Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Something’s Coming
August 27, 2021Update: Surprise, it’s the industry’s first reality show.
On Monday, deBanked will make an announcement about something new. What could it be? Any ideas?
I guess you’ll have to find out by subscribing to our email newsletter. Of if you’re already subscribed, stay tuned.
🙂
The Cash Advance of the Student Loan Industry Agrees to Be Treated Like a Loan
August 23, 2021
If you thought only small businesses were selling their future income for cash upfront, then you haven’t been paying attention to the student loan industry.
More than five years ago, fintech companies channeled the MCA concept into student lending. Called an Income Share Agreement, it works just as you would think, the funder advances tuition costs to the student and in return the student pays a fixed percentage of their gross income after graduation, but only if they are gainfully employed. They’re not loans and there’s no penalty if the amount paid back to the funder is less than the amount funded. It is essentially an MCA for college kids.
When deBanked interviewed a student named Paul Laurora about two years ago, Laurora said that in exchange for tuition money, he had agreed to pay 2.57% of his income for 7 years, whether he made a lot, a little, or nothing at all. The funder is making a bet that it will get a considerable return on its investment, but takes the risk of getting nothing if the graduate isn’t working during that time period or earns less than anticipated.
Laurora compared paying that way versus what his friend was faced with, which was to pay $230,000 either with cash or with student loans to attend NYU.
“ISAs” typically enjoy the regulatory benefit of not being a loan, but that could all change.
In California, the state’s Department of Financial Protection and Innovation took issue with a funder’s ISAs when they applied for a Student Loan Servicing license, a requirement in the state. That funder was named Meratas, a New York company that’s headquartered in Connecticut. Meratas’ encounter with the California DFPI resulted in a consent order on August 5th that will have the company’s ISAs treated as student loans and make Meratas an approved Student Loan Servicer.
“[This] action shows we are taking significant steps to better protect California student borrowers,” said DFPI Senior Deputy Commissioner Suzanne Martindale, whose Consumer Financial Protection Division oversees the student loan servicing law. “Regulating income share agreements like student loans levels the playing field and creates a fair marketplace that protects all consumers.”
Though the agreement only applies to Meratas, it could set a precedent for treatment of ISAs in the state.
Meratas celebrated the arrangement as a win.
“Because income share agreements do not fit neatly into existing federal or state legal regimes, we felt it prudent to be proactive at the state level, starting with California,” says Meratas founder and CEO Darius Goldman. “We are excited to work with the DFPI in its efforts to craft ISA-specific regulations for the benefit of all industry participants. Our partners take comfort in knowing that Meratas continues to be the leader in responsible and consumer-friendly ISA programs.”
A Lawsuit Against Marcus Lemonis & Others is Alleging That “The Profit” Is Scamming Small Businesses
August 22, 2021
Marcus Lemonis, the star of CNBC’s show The Profit, is no stranger to litigation, but a proposed amended complaint recently filed against him in a year-old dispute really lets loose. The 165-page grievance reads like its own reality show, in which plaintiffs assert that Lemonis is nothing more than a fraud.
“While he pretends to be savior on TV to save businesses, Lemonis actually and purposefully sets out to acquire them for himself and ruin them financially,” plaintiffs contend.
Forbes turned the allegations in the proposed amended complaint into an exposè about Lemonis and his TV show, leading with a photo of him that is captioned, “The Profit or Profiteer?” It racked up more than 33,000 views in the first 24 hours at last count by deBanked.
But the lawsuit filed by Nicolas Goureau, Stephanie Menkin, and ML Fashion, who were first filmed for the show in 2014, is a bit overshadowed by the fact that this is their 2nd amended complaint and that a motion to dismiss their previous one was already pending.
The latest one highlighted by Forbes is communicated to the public as being the culmination of an “eight-month investigation” carried out with the help of a “former district attorney and a top law school professor, and a world renown psychiatrist that was spurred by the coming forward of no less than seventy (70) family businesses that have been destroyed…”
The identities of the people who carried out the “investigation” are not shared and the 70 “destroyed businesses” are not co-plaintiffs. At times, it is hard to take the complaint seriously when it casually asserts sensational facts, like one that says a participant on the show killed themselves but it doesn’t say who they were, where they worked, or any other details about the death.
Plaintiffs are seeking at least $12 million in damages and they have just added NBC Universal Media, LLC as a defendant.
Lemonis contends that the plaintiffs earned $3 million for their labor and that they charged $1.3 million in personal expenses on the company credit card.
Overall, it’s probably unwelcome press for the show given that the eighth season just debuted. Many people in the small business finance community are fans of the show. In 2017, Lemonis personally criticized Kabbage, saying that they weren’t a friend of small business.
Lemonis is currently hosting a contest on twitter where small businesses are competing to win $10,000 by submitting their pitch.
Win $10,000 for your business …. Make your best pitch … must use #TheProfit to submit your pitch pic.twitter.com/8CuZAN5SJ0
— Marcus Lemonis (@marcuslemonis) August 21, 2021
IOU Introduces the “Cash Back” Concept to the Small Business Loan Market
August 4, 2021
Immediately following news of a management shakeup, small business lending company IOU Financial introduced a first-of-its kind offering to eligible customers, cash back.
“Available only to qualified new clients,” as the announcement says, the IOU Cash Back Loan enables borrowers to benefit from perfect payment history by receiving 3% of the original loan back in the form of a cash rebate.
According to Carl Brabander, the new EVP of Strategy, this is not a gimmick where the rebate can only be applied to a future loan or loaded up onto a gift card.
“The merchant would receive the cash back amount by ACH directly to their bank account,” he writes, “provided they (a) have a perfect repayment history and (b) apply for the rebate within 30 days of repaying the loan, using the cash back certificate we would have sent them when the loan closed.”
Translated into dollars, this reward could be sizable given that IOU’s average loan size hovers around $100,000 and can go much higher.
“The IOU Cash Back Loan gives us the opportunity to give something back to new clients that put their faith in us to fund their growth plans,” said IOU CEO Robert Gloer in a public statement.
The cash-back loan concept was developed scientifically through focus group testing, the company claims.
The sudden flurry of activity emanating from IOU can probably be attributed to a deal struck last year when Neuberger Berman, an investment manager with $374B under management, acquired a 15% stake in the firm.
Brabander says that IOU is very bullish on the rest of the year and 2022.
“We see small business coming back strong now that the 2nd round of PPP has finished working its way through the system,” he says. “That’s why we’re investing heavily in products (ex. Cash Back), technology (our IOU360 platform) and distribution right now…”
Wave of Management Changes Come to IOU Financial As it Ramps Up For the Future
August 4, 2021
Small business lender IOU Financial is undergoing one of the largest management shakeups of 2021. The company announced a slew of new hires and new roles for existing team members early this morning.
Joining the company are:
- Carl Brabander, EVP of Strategy
- Jason Stevens, VP of Loss Mitigation
- Sam Abolgar, VP of Finance (US)
New roles are as follows:
- Madeline Wade, EVP Operations
- Stewart Yeung, EVP of Finance
- Jeff Turner, EVP of Risk Mitigation
- Richard Zapata, VP of Engineering
- Lori Haygood, VP of Compliance
IOU founder Phil Marleau also recently completed his planned transition from CEO to an advisory role. President and COO Robert Gloer has taken over as CEO as previously announced.
The burst of change at IOU is perhaps unsurprising given that Neuberger Berman, an investment manger with $374B under management, acquired a 15% stake in the company last year.
“IOU’s new management structure lays the groundwork for growth and innovation,” Gloer said in a public statement. “With this team in place IOU Financial has never been in a better position to achieve rapid growth through innovation in the areas of technology, products and distribution.”
Velocity Capital Group Becomes First Funder to Offer Broker Commissions Via Crypto
August 2, 2021
Velocity Capital Group is bullish on crypto as a means of payment. Company President and CEO Jay Avigdor told deBanked that the company is officially incorporating cryptocurrency in two ways:
(1) Brokers can now choose to get paid commissions in cryptocurrency instead of cash.
(2) Merchants can now choose to get funded via cryptocurrency instead of cash.
In both cases, Avigdor touted the speed in which cryptocurrency can change hands versus waiting around for an ACH or a wire.
“Our goal since day 1 of VCG, was to give ISOs and merchants the ability to access capital as fast as possible,” Avigdor said. “With VCG’s proprietary technology, we have been able to change that mindset from ‘as fast as possible’ to ‘the FASTEST possible.'”
The company says it will use stable coins (USD Coin and DAI) to conduct these transactions “in order to limit market volatility” but that depending on the merchant or ISO relationship, they would be open to transmitting Bitcoin, Ethereum, etc.
Merchants getting funded with crypto would still have their future receivables collected via ACH so that part of the arrangement would not change. The underlying business is the same.
VCG alluded to there also being potential tax benefits of taking payment in crypto.
Avigdor believes that among industry peers, VCG is the first to offer commissions in crypto. He further explained that this is only one piece of the puzzle and that there are plans to integrate the company’s technology in a way that will allow merchants to access funding in less than 20 minutes from the time of submission to funds actually being received.
NJ Resurrects Small Business Finance Disclosure Bill
July 28, 2021New Jersey’s legislature has revived its small business finance disclosure bill. Having languished since last January, the Senate Commerce Committee quietly gave it a favorable report this past June.
New Jersey’s bill is similar to the law that New York is putting into effect on January 1st. As part of it, non-loan products will be required to calculate an APR even if one cannot be mathematically calculated by “estimating” one.
Brokers would be impacted too:
A broker who charges any fees or commission that would be paid by the recipient of the financing shall provide, at the time of extending a specific offer for a commercial financing transaction and in a form and manner prescribed by the commissioner, a written disclosure, in a document separate from the provider’s contract with the recipient, stating the following, if the information is not contained within the disclosure offered by the provider directly to the recipient:
(1) a list of all fees or commissions that would be paid to the broker by the recipient in connection with the commercial financing;
(2) the total dollar amount of charges listed pursuant to the bill;
and
(3) any increase to the annual percentage rate due to the charges listed above and the resulting dollar cost.
You can read the Senate Commerce Committee’s report here.
Should Small Business Lenders Weigh Risk of Applicants Getting Prosecuted for PPP Fraud?
July 23, 2021
As law enforcement officers and prosecutors gradually move on from fake businesses that got PPP in favor of real ones that lied to get more PPP funds than they should have, non-PPP loan underwriters may be forced to grapple with a new question: Is the merchant at risk of PPP fraud prosecution?
Alarm bells have already been sounded by Experian for a different reason, one that warned commercial fintech lenders that the mere receipt of PPP funds should not be considered enough to confer legitimacy on a loan applicant.
But what if everything checks out and the business is legitimate? PPP could come back to adversely affect the performance of the loan if the applicant is later prosecuted or forced to give back all or a portion of the PPP funds. A recent roundup by the Department of Justice, for example, resulted in 22 individuals being charged for PPP related fraud. More than a dozen actual businesses were ensnared by it, with the litany of charges including things “false statements to a federally insured financial institution.”
If a business misappropriated the funds, lied to get more than they should have, lied about when the business was founded, or engaged in some other kind of misleading impropriety, that business could be a ticking time bomb for lenders.
Proactive underwriters or fintech technology could assess whether or not the PPP funds obtained by an applicant were financially realistic and that the business start date aligned with PPP requirements. A business doing $20,000 a month in sales that obtained $200,000 in PPP funds, for example, may look sustainably healthy but raise a red flag that it may not have been legitimately obtained. Underwriters should be crunching the numbers and thinking about whether or not this applicant is likely to face consequences and what that might mean for the loan if it’s approved.
This editorial is the opinion of the author.
