owners default on those loans, then customers’ deposits are at risk. When TechCrunch probed Lee on that point last year, he claimed that Tellus utilizes “very strict underwriting criteria” and had not yet seen any defaults because the majority of its borrowers “go on to soon after refinance their loans at more favorable terms.” In that earlier conversation with TechCrunch, Lee said Tellus had lent out more than $80 million with an average loan size of $2 million since its 2016 inception (Barron’s recently reported that the figure was now $100 million, according to industry tracker Attom). Lee also said the company partners with mortgage brokers to find borrowers, and that it finds its retail clients via channels such as Instagram, TikTok and Google.
In his letter, Brown wrote: “Although Tellus claims that it is not a bank, a fact its website repeatedly reminds customers of, I am concerned that Tellus’s practice of marketing high-interest deposits to fund real estate loans may give consumers the false impression that their money is as safe as a deposit at an FDIC-insured bank. I urge the FDIC to take a closer look at Tellus and its operations.” He also pointed out that Tellus does most of its real estate lending in the San Francisco Bay Area, a region where property values have been declining.
He added: “This downswing may pose increased risks to Tellus depositors if Tellus borrowers default on their loans.”
Brown also pointed out that while Tellus touted partnerships with FDIC-insured banks such as JPMorgan Chase and Wells Fargo, it turns out those relationships “did not exist.” Indeed, when Barron’s talked with both banks about the company’s claims toward that end, they expressed surprise, reported Barron’s.
“Wells Fargo does not have the relationship that’s described on Tellus’s website,” the company said in a statement to Barron’s. “We are working with Tellus to update the language on their website, and remove our company’s name.” Wells Fargo said it also disagrees with the description of itself as a “banking partner.”
JPMorgan told Barron’s it does “not have a banking or custodial relationship with the company.”
Barron’s published its investigative piece about Tellus on April 11. On the FAQ section of Tellus’s website, the company posted an update on April 26, saying: “Tellus is not a bank, and your Tellus accounts are not FDIC insured. All of our cash is held at leading banks, each member FDIC insured. We keep this cash at different banks to ensure you always have access to your money, even if there’s a problem with one of these banks. Once we lend money, that cash is considered ‘deployed.’ Deployed cash acts as a loan, meaning it’s a real estate loan itself and has no FDIC insurance. These loans are not mortgage-backed securities, as Tellus holds no mortgage-backed securities.”
In general, there has been widespread panic about accounts that are not FDIC-insured, leading people to withdraw billions of dollars from regional banks since mid-March to protect their assets and to the shutdowns of Silicon Valley Bank and First Republic Bank.
TechCrunch reached out to Tellus and Andreessen Horowitz, neither of which had responded to requests for comment at the time of publication. (Update 5/5: Tellus CEO and CTO Jeromee Johnson provided this written statement to TechCrunch: “I have received the request for information from Senator Brown. We are also aware of the Barron’s article that prompted the Senator’s concern. While many of the facts in that article are true, we strongly disagree with his portrayal of our business as misleading or unduly risky. Tellus is a startup that is on a mission to improve the financial health of American consumers. We are grateful for – and share – the Senator’s concern for the well being of our customers. I and Tellus will be cooperating fully with the request for information.”)
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