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
Sneak Peek of Our May/June 2017 Magazine Issue
June 5, 2017
Move over New York, California and Florida because Texas has become a strong incubator for alternative small business finance. In this newest deBanked magazine issue, we went to Dallas-Fort Worth, Austin and Corpus Christi to find out how and why non-bank financing products are flourishing. We were impressed by what we found and inspired just enough to dub Texas The ‘Loan‘ Star State.
And we went bigger than Texas (if that can be believed) by exploring how alternative lenders are spreading their wings beyond the states into other countries like the UK, Australia and Canada. But does it make sense to go abroad before you’ve cornered the market domestically? Industry captains share their thoughts.
There’s more of course, like how new tweaks to automated processes are actually making manual underwriting exercises easier. That itself has re-opened a debate that won’t seem to go away, humans vs computers in underwriting. In 2017, the humans aren’t out of the game yet and some think they never will be, but there are new tools available to increase speed and efficiency.
There’s legal decisions you’ll want to read and details about a new small business lending regulator you’ll want to know about. It’s all in the May/June 2017 issue that subscribers will be receiving in the mail soon and if you’re not subscribed, you should sign up FREE right now!
Commercial Finance Coalition Continues to Engage
June 1, 2017
A sign of a mature industry? The Commercial Finance Coalition is becoming a major liaison between the merchant cash advance industry and Washington. Just as peer-to-peer lenders and electronic payment companies have their own trade associations, the CFC is regularly engaging with legislators to offer their input where needed. And that requires a concerted effort, as evidenced by the group’s most recent trip that included meetings with 26 Members of Congress and senior staff. Those are typically separate individual meetings so you can imagine the amount of time and preparation involved.
“The Commercial Finance Coalition (CFC) conducted our third Washington, DC legislative fly-in last week,” Dan Gans, the CFC’s executive director, said to deBanked. “Fifteen members of the organization attended as well as a few prospective members. The CFC continues to establish itself as the premier trade group in the MCA and alternative small business finance space.”
The CFC also gets involved at the state level and played a role in preventing harmful legislation in New York a few months back. Most importantly, their mission is to simply tell their story.
“Studies show that traditional banks cannot meet the overwhelming demand for small business capital in the United States and we be believe that CFC members help thousands of entrepreneurs grow and sustain their businesses,” Gans explained. “We believe it is critical to educate policy makers in Washington and in state capitals like Albany and Sacramento about the vital role our industry plays in helping small businesses achieve success.”
The CFC is not the only trade association in the industry, but they have made political engagement a focal point of their mission since they were founded 18 months ago.
Gans elaborated on this. “Since its establishment in January of 2016, the CFC has been educating Members of Congress and state legislators about MCA and non-bank small business finance. We give our members a needed voice with elected officials and regulators. I would encourage anyone in the MCA space that is not a CFC member to inquire about membership. The industry is facing many threats and it is important that groups like the CFC stand in the gap to educate government leaders about the thousands of jobs advances from our members create across the country.”
To inquire about CFC membership, they advise to please contact Mary Donohue at mdonohue@polariswdc.com or call (202) 368-9758.
Full disclosure: I have accompanied the CFC on their DC fly-ins and the engagement is every bit as real and consequential as it sounds.
Why OnDeck is Underperforming its Peers
May 29, 2017
Small business lending company OnDeck was down nearly 23% on the year when the market closed on Friday. One of their closest rivals, Square, a company that makes business loans in addition to offering payment processing services, was up almost 64% this year so far. The disparity can be partially attributed to the market’s changing perception of OnDeck, originally viewed as a disruptive technology company, to what they’re seen as now, a niche commercial lender. Their tech multiple is gone, putting their market capitalization near book value.
Square is faring differently since they have virtually no borrower acquisition costs (whereas OnDeck has high acquisition costs) and a strong revenue stream outside of loans. Square’s strategy is to turn its existing payment processing customers into borrowers.
Meanwhile, Lending Club, an online lender that makes both consumer loans and business loans, is up 6.48% on the year. Despite being down 63% from their IPO price, Lending Club is different in that they generate fee income off of originated loans rather than book loans on balance sheet like OnDeck.
What ties them all together is that OnDeck, Square and Lending Club all rely on chartered banks to make the loans they advertise, a model that is coming under scrutiny by states such as New York. OnDeck and Square both depend on Celtic Bank, a Utah-chartered industrial bank.
Among its peers, OnDeck arguably has the riskiest makeup. They’re concentrated in only one type of lending, they have high acquisition costs, and they retain direct exposure to the loans they generate. Combine that with a lack of profits, lack of growth, and future regulatory challenges ahead, and it’s easy to understand why they’re so significantly underperforming the pack.
Lending Club Raises Minimum Deposit Amount for New Investors
May 18, 2017The micro retail investor can no longer experiment with peer-to-peer lending through just a handful of loans, according to a recent announcement made by Lending Club. Going forward, new users must deposit at least $1,000 to get started. Those investors can still allocate $25 per loan, however. The reason for the deposit increase? Forced diversification.
A Lending Club blog post explained that “data shows that Lending Club investors who are able to diversify their accounts have generally experienced less volatility than investors with more concentrated holdings. This is in part because investors are able to purchase multiple Notes, reducing their exposure to any single Note.” 98% of accounts with more than 100 notes have experienced positive returns, they claim.
On the LendAcademy blog, Peter Renton advocated for an even higher minimum, $2,500, so that investors could at least start off with 100 notes.
It’s an acknowledgment that the type of investing actually carries the risk of loss and is not actually for everyone. I would not be surprised if they eventually set a minimum deposit amount of $10,000 or simply phased out retail investors altogether in favor of accredited ones at a minimum instead. Time will tell.
Federal Court Agrees, Merchant Cash Advances Not Loans or Usurious
May 13, 2017
By now, numerous judges in the New York Supreme Court have concurred that purchases of future receivables are not loans nor usurious, yet challenges to these contracts continue. In the latest landmark ruling, defendants/counterclaim plaintiffs Epazz, Inc., Cynergy Corporation, and Shaun Passley a/k/a Shaun A. Passley, moved to have the original action involving their merchant cash advance dispute transferred from state court to federal court, perhaps hoping for a different opinion on whether such agreements are usurious.
The law was not on their side. In the Southern District of New York, a federal court, the Honorable Louis L. Stanton echoed on May 9th, 2017, what state judges have been saying all along, that a purchase is not a loan because the purchased receipts are not payable absolutely.
In this case, the “receipts purchased amounts” are not payable absolutely. Payment depends upon a crucial contingency: the continued collection of receipts by Epazz from its customers. TVT [TVT Capital] is only entitled to recover 15% of Epazz’s daily receipts, and if Epazz’s sales decline or cease the receipts purchased amounts might never be paid in full. See counterclaims, Exhs. A-C at 1. The agreements specifically provide that “Payments made to FUNDER in respect to the full amount of the Receipts shall be conditioned upon Merchant’s sale of products and services and the payment therefore by Merchant’s customers in the manner provided in Section 1.1.” Id. at 3 § 1.9.
Defendants’ argument that the actual daily payments ensure that TVT will be paid the full receipts purchased amounts within approximately 61 to 180 business days, id. ¶¶ 33-47, is contradicted by the reconciliation provisions which provide if the daily payments are greater than 15% of Epazz’s daily receipts, TVT must credit the difference to Epazz, thus limiting Epazz’s obligation to 15% of daily receipts. No allegation is made that TVT ever denied Epazz’s request to reconcile the daily payments. TVT’s right to collect the receipts purchased amounts from Epazz is in fact contingent on Epazz’s continued collection of receipts. See Kardovich v. Pfizer, Inc., 97 F. Supp. 3d 131, 140 (E.D.N.Y. 2015), quoting Amidax Trading Grp. v. S.W.I.F.T. SCRL, 671 F.3d 140, 147 (2d Cir. 2011) (“Where a conclusory allegation in the complaint is contradicted by a document attached to the complaint, the document controls and the allegation is not accepted as true”).
None of the defendants’ arguments, Counterclaims ¶¶ 51-109, change the fact that whether the receipts purchased amounts will be paid in full, or when they will be paid, cannot be known because payment is contingent on Epazz generating sufficient receipts from its customers; and Epazz, rather than TVT, controls whether daily payments will be reconciled.
The decision relies heavily on the reconciliation clause common to merchant cash advance agreements, whereby merchants can adjust their daily ACH amounts to correlate with their actual sales activity. This concept is explained at length in the Merchant Cash Advance Basics training course.
Furthermore, the court was incredulous over the defendants’ claim that they actually wanted loans but were instead fraudulently induced into purchase agreements.
Defendants do not claim that they were misled with regard to the amount of their payment obligation, only that they were misled into believing that their repayment obligation would be absolute when it actually is contingent. Their injury from that is unclear.
In short, the judge suggests that entering into a loan would’ve been worse because it was absolutely repayable, whereas the purchase agreement was not. So how could they have been damaged?
The entire decision surrounding all the claims can be downloaded here.
The case is Colonial Funding Network, Inc. as servicing provider for TVT Capital, LLC v. Epazz, Inc. Cynergy Corporation, and Shaun Passley a/k/a Shaun A. Passley in the United States District Court’s Southern District of New York. Case: 1:16-cv-05948-LLS.
Defendants Shaun Passley and Epazz also lost challenges in another merchant cash advance case in the New York Supreme Court.
‘Debt Collection Terrorist’ Sues Protection Legal Group and Corporate Bailout
May 13, 2017
A new crop of supposed debt relief companies are beginning to take fire from all sides. In this latest case, Mark D. Giubaldi & Associates, LLC DBA Protection Legal Group and Corporate Bailout LLC, have once again found themselves on the receiving end of a complaint. On Wednesday, May 10th, Craig Cunningham, a once self-proclaimed debt collection terrorist and famous TCPA litigant, filed a lawsuit in the Northern District of Texas to seek out more than $1 million in damages for alleged unsolicited robocalls to his cell phone.
Cunningham, who goes by the screen name Codename47 on the fatwallet.com forum, previously authored a post titled, “TCPA enforcement for fun and for profit up to 3k per call” and is well known in the TCPA plaintiff community. In the complaint against Protection Legal Group and Corporate Bailout, he claims that they called him more than 50 times to ask about supposed “merchant cash advance loans” he had outstanding. The deeply troubling problem with that, according to the complaint, is that Cunningham doesn’t have any such thing.
When the calls connected to an agent, the Plaintiff was told that he was called by the defendants and told that according to UCC filings, they had noticed the Plaintiff had several merchant cash advance loans out. In reality, there are no UCC filings, and the Plaintiff has no merchant cash advance loans outstanding. In every call, the Plaintiff noticed a delay between answering the phone and the call connecting with a live person, which is characteristic of an automated telephone dialing system.
These are just some of many harassing calls the Plaintiff has received and as Defendants are just content to knowingly call what could be wrong numbers, or uninterested individuals and are blanketing the nation with these unsolicited calls.
[…]
Additionally, in the above referenced telephone calls, Defendants and their agents falsely claimed to have information regarding alleged UCC filings of Plaintiff, which don’t exist and were never made.
These calls were knowingly and willfully placed and the Defendants had or should have ascertained they were calling the wrong person.
Additional lawsuits currently pending against Protection Legal Group allege that the company is practicing law without a license in New York and interfering with merchant cash advance contracts.
Craig Cunningham v. Mark D. Guidubaldi & Associates LLC DBA Protection Legal Group, and Corporate Bailout LLC was filed in the United States District Court for the Northern District of Texas under case # 3:17-cv-01238-L.
Are You a Loan Broker? You Need to Be Licensed in Vermont
May 12, 2017
Loan broker licensing may have gotten stalled in New York, but in Vermont, it’s the law. Governor Phil Scott made H. 182 official on May 4th, regulating everyone engaged in loan solicitation with prospective Vermont borrowers. Specifically this applies to anyone that:
- offers, solicits, brokers, directly or indirectly arranges, places, or finds a loan for a prospective Vermont borrower;
- engages in any activity intended to assist a prospective Vermont borrower in obtaining a loan, including lead generation;
- arranges, in whole or in part, a loan through a third party, regardless of whether approval, acceptance, or ratification by the third party is necessary to create a legal obligation for the third party, through any method, including mail, telephone, Internet, or any electronic means;
- or advertises or causes to be advertised in Vermont a loan or any of the services described in (i) –(iii). This license does not include the authority to engage in the business of making loans.
The loan solicitation law is separate from a Commercial Lender License, which already requires licensing to solicit business loans under $1 million, as it covers:
- Any company or person who engages solely in the business of making commercial loans of money, credit, goods, or things in action and charges, contracts for or receives on any such loan interest, a finance charge, discount, or consideration therefore. Commercial loans do not include a loan or extension of credit secured in whole or in part by an owner occupied one-to-four unit dwelling. [Note: The company’s main office must be licensed as a commercial lender prior to, or simultaneously with, the filing of a branch commercial lender license.]
- Each location, whether located in Vermont or not, desiring to engage in the business of making commercial loans in Vermont must obtain a separate license by filing a Form MU3 through the NMLS.
- A commercial loan solicited or made by mail, telephone or electronic means to a Vermont business is subject to licensing notwithstanding where the loan is legally made. No person may engage in the business of soliciting or making commercial loans by mail, telephone or electronic means in Vermont unless duly licensed.
Brokers and lead generators should take a good hard look at their marketing since it may not matter if the customer ultimately is referred to a non-lender such as an equipment lessor or a merchant cash advance company if loans are even an option among many.
According to the law, each loan solicitation licensee shall include clearly and conspicuously in all advertisements of loans and solicitations of leads, the following statement:
“THIS IS A LOAN SOLICITATION ONLY. [INSERT LICENSEE NAME] IS NOT THE LENDER. INFORMATION RECEIVED WILL BE SHARED WITH ONE OR MORE THIRD PARTIES IN CONNECTION WITH YOUR LOAN INQUIRY. THE LENDER MAY NOT BE SUBJECT TO ALL VERMONT LENDING LAWS. THE LENDER MAY BE SUBJECT TO FEDERAL LENDING LAWS.”
A loan solicitation license cost $1,100.00 (includes a $500.00 Licensing Fee, a $500.00 Investigation Fee; and the $100 NMLS processing fee), according to the government website.
If you’re sending mailers to Vermont businesses, calling them or even marketing to them on the Internet, you should speak with an attorney about both the loan solicitation license and commercial lenders license first.
What You Need to Know About The CFPB and Small Business Lending
May 10, 2017
On Wednesday, the Consumer Financial Protection Bureau (CFPB) held a hearing on small business lending. Here’s why it mattered and what you need to know:
Why: The 2010 Wall Street Reform and Consumer Protection Act, aka Dodd-Frank, empowered the CFPB to collect data on small business lending. The CFPB is just now getting around to rolling this out. The purpose is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses. In short, to determine if women and minority-owned businesses are operating on a level-playing field when it comes to accessing credit.
Who: “I’m an MCA funder, factor, equipment lessor or other, and this only applies to lenders right”?
Maybe, maybe not. Although Section 1071 makes several references to loans and credit, it doesn’t refer to the companies subject to data collection as small business lenders. Instead it says financial institutions which it defines as “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.” That sounds incredibly broad.
What: What are they trying to collect?
- the number of the application and the date on which the application was received;
- the type and purpose of the loan or other credit being applied for;
- the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;
- the type of action taken with respect to such application, and the date of such action;
- the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant;
- the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;
- the race, sex, and ethnicity of the principal owners of the business; and
- any additional data that the Bureau determines would aid in fulfilling the purposes of this section.
How: Great question. The law says that where feasible the underwriter or analyst isn’t allowed to know if the business is woman-owned or minority-owned and that this information must be captured separately and kept secret from the underwriter. The section is actually called the “NO ACCESS BY UNDERWRITERS” section. Oddly, as this applies to all small business lending, not just faceless transactions, one wonders how an underwriter is supposed to avoid discovering the gender or ethnicity of the applicant. It is possible that in 2009 when this section was drafted, the architects could not imagine a business lending universe that looked beyond FICO scores and balance sheets.
When: It’s still early days. Right now the CFPB just wants to know everything about what these “financial institutions” do and how they do it before they start requiring the data be collected. To that end, they’ve published a Request For Information, seeking voluntary responses so that they can start formulating the data collection framework in a way they believe best.
Where: Where can you read and watch more about this? We’ve got some information on this page here, including a video of the hearing.
What should I do? Should I do anything?
Join an industry trade association. When it came to the proposed regulation in New York, they did most of the heavy lifting. There are many to choose from depending on your business model. In New York though, the regulations were purely proposed. Under Dodd-Frank, the CFPB already has the power to collect data. They’re just finally getting around to using it.
