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(Bloomberg) -- After her family’s shiba inu died of cancer, Dawn Sabins decided to surprise her 7-year-old son with a new puppy. In March 2015, she dropped into a San Diego-area pet store looking for an English bulldog. She walked out with a golden retriever.

That wasn’t so strange, even if $2,400 was more than she’d intended to spend. (There’s a reason pet stores put puppies in the window.) The odd part came a few weeks later, when she and her husband were going over their credit reports and saw a $5,800 charge from a company they’d never heard of.

The Sabins had bought their new dog, Tucker, with financing offered at the pet store through a company called Wags Lending, which assigned the contract to an Oceanside, California-based firm that collects on consumer debt. But when Dawn tracked down a customer service rep at that firm, Monterey Financial Services Inc., she learned she didn’t own the dog after all.

“I asked them: ‘How in the heck can I owe $5,800 when I bought the dog for $2,400?’ They told me, ‘You’re not financing the dog, you’re leasing.’ ‘You mean to tell me I’m renting a dog?’ And they were like, ‘Yeah.’ ”

Without quite realizing it, the Sabins had agreed to make 34 monthly lease payments of $165.06, after which they had the right to buy the dog for about two months’ rent. Miss a payment, and the lender could take back the dog. If Tucker ran away or chased the proverbial fire truck all the way to doggy heaven, the Sabins would be on the hook for an early repayment charge. If they saw the lease through to the end, they would have paid the equivalent of more than 70 percent in annualized interest—nearly twice what most credit card lenders charge.

If that weren’t bad enough, Dawn Sabins soon decided Tucker was too rambunctious for her family’s home. She called the pet store and threatened to leave the pup tied up outside the store, then decided on what she thought a more humane path. She sold the dog to a local trainer for $500, stopped making payments on the lease, and spent 18 months griping in online reviews and emails.

She wasn’t alone.

“You mean to tell me I’m renting a dog?”

“There is just no way I should pay over $5000 for a $2000 puppy,” wrote one customer in an April 2014 complaint collected by the Federal Trade Commission after financing a Yorkshire terrier from a Kennesaw, Georgia, pet store with a lease from Wags Lending. (That complaint and the others that follow were directed at Monterey Financial by customers who had financed high-end pets through Wags Lending.) “The rep … told me the payments I had been making are rental [fees],” wrote another surprised lessee. “For a dog?? They are renting animals?? No way! Yes it's true!”

One cat lover described buying a Bengal kitten from a breeder in Jacksonville, Florida, at a sticker price of $1,700—then learning they were on the hook for 32 monthly payments of $129, or about $4,100. “They explained to me that not only was this not a loan but a lease in which I would either have to continue making these payments or return the animal,” the customer wrote in a November 2015 complaint. “Also this cat is ruining my credit score.”

The complaints raise a valid question: Why would anyone walk into a pet store to buy an animal and decide, instead, to lease?

Because dogs can be expensive, and not everyone who wants a fancy one can afford to pay cash or use a credit card. Because others, like Sabins, are more eager to bring home their new furry friend than to read the fine print of their contract. But mostly because—thanks to a 36-year-old Nevadan who ditched a career in private equity to help subprime borrowers finance purebred pets—they can.

“When I take a good hard look at what the world will be like in 10 years, I think most things are going to be on lease,” said Dusty Wunderlich, chief executive officer of Bristlecone Holdings LLC, the Reno, Nevada-based company that operates Wags Lending.

It was Monday morning at the company’s offices, across the Truckee River from Reno’s seedy downtown, and Wunderlich was dressed in ostrich-skin boots and a flat-brimmed baseball cap—the same kind of Western spin on startup chic that animates his company, named for a species of pine tree native to Nevada that can live for thousands of years.

Wunderlich rents his apartment. He leases his car. He owns his horse. He’s drawn to the rugged individualism expressed in the novels of Ayn Rand and the blog Cowboy Ethics, but he hastens to argue that while he profits off high-cost lending, he’s also improving the lives of subprime borrowers. He is, he writes in a mission statement on his personal website, “living in a Postmodern culture while maintaining my old American West roots and Christian values.”

Wunderlich dreamed up Wags Lending in 2013, then used the pet-leasing business to launch an improbable collection of financing vehicles—writing leases against furniture, wedding dresses, hearing aids, and custom auto rims. In a little more than three years, his company has originated 66,000 leases for just over $100 million. He once worked out a plan to lease cattle to dairy farmers, though plummeting commodity prices soured the economics. (He got far enough to decide that if a cow gave birth during the terms of the lease, the lessee got to keep the calf.) In another idea that never reached the market, he explored lease financing for funerals.

“We like niches where we’re dealing with emotional borrowers,” Wunderlich said.

Bristlecone is transparent about the lease structure in its contract language and in online marketing, Wunderlich said. The company relies on retailers to communicate the terms of its contracts, he said, which sometimes leads to confusion. Even so, he said, complaints about costs or structure are “fringe cases,” and Bristlecone offers a money-back guarantee for the first 30 days. After that, the company tries to satisfy customers who complain. “If a customer feels misled, we want to work out a way for them to get out of the contract.” Bristlecone spokeswoman Brooke Rose said in an email that after the Sabins complained, the company offered to let them out of the lease for Tucker’s retail price but didn't hear back.

As for Monterey Financial, the company to which Wags assigns some contracts, its chief executive Chris Hughes said in an email that it “addresses any and all consumer complaints until there is a resolution.”

In Wunderlich’s telling, U.S. lenders do a good job of pricing credit for prime borrowers, lowering their interest rates as their credit scores rise. But lenders have taken a cruder approach with the millions of subprime borrowers, extending the same high interest rates to large swaths, regardless of their individual credit histories. Wunderlich says he wants to “democratize access to credit through dynamic pricing across the credit spectrum”—a fancy way of saying his customers pay rates based on their own ability to repay, not someone else’s.

Fast, technology-driven underwriting has become table stakes for online lenders in the age of cloud computing, with a range of companies promising to make credit decisions more quickly than traditional banks. Bristlecone’s main innovation is to apply that kind of underwriting to leases. Unlike credit cards and installment loans, which are subject to usury laws in many states, closed-end leases face no caps on how much a financing company can charge.

That lets Bristlecone charge effective interest rates ranging from about 36 percent to 170 percent on an annualized basis, based on sample rates published on its website. (Bristlecone doesn’t express its pricing in terms of APR, since Wunderlich says it underwrites leases, not loans. The effective interest rates quoted here represent the rates borrowers would pay if they took out term loans with the same payback costs and schedule as a Bristlecone lease.) Those rates may sound high to borrowers used to paying 15 percent on their credit card, but Wunderlich says they’re a fraction of what payday and other subprime lenders charge.

“When you really look at how the credit situation is set up in the United States, it’s highly discriminatory,” he said. “People are like, ‘Oh, high interest rates, that’s bad.’ But it’s like—not really. It can be. But if used properly, it can be very good.”

Wunderlich grew up in Elko, Nevada, home to one of the largest gold-mining operations in the U.S. His parents managed local casinos; his grandfather once owned a furniture store that sold mattresses to the local brothels. Dusty won a golf scholarship to Missouri State University, earned two business degrees, then moved back to Nevada to work as an analyst at a gaming company. There, he struck up a golf-course friendship with a financier named Alfred Villalobos whose firm, Arvco Financial Ventures LLC, helped hedge funds and private equity firms win business from the California Public Employees’ Retirement System.

Villalobos took Wunderlich under his wing, hired him in 2006, and sent him around the globe in search of investors for deals in the new energy sector. But in 2010, Wunderlich felt an itch to strike out on his own. Nevada’s public school system had just established a fund to make private equity investments in local businesses, and Wunderlich set up a one-man advisory firm to help the state score deals. (He picked the right time to make the career move: Villalobos later was criminally charged with bribing the former head of CalPERS and pleaded not guilty. He committed suicide in 2015. His lawyers said at the time that he had been ill for at least two years.)

The advisory business was slow going. Wunderlich merged it into a Sacramento-based investment bank, where he did advisory work for a paddleboard company and considered buying into a company raising money from Chinese investors for luxury real estate projects. Then he saw his opportunity: A lender specializing in financing furniture, electric scooters, and all-terrain vehicles was looking for a buyer, and it fell to him to examine the books. The deal fell through, but he came away impressed by the economics of high-interest loans.

It was 2012, still early in the U.S. economy's slow recovery, and Reno home prices were less than half of their boom-time highs. Local unemployment was at 12 percent. And Wunderlich noticed something else: Spending on restaurant meals had plunged during the recession, according to Census data, but spending on pet food had ticked up.

Thus was born the idea to finance purebred dogs.

Wunderlich considered various credit models before he landed on the closed-end lease, which gave him free rein from usury laws in all 50 states. It seemed well-suited to an era when the housing crisis was threatening to sour Americans permanently on mortgages, credit card loans, even the concept of ownership.

“When I take a good hard look at what the world will be like in 10 years, I think most things are going to be on lease”

He recruited a former hedge fund salesman named Kyle Ferguson as co-founder and launched Wags Lending, thinking dog leases would mark just the first step in a vertically integrated pet-financing company that would eventually include food deliveries, chew-toy subscriptions, and veterinary loans. Then their point-of-sale lease financing became a hit, and they decided to double down on it.

Rebranding as Bristlecone, they began rolling out new lending verticals, like I Do Lending (for bridal shops) and One Road Lending (for auto shops). Loan volumes soared from $15 million in 2014 to $38 million the next year. But as a startup lender with little history of making performing loans, Bristlecone was borrowing at interest rates as high as 20 percent. It was hard to profit at those rates, so it sold some contracts to other companies.

Wunderlich began poaching programmers from a software company that writes code for video slot machines. He staffed his executive ranks with fellow Nevadans like Ferguson and Jeffrey Jones, the son of a commodity trader who’d buried burlap sacks full of pennies in his backyard and had told his kids to dig them up once the copper was worth more than the pennies. He penned a memo on “ranch-style culture” to instill in his new recruits what he called “cowboy virtues”—humility, ingenuity, accountability.

In 2014, Bristlecone landed a meeting with SenaHill Partners LP, a New York-based merchant bank firm that invests in financial technology startups. It didn’t take long for Justin Brownhill, a partner at SenaHill, to sense an opportunity in the company’s data-driven lending model and point-of-sale marketing strategy. Five minutes into the meeting, Brownhill excused himself. “I walked out and grabbed my three other partners and said, ‘I think we have something special here,’ ” Brownhill said.

Wunderlich parlayed that meeting into a seed round of $1.1 million. SenaHill also connected him with a firm that furnished Bristlecone with a $75 million line of credit, lowering Bristlecone's borrowing costs.

Humans have been making interest-based loans for about 6,000 years and debating the morality of the practice for almost as long. In the U.S., caps on interest rates have flushed borrowers with poor credit into less regulated, more expensive corners of the market since at least the early 20th century, when workers in industrializing U.S. cities began seeking small loans to bridge the gap between paychecks.

Back then, usury laws tended to cap annualized interest rates somewhere between 6 percent and 12 percent, rates at which banks had a hard time profiting, according to Joshua Sledge, a director at the Center for Financial Services Innovation who has studied the history of U.S. usury law. Traditional lenders eschewed the growing market—but loan sharks didn’t.

In 1911, a New York-based nonprofit called the Russell Sage Foundation started offering small cash loans on an experimental basis, trying to find an interest rate at which they’d be profitable for lenders and manageable for borrowers. It settled on 3 percent a month, or 36 percent on an annualized basis, and drafted model legislation capping rates there. The limits weren’t universally adopted, but the pricing template endured and still serves as a de facto limit on rates for credit cards issued by nationally chartered banks.

Despite those rules, banking to customers underserved by traditional financial services was a $141 billion industry in 2015, according to a recent report from the Center for Financial Services Innovation—a tally that includes pawn loans, subprime credit cards, overdraft charges, and other products that can carry annualized interest well into the triple digits. Wunderlich presents his leases as something of a lesser evil compared with them.

That argument is more convincing for some products than others. For a subprime customer in the market for a dining room set, a Bristlecone lease might offer a better deal than a rent-to-own retailer, which can charge effective APRs of more than 300 percent. Most payday-loan borrowers, on the other hand, use that cash to pay bills; less than one in 10 uses it to buy something, notes Nick Bourke, director of consumer finance at Pew Charitable Trusts. In other words, Bristlecone’s dog leases might not be replacing more expensive credit. They may just offer a new way for subprime borrowers to buy things they can’t afford.

“We’re all for going to the shelter and adopting a dog,” Wunderlich answers. “But if a person wants a Chiweenie, they’re not going to go to a shelter and find a Chiweenie.”

On its website, Wags Lending offers happy testimonials from effusive but anonymous pet owners who used lease financing to buy pups. When asked to furnish s satisfied customer for an interview, the company suggested Elizabeth Harvey, a college student, and Kristin Smith, a Reno salon owner.

Harvey, 24, used a Wags lease to take home a Chihuahua from an Erie, Pennsylvania, pet store. In the past, Harvey said, she had adopted rescues. The contract was expensive, but she was already enamored of the pooch, which she named Little. Later, once she’d taken Little home and realized she was leasing him, she called Wags to complain, and the company waived several months’ worth of payments. “I probably wouldn’t feel so thankful if it was any other dog,” she said. “For some reason, I just connected to this one.”

Smith, 40, has used leases from Bristlecone for two dogs, both Morkies—a Maltese-Yorkie hybrid. She bought the first dog, Julius, on a whim after walking into a local pet store without a credit card. “It was like, I didn’t want to leave without him,” she said. After Julius was killed in a traffic accident, Smith worked with Bristlecone to craft a lease for a new dog, which she named Monsieur Fluffington (“the smaller the dog, the longer the name”). “I can’t say enough good things about Wags,” she said.

Last summer, a consumer watchdog lawyer named Margot Saunders got a call from a friend in West Virginia, asking her to take a look at an unusual contract. The papers described a lease transaction for two teacup Yorkies underwritten by Wags Lending.

Saunders, of counsel to the National Consumer Law Center, thought the contract looked like it might not hold up as a lease in court.

Under the federal Consumer Leasing Act, the defining characteristic of a lease is that the lessor can take back and remarket the underlying asset. That distinction, Saunders said, has been crucial to convincing lawmakers that leases are different from loans and shouldn’t be subject to caps on interest rates.

Saunders didn’t think the contract for the teacup Yorkies met that standard. Before she could pursue a lawsuit, though, the lessee settled her complaint for a refund.

Now, Saunders is looking for another aggrieved customer so she can test the legality of the contract in court, on the theory that a dog can’t be redeemed and resold at the end of a lease, as a car might be. “There’s no real contemplation with a dog that you’re going to run it back in.”

Wunderlich says his company’s contracts legally qualify as leases. When the company can’t get pet stores to take back dogs, he said, Bristlecone itself works to find new owners, sometimes flying the dogs back to Nevada.

Last July, Wunderlich traveled to Sun Valley, Idaho, for a conference attended by attorneys general of Western states—part of a regular effort to assure regulators he’s complying with state leasing law. He says he’s also met with staff from attorney general’s offices in New York, New Jersey, Kansas, and Virginia.

“We’re all for going to the shelter and adopting a dog. But if a person wants a Chiweenie, they’re not going to go to a shelter and find a Chiweenie”

For now, Wunderlich is still focused on launching new credit products. He recently finalized a deal with a Utah-based bank that helps online lenders use the state's lender-friendly laws to make loans elsewhere. That will let Bristlecone expand its product offerings to include term loans, allowing it to extend more enticing rates to borrowers with better credit profiles and to finance services like veterinary care, elective surgery, even funerals—not just tangible assets like dairy cows and Labradoodles.

“We’ve gone a long way to making sure that what we’re doing is within the confines of the law,” he said. “Is there a regulator one day that’s going to just absolutely not like what we do and pick a fight with us? Probably. And we’ll have to hash it out.”

For Sabins, getting out of her lease contract turned into a lengthy ordeal.

When she first figured out that she was leasing Tucker, she complained to both Monterey Financial and Bristlecone. She stopped making payments and stopped worrying about the charge, until she and her husband looked into refinancing their home and realized the unresolved lease was marring their credit report. By then, she’d already sold the dog.

This past June, she reached out to Wags again. In July, Wags promised to clear up her credit report. In October, it refunded her the lease payments she made.

She still worries the transaction will come back to haunt her. Before she took Tucker home back in early 2015, the dog had a microchip implanted under his skin to register him with the American Kennel Club. When she sold him, she forgot to ask the buyer to update the registration.

Every now and then, unease gnaws at her. She worries the dog will bite someone and authorities will track it back to her. “I think, ‘They’re going to blame it on me!’”

 

To contact the author of this story: Patrick Clark in New York at pclark55@bloomberg.net.

To contact the editor responsible for this story: Samantha Schulz at sschulz17@bloomberg.net.

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