California Sucks for Merchant Cash AdvanceDecember 17, 2015 | By: Sean Murray
In the ’00s and early ’10s, businesses throughout California would forever make merchant cash advance companies rethink how they operate in the state. At issue was the methodology of buying future credit card receivables and how that meshed with the state’s strict lending laws.
For those that remember, an attorney named Anat Levy of Anat Levy & Associates, PC, quickly became somebody you didn’t want to know. Levy became famous, or rather infamous, through her role in Bistro Executive, Inc., et. al. v. Rewards Network, et. al., a class action that argued Rewards Network had violated state usury laws. The plaintiffs won and Rewards Network appealed. They ultimately settled however for nearly $60 million.
Her success in that case would lead to a string of similar cases against companies buying future receivables from California businesses, including AdvanceMe Inc., who eventually settled for $23.4 million. As the heat on the industry turned up, some merchant cash advance companies mitigated these disputes through enforceable arbitration clauses such as in Captain Bounce, Inc., et. al. v. Business Financial Services, Inc. et. al.
While there is no law that requires purchasers of future receivables in California to be licensed lenders (especially considering most merchant cash advance companies are not lenders), the constant threat of crippling usury litigation was enough to make some companies restructure their product as an actual loan, at least in that state. Others decided to cross off doing business in the state entirely. For those that decided to lend there however, they had to jump through the necessary hurdles to become a licensed lender. (Read Paul Rianda, Esq’s instructions for how to do this)
It seems that strategy is not without complications either. Under California’s Finance Lender’s Law, lenders have been prohibited from paying any compensation to unlicensed brokers for a loan referral. That would seem to mean that in becoming a lender there, you can no longer accept business from your brokers which is often the entire point of becoming a lender in the first place.
This law recently moved to the forefront of the industry’s watch list after new legislation (SB 197), which is slated to go into effect on January 1, 2016, reiterated the restrictions while simultaneously creating tough standards to obtain an exception.
Patrick Siegfried, Esq. and attorneys for Hudson Cook, LLP have already posted their analyses on the new law on deBanked.
Already one lender has publicly informed its brokers that it will no longer accept their business due to SB 197 specifically. “As of January 1st, 2016 changes in the California Finance Lenders Law (Senate Bill 197) requires brokers and lenders to be licensed when referring or making loans to California residents,” wrote LoanMe in an email it circulated last week. LoanMe’s model has consistently been lending however, not merchant cash advance. Still, the announcement ruffled feathers on industry forums where brokers were unsure of what the implications were.
LoanMe didn’t disclose however that there was uncertainty over their claim to be a licensed lender in the first place. On February 18, 2015, California’s Commissioner of Business Oversight hit LoanMe with a desist and refrain order for making among other things, “false, misleading and deceptive representations” about their status as a licensed lender. After making the case that the license LoanMe was arguing a claim to should be revoked, the accusation was withdrawn without prejudice the following month after the Commissioner received “additional information.”
According to the Department of Oversight’s website, LoanMe, Inc. is not directly licensed, though the dispute seems to stem from their argued adoption of another entity’s license, a company called Cash4Rent Inc.
While the outcome of that state inquiry is unclear, it may perhaps add some color to LoanMe’s decision to stop accepting business from unlicensed brokers in California. In deBanked’s November/December magazine issue, California attorney Paul Rianda wrote that the state is so thorough that he has seen a license application rejected because the lender forgot to include the period after “Inc” in the company name.
Still, he wrote, “given the fact there have been a number of successful lawsuits against cash advance companies in California, many cash advance companies have decided to take a different route and get a lending license to provide loans to merchants in the state. If done correctly, this can allow companies to provide loans to merchants in California at roughly the same profit margins one could expect from a cash advance.”
And yet, the California Finance Lenders Law allows companies offering merchant cash advances to be exempt from the licensed broker requirement.
So what to do?
Given the history of litigation and legislation, being in the funding business in California is a tough job regardless. After becoming licensed, “that is where the fun begins,” Rianda wrote. “You are subject to many laws in California and audits by the State.”
Fun indeed…Last modified: December 17, 2015
Sean Murray is the founder of deBanked, an 11-year veteran of the merchant cash advance industry, a casual Lending Club and Prosper note investor, the co-founder of Daily Funder, an alternative lending speaker, consultant, writer, and enthusiast. Connect with me on LinkedIn or follow me on twitter.