Luke LaHaie is on no one’s list of Wall Street heavy-hitters. But from the comfort of his Chicago condo, he’s just become the biggest player in a hot new thing in American finance: pandemic relief loans.
His little-known firm, The Loan Source, has scooped up $3.3 billion of small-business loans issued under the federal Paycheck Protection Program. LaHaie, 35, is racing to buy even more.
The Loan Source is part of a largely hidden ecosystem that’s sprung up around the PPP program, which was designed to keep small businesses afloat. It’s capitalizing on free money from the Federal Reserve to buy PPP loans from the banks that actually lent out the money, with the goal of eking out a small profit in the unglamorous business of servicing the debt.
LaHaie is one of the new breed of pandemic pros who are trying to make a little money off the PPP program, often at little risk to themselves. The loans in question are guaranteed by the government. That means defaults aren’t a worry, whether small businesses survive or not.
A data tracker developed by a team of 40 researchers and policy specialists, led by Harvard University economics professor Raj Chetty, shows the program has protected very few paychecks. They detected just a 3% difference in employment patterns for businesses above and below the PPP’s 500-employee cutoff. That implies the $521 billion program disbursed $289,000 for each job saved.
LaHaie, meanwhile, spends much of his day on the phone with banks, which have already made the easy money, reaping more than $10 billion in origination and processing fees. Now they’re left with the burdensome administrative task of servicing the debt and helping many borrowers who qualify for loan forgiveness.
LaHaie’s pitch: sell us your PPP loans, at a small discount to face value, and we’ll save you the headaches to come.
“They are going to have to service these loans for two to five years,” LaHaie, a co-founder of the Loan Source and its chief investment officer, said in an interview. “This isn’t something you can do part time.”
Read more: As Banks Shed Relief Loans, Pitfalls Arise for Borrowers
The Loan Source plans to at least double its collection of loans, but the clock runs out when the Fed’s credit line expires on Dec. 31 (unless it’s extended). Lawyers, brokers and firms that initially advised LaHaie on how to put the program together, including Crestmoor Capital Partners and GreensLedge Group, are helping him get more loans from banks before the window of opportunity closes.
Peapack-Gladstone Financial Corp., Northeast Bank and Bryn Mawr Bank Corp. are among about 25 lenders that have announced sales to the Loan Source.
“There would have been very significant technology costs and payroll or opportunity costs by having to shift our folks to service these loans,” said Richard Wayne, chief executive officer of Lewiston, Maine-based Northeast, which sold $457.6 million of PPP loans to LaHaie’s firm. “We made the business decision that we would be better off selling the loans and not having to be burdened with doing the servicing.”
LaHaie knows it’ll be a grueling couple of years servicing thousands of small-business loans, but he figures the firm can make decent money, virtually risk-free, because the loans are backed by the U.S. government. The Fed charges 35 basis points to use its credit line. That comes with pretty favorable terms for a borrower — 100% financing and no recourse.
LaHaie, a Michigan State University graduate who previously worked as a managing director at ExWorks Capital, a senior secured debt fund, already has 60 to 80 people working with businesses that hope to get their loans forgiven. He predicts about 80% of borrowers actually will.
Less certain is the degree to which the taxpayer funds have helped those reeling from the economic fallout caused by the pandemic.
“If the goal of the program was to save jobs in the short term,” Harvard’s Chetty said, “this was not a very efficient way to do that.”
— With assistance by Tom Maloney, Ben Steverman, Craig Torres, and Elaine Chen