Archive for 2020
The FTC’s Power to “Wipe Out” is Under Siege
October 9, 2020
As the FTC contemplates how to “wipe out” entire industries, federal courts around the country have recently ruled that the regulator can’t accomplish such a goal under Section 13(b) of the FTC act. That’s the statute the FTC relied on to bring its most recent actions against merchant cash advance companies. It might not have bite.
Under 13(b), the FTC is empowered to bring a lawsuit to obtain an injunction against unlawful activity that is currently occurring or is about to occur. It’s powerful, but very limited. However, for the last several decades, the FTC, with the help of federal courts, has interpreted the statute to mean that it can also force the defendants to “disgorge” with illegally obtained funds.
That’s how the FTC wiped out Scott Tucker and his payday lending empire. In a lawsuit the FTC brought against his companies under 13(b) in 2012, the Court entered a judgment of $1.3 billion against him.
Not so fast, modern legal analysis says. Tucker’s case is being brought before the Supreme Court of the United States to settle once and for all what 13(b) allows for and what it doesn’t.
The momentum does not weigh in the FTC’s favor.
On September 30, the Third Circuit ruled in FTC v AbbVie that the FTC is not entitled to seek disgorgement under 13(b). The Seventh Circuit arrived at a similar conclusion last year in FTC v Credit Bureau Center.
In an interview with NBC, FTC Commissioner Rohit Chopra said in August “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
As the FTC attempts to be more proactive in the area of small business finance, it will be important to monitor what the Supreme Court ultimately decides it can actually accomplish.
Important News for MCA Collection Actions in New York – Governor Cuomo Lifts New York Civil Litigation Tolling Deadlines After November 3, 2020
October 9, 2020
On March 7, 2020, Governor Andrew M. Cuomo issued Executive Order No. 202 Declaring a Disaster Emergency in the State of New York due to the COVID-19 pandemic. Executive Order 202 was followed by Executive Order No. 202.8 on March 20, 2020, which tolled (i.e., suspended) “any specific time limit for the commencement, filing, or service of any legal action, notice, motion, or other process or proceeding, as prescribed by the procedural laws of the state . . . until April 19, 2020.
In lay terms, Governor Cuomo’s Order suspended any statute of limitations deadline for the filing of a lawsuit, and perhaps more important for debt collection activities in the Merchant Cash Advance industry, suspended the deadline for obtaining default judgments in the State of New York. In other words, even after New York State Courts reopened in May, New York Courts could not issue default judgments against defendants who failed to appear in response to a summons and complaint in any civil action, including collection actions, if the date of default for non-appearance occurred after March 20, 2020.
The Governor’s suspension of court deadlines continued well past the initial April 19, 2020 deadline, being extended by numerous executive orders throughout the summer and early fall. The most recent executive order, Executive Order No. 202.67 issued on October 5, 2020, extended the tolling deadline again until November 3, 2020.
But there is hope in sight. In addition to extending the suspension of court deadlines, Executive Order 202.67 states, “for any civil case, such suspension is only effective until November 3, 2020, and after such date any such time limit will no longer be tolled.”
The good news here for debt collection professionals is that deadlines in civil cases in New York State will begin to accrue again as of November 4, 2020. What this means is that any civil action properly served on a defendant that was suspended as of March 20, 2020, will begin to accrue again on November 4, 2020.
In summary, for the debt collection professionals in New York State, this means a return to business as usual on November 4, 2020.
Austin LLP is a law firm that supports the Merchant Cash Advance industry. As such this article is attorney advertisement. The opinions reflected in this article are those of the author and should not be construed as legal advice.
OnDeck / Enova Merger Overwhelmingly Approved by Shareholders
October 8, 2020The drama surrounding what OnDeck allegedly did or did not disclose to shareholders about the Enova merger presumably came to an end on Wednesday. 38 million voting shares approved the deal while less than half a million voted against it.
However, shareholders sent a message by voting against “the compensation that may be paid or become payable to the Company’s named executive officers that is based on or otherwise relates to the merger.”
OnDeck has said that the merger is expected to be completed in the fourth quarter of 2020.
Square, Stripe, Intuit, Shopify, Talked SMB Lending at LendIt Fintech 2020
October 8, 2020
The LendIt Fintech digital conference last week was a sign of the times. This year, millions of average businesses and consumers have had to go virtual: they had no choice. 2020 has been a year of struggle and survival, and a time of great fintech adoption.
Some firms have been more successful than others. Going full digital, LendIt introduced virtual networking at the conference- the first day alone saw 2,171 meetings. Zoom meetings and virtual greetings took the place of handshakes and elevator pitches that would regularly accompany the convention.
On day three, LendIt hosted a panel of SMB lending leaders from Stripe, Shopify, Square, and Quickbooks Capital. Bryan Lee, Senior Director of Financial Services for Salesforce, served as moderator and he focused the discussion on “How the leading fintech brands are adapting.”
THE PIVOT
Lee began the talk by asking Eddie Serrill, Business Lead from Stripe Capital, about how the industry has pivoted.
Serrill talked about how Stripe was powering online interactions and saw an influx of traditionally offline businesses switching over to their platforms. Stripe also saw an increased demand for online purchases and payment.
“We’ve been trying to find that right balance between supporting users that have been doing incredibly well,” Serrill said. “While trying to support our users who are seeing a bit of a setback.”
Stripe introduced a lending product in September of last year and now SMBs can borrow from Stripe and pay back by diverting a percentage of their sales, much like the other panelists’ companies offer.
Jessica Jiang, Head of Capital Markets at Square Capital, talked about how her firm adjusted. Square reacted to fill the niche of their underserved customers by introducing a main street lending fund, serving industries hard hit by the pandemic, Jiang said. Small buinesess that relied on in-person action like coffee shops and retail community businesses were given preferential lending options.
Product Lead at Shopify, Richard Shaw, said that this year his firm learned to be prepared for anything. Everything that Shopify was potentially going to do or planning on implementing in the coming years suddenly became a here-and-now necessity.
“We tore up our existing plans,” Shaw said. “It was like the commerce world of 2030 turned up in 2020. You need to do ten years of work, but you need to do it today.”
Shopify, the Canadian e-commerce giant has doubled in value this year. The firm launched Shopify Capital in the US and Canada in 2016 and has originated $1.2 billion in funding to small businesses since that time.
Luke Voiles, the VP of Intuits QuickBooks Capital, talked about how his team handled pandemic conservatively.
“Five years of digital shift has happened instantaneously due to COVID,” Voiles said. “Intuit is pretty recession-resistant in the sense that you have to do taxes, you have to do your accounting, and the shift to digital helps a lot.”
Business lending was different, Voiles said, as soon as his team saw COVID coming, they battened down the hatches, slowed lending, and pivoted to facilitating PPP.
PPP
Voiles said the craziest thing he has seen in his career was what Quickbooks did to deploy PPP aid.
Within about two weeks, almost 500 people from across Intuit came together to shift all the data they carried on customers to aid applications.
“We were uniquely positioned to help solve and deploy that capital,” Voiles said. “We have a payroll business where 1.4 billion business use us, we have a tax business where we have Schedule C tax filings, and we have a lending business. We were able to pivot and put the pieces together quickly.”
QuickBooks Capital deployed $1.2 billion to 31,000 business in a process that Voiles said was 90% automated. Now customers are awaiting other rounds of government aid.
Square’s Jiang said the initial shutdown weeks in March and April saw hundreds of Square team members working on PPP facilitation through the night and weekends. As the funds dried up those first two weeks, it was clear to Jiang the program was favoring larger firms and higher loan amounts, leaving out small businesses.
“That’s typical of investment bankers, but not very typical of tech,” Jiang said. “PPP is a perfect example of how small businesses are continuing to be underserved by banks.”
THE SHAKEOUT AND THE FUTURE
2020 has been a major shock to the lending marketplace. Voiles from Quickbooks said the amount of work it took to make it through the first wave was a significant shakeout.
“You’ve seen what’s happening with Kabbage and OnDeck and other transactions with people getting sold; there is a shakeout happening in the space,” Voiles said. “The bigger players will make it through and will continue to help small businesses get access to capital that they need.”
When asked about the future roadmap of QuickBooks Capital, Voiles said it wasn’t just about automating banking. Using Intuit’s resources to build an automated system is only half of the picture- the firm believes in an expert-driven platform. After the automated process, customers will be able to talk to an expert to review the data, and “check their work.” Voiles said Quickbooks wants to offer a service that is equivalent to the replacement of a CFO.
“These small businesses that have less than ten employees, they can’t afford to hire a pro,” Voiles said. “They need automated support to show them the dashboard and picture of what their business is.”
Pointing to Stripe’s online infrastructure, Serrill exemplified what successful lenders will offer next year: a platform that combines many needs of SMBs in one place.
“I think it’s really about linking all of this data, making it super intuitive and anticipating the need for their users, so they don’t need a team of business school grads to manage their finances,” Serrill said. “So they can get back to building the core of their business, not figuring out whether they have enough cash flow tomorrow.”
Jiang said the future of small business would be written in data, contactless payments, and digital banking. She sees consolidation in the Fintech space and has a positive outlook on bank-fintech partnerships.
The FDIC granted Square a conditional approval for the issuance of an Industrial Loan Company ILC in March this year. Jiang outlined plans on launching an online SMB lending and banking service next year called Square Financial Services if the conditional charter remains in place.
For Shopify’s future, Shaw was excited to look forward to the launching of Shopify balance- a cash flow management system, and Shopify installment payments. He reiterated that the success of Shopify’s lending division was due in part because making loans was not the entire business.
“Shopify Capital is one piece of a wider ecosystem,” Shaw said. “All these things together are more powerful than individual parts.”
LendingClub Formally Ends “Peer” Aspect of Its Business, Proceeding With Radius Bank Acquisition
October 7, 2020
LendingClub is finally ending the “peer-to-peer” aspect of its platform for good. Earlier today, the company announced that it would cease offering and selling Member Payment Dependent Notes effective December 31st.
“Ceasing the Retail Notes program will allow LendingClub to redeploy capital and improve platform efficiency, enabling the company to help even more members as LendingClub progresses towards closing the Merger and becoming a bank holding company,” the company said in an official statement. “All Retail Notes outstanding as of the date the Retail Note program is ceased will be unaffected by the cessation of the program. Accordingly, with respect to such outstanding Retail Notes, LendingClub will continue servicing the corresponding member loans and information regarding such Retail Notes will remain viewable in the applicable Retail Note investor accounts.”
LendingClub rose to fame with its peer-to-peer model nearly a decade ago, but using retail investors to fund loans has been eroding over time. ‘Peers’ Are Almost Gone From Lending Club’s Funding Mix was the title of a February 2019 deBanked story that highlighted this trend, for example.
Meanwhile, the focus on Radius Bank is a reminder that the announcement made nearly 8 months ago is still a work-in-progress.
“In connection with and in furtherance of the Merger, LendingClub has been in regular contact with federal banking regulators and, on September 25, 2020, filed an FR Y-3 application with the Federal Reserve to become a bank holding company,” the company said. “LendingClub plans to offer a full suite of products as a bank. This includes a high-yield savings account that will be initially exclusively available to its existing retail investors and will offer a compelling interest rate, as well as other products that take advantage of the marketplace to allow its customers to both pay less when borrowing and earn more when saving.”
Radius Bank was the subject of a major deBanked Magazine story in 2017 titled Tech Banks: Will Fintech Dethrone Traditional Banking?
Kapitus CEO Speaks on Success of Rating Reaffirmation
October 6, 2020
When lending companies faced the tightest squeeze on capital since the great recession, many ran into trouble. Kapitus, having survived 08′, met 20′ with the same discipline that helped them navigate the pandemic.
“Our whole industry was put on a credit watch downgrade, and it’s very exciting that we were upgraded, reaffirmed to the original rating,” Kapitus CEO and founder Andy Reiser said. “Most of the companies, our peers defaulted and went into what’s called rapid amortization and did not make it through to keep their securitization.”
Reiser was happy to report that Kapitus received a rating affirmation from Kroll Bond Rating Agency (KBRA) on Friday. KBRA has removed the Kapitus securities from a Watch Downgrade.
Back in March, the businesses that Kapitus and their competitors funded across the country, faced state mandated shutdowns. Many customers were suddenly unable to make the loan, MCA, or equipment payments that they had been able to make for years.
For lenders that bundled and securitized the loans they made, the value of those loans was called into question.
On March 30, KBRA placed the ratings of 29 securitizations representing $2.1 billion from 10 SMB lending firms on a “Watch Downgrade” due to the economic downturn.
To overcome the warning, Kapitus reigned in and focused on helping their customers. Reiser cited the addition of Jeff Newman from Citigroup to manage the risk team as an example of how the firm has been focused on funding responsibly for years.
“We focused on strong business practices and keeping the portfolio strong, and it paid off,” Reiser said. “We never stopped, we were not lending at the same velocity that we did pre COVID, but we never had a day that we didn’t fund a new deal.”
Reiser said that during the pandemic’s height, the team took a lot of long nights working on new products. One was a “step renewal” that allowed clients to pay installments and build up to the full payment, to make sure they were not overwhelmed. Kapitus also offered extended periods for their healthcare loans, up to 36 months, Reiser said.
For companies like Kapitus, a questionable rating could lead to a rapid amortization event: a sudden call to liquefy the bonds and give back investor money. For some, an event like this will spell the end: most firms don’t keep hundreds of millions or even billions on hand to give back principals in a moment’s notice.
Reiser said out of the ten securities on credit watch, only one other was reaffirmed, due to a renegotiation of terms that bond investors had to agree on. Kapitus made no negation but was reaffirmed due to the success of their business practice, Reiser said.
The securitization was initially issued for $105 million in June 2018, and expanded to $160 million last December, in three classes with a senior class rating of “A.”
Reiser believes that the pandemic, like the ’08 recessions, will see some consolidation and strong companies prospering in a displaced environment.
“I think COVID will teach a lot of other players that were very aggressive in coming down to this market that it’s not so easy,” Reiser said. “I think some of the banks and the alternative lenders that were more eager to come into this market may not be so aggressive at least for a while.”
Yellowstone Capital Moves to Dismiss FTC Lawsuit
October 3, 2020
Newly revealed in court documents filed on Friday is that the recent FTC lawsuit against Yellowstone Capital culminated after a 2-year inquiry. What may have been a surprise to the Yellowstone defendants is how the FTC brought its case or that it ultimately even decided to bring one at all. A motion to dismiss has been filed.
Specifically, counsel for Yellowstone references in its papers that in the preceding years, Yellowstone had already complied with FTC discovery requests that amounted to the production of “24,000 pages of documents, more than 1,400 audio recordings, and responses to numerous interrogatories and follow-up inquiries.”
Following that, the FTC filed suit on August 3, 2020, alleging Misrepresentations Regarding Collateral and Personal Guarantees, Misrepresentations Regarding Financing Amount, and Unfair Unauthorized Withdrawals. In it, it relies heavily on alleged materials dating as far back as five years ago to make its case.
This is fatal to the FTC’s suit, the defendants contend, because the FTC laid out its claims under a very specific statute of the FTC Act, Section 13(b), which can only be brought in federal court if they believe a defendant “is violating, or is about to violate” this area of the law. Past conduct, they say, even if it were true, is not applicable. No acts in 2020 or even from 2019 are alleged with any particularity, nor is it said that any might be happening or will happen.
Some of the purported web pages, ads, or contracts that the FTC refers to no longer exist, have long since been replaced, were taken out of context, or could not even be identified as to where or whom they even originated from, defendants say.
Defendants make further arguments for dismissal, one of which takes issue with alleged quotes or comments made by anonymous merchant customers. “The Complaint does not indicate, for instance, if these unidentified customers had breached their MCA agreements or otherwise incurred additional fees beyond the Purchased Amount that were due and owing to Yellowstone under their respective agreements.”
Deprived of all context and specifics, the complaint is loaded with elements that look bad but fall well short of the necessary legal burden, defendants essentially argue.
“The FTC has overextended itself in this litigation,” defendants say in their papers.
They further raise concern that it arises from a possible personal agenda rather than a legally-founded one. Reference is made to an NBC interview in which FTC Commissioner Rohit Chopra told the interviewer that “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
Chopra had also issued an official statement regarding Yellowstone in which he expounded almost entirely on legal questions that were not even raised in the lawsuit itself but create the impression that they are.
Yellowstone has asked for a stay of discovery pending the outcome of the motion to dismiss.
You can read Yellowstone’s full motion to dismiss here.
The FTC’s interest in this area of finance has been known for some time.
Jackie Reses is Leaving Square Capital
October 2, 2020
Square Capital’s lead executive, Jacqueline Reses, is leaving the company. Square announced on October 2, that her resignation would be effective as of October 31. Reses is largely responsible for developing Square’s robust lending business, one that effectively made the company one of the largest non-bank small business lenders in the country.
It’s time to hang up my boots and say goodbye to my good friends at @Square. To the people I’ve worked with: everything I love about Square is related to you. It is my privilege and honor to have been along for the ride with you.
— Jackie Reses (@jackiereses) October 2, 2020
I shared my thoughts with Squares today because the place is so special! I thought I would share. pic.twitter.com/tXAE0dZhK9
— Jackie Reses (@jackiereses) October 2, 2020
