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Catherine Brennan: How's it going? I'm Cathy Brennan.
I'm a partner at Hudson cook. And this is Bob Zadek.
How you doing? Are we sitting? This is exciting stuff.

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And it's also very terrifying. So I don't know how you
can be sitting by I will be seated. Now, the prior
session said something along the lines of you don't

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have anything to worry about. Because stuff is only
happening at the state level. Did you catch that? Are
you guys aware? Come on, are you awake? Are you alive?

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Are you here? Are you interested? Okay. Thank you. So
Bob, what about at the state level?

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Bob Zadek: Well, the state level is fine. I'm a
libertarian, I like things close a level possible. I'd
rather it be resolved on my block. But if we settle for

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the states, the problem is, everybody or many people
are sanguine, because we only have California to worry
about, we'll get into that. We have New York and we

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have New Jersey. We can manage three states.

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Catherine Brennan: So we only have the largest markets
in the country to worry about. This is a lot to worry
about. So...

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Bob Zadek: And we have the 47 next largest markets
right behind the corner.

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Catherine Brennan: Behind the corner, right behind the
corner. So we're going to talk today about legislative
developments in New York and New Jersey. We're also

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going to talk about California, which is terrifying.
And then federal law developments we'll touch on
briefly, there's also been a recent case that we want

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to bring to your attention, because the theory that is
discussed in that case should be terrifying to anybody
who's operating in any of the 50 states. So are you all

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scared?

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Bob Zadek: If you're not scared, leave this room.
Having learned that you have to rely as your greatest
ally in Congress, Maxine Waters.

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Catherine Brennan: Maxine Waters.

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Bob Zadek: You will be begging to her for help when we
have 50 state regulatory schemes, and your disclosures
are that big, because every single state is different.

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And you'll be begging for, please let us have federal
regulation. That's what the future might be. if things
continue along that trend.

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Catherine Brennan: So things are definitely not going
to continue in no regulation. It is become clear that
there will be state regulation. It might not be today,

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it might not be tomorrow, but in the future, there will
be legislation that may require you to get a license,
may prohibit you from brokering transactions that

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exceed 25% interest per year, which makes this business
model not feasible. Or disclosure requirements where
you'll have to give an addition to the contract like

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pages and pages of disclosures. So if you're not a
member of a trade association, you may consider joining
one. If you think you need a new trade association,

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specifically for brokers, you may consider forming one.
These are things you should be proactive about,
especially in New York. New York has four bills right

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now that would affect merchant cash advance companies
and brokers. There's legislation in New York to
prohibit confessions of judgment. How many people here,

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read the Bloomberg series on confessions of judgment?
Raise your hands high. You all should have read this.
So as a result of media reporting and bad stories

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getting out in the press, you have politicians who are
very lazy, and will promulgate regulation or laws in
order to say like we've responded to this. So the

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response to the Bloomberg series has been this
legislation in New York to prohibit confessions of
judgment and commercial transactions. We're not going

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to spend a lot of time talking about confessions of
judgment today, because the next panel is all about
confessions of judgment. So if that's the only thing

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you care about, you can go get coffee right now, but
hopefully, you'll still be here. There's also
legislation that will require licensing for merchant

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cash advance companies. The good news here is New York
does not require brokers of these types of transactions
to be licensed. So I'm trying to give some good news

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here. It also will consider merchant cash advances to
be loans for all purposes, and then creates new
remedies for merchants to sue you. What do you think,

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Bob?

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Bob Zadek: Well, what's really strange is the merchant
cash advance industry. And I've been I remember the
first time I touched a merchant cash advance contract,

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which was really a merchant cash advance contract. And
I was doing lending in New York, and I saw this
product, which was purchasing future credit card sales.

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And I'm a lender. I'm a factoring lawyer, I do secured
loans. And I said, how can you purchase future credit
card sales? and to me the closest analogy I can make

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is, it's like buying the weather. It's like that
tangible an asset. And but the product was created. And
the product was created as a purchase, I think, to not

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be a loan, so that it wouldn't be subject to a usury
test. Because in New York, which is where a lot of this
started, we have this usury ceiling for most small and

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medium sized loans of 25% per annum. And of course, how
can you make a buck on 25% per annum, the only way to
make money at 25% per annum, if you define per annum as

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a 90 day year, then as you can make a living. But if
you don't do that, it's hard to make a living. So the
product was built on the assumption. If we buy

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something borrowing from factoring, instead of lending,
we can avoid the usury. And that has primarily worked.
But it's predicated upon a court created, lawyer

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created fiction, that is not really necessary, because
in most MCA products, you can't compute fact the
interest rate anyway. So it doesn't matter. But here we

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are, at the case law in New York on usury has been
mostly sanguine, mostly comfortable for us. So the
issue of interest rate regulation for the minute

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insofar as usually concerned is not a problem. But as
Cathy has mentioned, once we start talking about
regulation, initially, we're only talking about

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disclosure. Disclosure is painless. Disclosure is no
matter how complex that disclosures, disclosures, per
se, and I think you'll agree is nothing to fear.

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Catherine Brennan: Disclosures are just more paper.
That's exactly right. So it's more information that you
have to provide. But what Bob said about things had

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been mostly favorable, things are about to potentially
become extremely unfavorable, particularly in New York
with this new bill there on the screen right now. This

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is assigned to the Standing Committee on banks. Those
of you who are registered voters in New York, I
strongly suggest you go to the website of the New York

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General Assembly, and you figure out who your
legislator is, if you don't already know and you make
friends with them. The the guy who is the chair of this

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committee is out on Long Island. I get I'm guessing a
lot of people here might have him as their representer.
You should make yourself known to him to let him know

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what this would do to communities in New York who rely
on this industry. This is a significant bill because it
would effectively end merchant cash advance in the

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state. Are you all scared? Yeah. But the good news is
you wouldn't have to get licensed. That was a joke. You
can laugh at that or not. Don't do that. Alright, so

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next confessions of judgment. Like I said, we're not
going to talk about that because the next excellent
legal panel is going to talk about that for a half an

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hour. This is another bill that it will just allow
merchants who are engaged with you to file civil usury
as a defense. They cannot currently do that. This is

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something that is more relevant at the moment to people
who broker not only merchant cash advances, but small
business loans. All of these bills have been assigned

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to the Standing Committee on banks. So again, I really
encourage you to talk to your legislators. The good
news is that nothing has moved yet. This is a bill that

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is maybe has more legs than the other bills. This is a
broader bill. It's not just applicable to merchant cash
advances. It is you see that acronym at the top the

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UDAP. Like they are adding more and more letters to
traditional UDAP, which was unfair, deceptive acts and
practices. Now you have unfair, you have unlawful, you

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have abusive. So this legislation would add abusive.
Luckily, that's only a consumer concept. So for today,
we can put that to the side, but it also adds this kind

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of concept of something being unlawful. So something is
unlawful in that it violates any law. There is a
private right of action that could lead to statutory

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damages and also allows for class action. So if there
is legislation that makes unlawful what you're
currently doing, this is just another way for merchants

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to sue you. What do you think about that, Bob?

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Bob Zadek: Well, Cathy said two words that are really
scary. And I find myself as I said earlier, I could
care less about pure disclosure. The pure disclosure

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means, you ask Cathy if she's or her firm is your
lawyer, okay. Draft something that complies with the
statute. And Cathy does it and gives it to you, and you

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pay a one shot bill to your lawyer, and you pass that
tiny bill along to your clients, and you're done.
Disclosure is free and painless, because it's free to

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you. You pass along the cost. And it's a one shot deal.
Cathy does it right? And you're done. But what Cathy
said, which ought to have cleared the room, is what you

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look for in these statutes is where the statute gives
as a remedy to an aggrieved borrower, a private
lawsuit, or a private class action, because that's

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where the class action bar rolls up their sleeves.
Calls their Maserati dealer said, okay, the sky's the
limit, I'll take all the options, because now I can sue

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another big group. MCA's on a class action basis, and
recover mega damages. And that's where the world starts
to fall apart. So disclosure, no big deal. It's

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freebie, but class actions, private causes of action,
those kinds of issues are deal ending issues in this
world. And you must learn to fear them. And you must

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through your trade associations, resist them, bear in
mind that class action lawsuits primarily benefit. They
don't benefit the plaintiffs. They only benefit counsel

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in a big way. They don't benefit anybody else in the
world is simply a way to give a favor to the very
powerful class action plaintiff bar. And those are the

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words that when Cathy says them, you have to be in
fear.

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Catherine Brennan: Be in fear. That's, that's what I
live to do is to scare people. I'm sorry, I actually
don't live to do that. But how many people here know

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who your elected officials are in New York, if you're a
registered voter in New York, how many people here know
who your elected officials are? Okay, so I'm gonna

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assume you're all probably New Jersey residents, right?
Because that was one person who raised their hand. You
need to know who your elected officials are, you need

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to engage with them. If you do not engage with them.
The stories they're going to hear are the stories of
aggrieved merchants who felt taken advantage of. And

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that is a very compelling story. For someone who's only
hearing one side of the story, you need to tell your
stories, you need to tell your stories about how you

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enabled small businesses to grow and hire more people
in your communities. If you are not telling those
stories, they will not be heard. Do people understand

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what I am saying right now? Yes, you need to tell those
stories. So the last bill that we talked about the UDAP
bill is this. I just want to say this for the one

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person who appears to know who their representative is.
That was a joke. God, this is tough. It's tough.

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Bob Zadek: It must be a family relative.

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Catherine Brennan: Yeah, I don't know. So that bill was
assigned to consumer affairs and protection committee.
So all the other bills were assigned to the banks

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committee. And the other bill, the last bill was
assigned to Consumer Affairs Committee. So now we're
going to talk about New Jersey. So New York was doing

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all this stuff. And then New Jersey was like, we want
to get in on this too, because we have an inferiority
complex, we want to be like New York. That was a diss

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on New Jersey, because I'm from New York. So I will say
that. There are four bills pending right now in New
Jersey, two of them deal with confessions of judgment,

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which we're not going to talk about. And then the other
two, one was introduced first and the other was
introduced subsequent and this the subsequent bill is

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much worse. So things are also bad in New Jersey. So
the first bill, this has been around for a while and it
hasn't really moved, like nothing has happened. There's

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been a lot of talk, there's been a lot of testimony.
Our partner Kate Fisher, who's on the next panel
testified about, you know how this would hurt the

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industry. But there's so much in this bill, and I
encourage you to take a look at it if you do any
business in New Jersey, which means you all should take

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a look at it. It talks about closed end loans, it talks
about open end loans and talking about factoring, cash
advance, acid vs. based transaction, but what do all

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these things mean? Like what are they talking about
when they're saying these things?

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Bob Zadek: Well, the trouble is, when you talk about
disclosure, the legislature is attempting, not doing a
good job, but attempting to not require disclosure as a

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rote, meaningless act, but to try to give the consumer

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Catherine Brennan: Merchant, not consumer.

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Bob Zadek: Comsumer of commercial services. The
merchant, sorry, that give the merchant information so
the merchant can make an intelligent buying decision.

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Now putting aside that's a fantasy world people, how
fast can I get my money? How fast? What wire
instructions? but to give to go through the motion of

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giving the merchant away to differentiate one product
from another, you want to make disclosures. Now, the
trouble is that products are often packaged

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differently. There's a marketing feature going on.
There are revolving loans, term loans, loans where
you're purchasing accounts, loans where you're

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purchasing future receivables. There are all loans
secured by equipment. All of them have their own
jargon, their own vocabulary, and most importantly,

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it's very complicated to convert loan terms into a
constant APR, annual percentage rate. So the
legislature is attempting to convert everything into a

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uniform set of rules. So a consumer commercial buyer of
loans can make a decision. And in doing so, the
legislature, not especially knowledgeable in the

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language of lending is trying to require the lender to
first of all decide what of these five buckets, your
product falls, and depending upon which bucket it's in,

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these are the disclosures. Now, once again, the
challenge is for the lawyers who advise the industry,
because we have to sort it out, our clients will say,

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just give us something we're not going to go to jail.
That's the instructions we get. And we have to convert
that. Now there will be trial and error, because the

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definitions are not going to work that great.

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Catherine Brennan: They're not and they're not going to
work great also, because Bob is right. They don't
understand this industry. And the language in the bill

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that talks about cash advances and factoring or acid
based transaction. Depending on what your deal looks
like, you might fall under one of those. If you're also

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brokering loans, be they closed or open and you could
you will be caught up in this. So here, this is very
small print here. And here. There are different rates

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disclosures, depending on the product. Now, for the
merchant cash advance products. This is a fiction
because there's not a rate that's disclosed. So you can

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see this very tortured language. And Bob is right. Like
if this becomes law, you asked Bob or me to draft these
disclosures, we'll give it to you. What merchants are

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going to do is you know, and not read it, they're gonna
just take it and not read it. So this is a useless
exercise. But this is a lot less painful than the

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alternative that's out there. So you know, if you if
you're sleeping at night, you can, you know, get this
bill and you can read it. Again, if you are in New

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Jersey, it's very important for you to determine who is
your representative, so you can go talk to them and
explain why these rates disclosures do not work in a

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merchant cash advance transaction.

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Bob Zadek: My only view is, to me, my view of the
legislative process is I am delighted to have the
legislature spend all their time worrying about

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disclosure, because every minute they're worrying about
disclosure, which I don't care about, we'll just do it,
then not worrying about rate regulation. And rate

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regulation is an industry killer.

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Catherine Brennan: Right.

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Bob Zadek: And a word about rate regulation. Usury is
one of the oldest concepts in the law.

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Catherine Brennan: It's in the Bible

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Bob Zadek: It's in the Bible. And every major, most
major religions have provisions on usury is if there
was like consumer lending going on in medieval times.

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So so but why does that happen? It's a fascinating
history. And the reason we have usury laws in New York
and in Florida and a few other states which are

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meaningful is because of the biblical and the religious
antecedents. Do you know why? Why usury existed as a
sin in most religions, because in the Middle Ages, the

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biggest borrowers were the churches. And the best way
to keep the rate down is to tell the lenders you're
going to rot in hell if you charge them too much. Now,

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the lenders don't want to rot in hell. So they lend
money to the church at a really low rate. That's better
than any legislation.

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Catherine Brennan: Did you. Did you think we were going
to get a theology lesson today. No, this is fascinating
stuff.

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Bob Zadek: So we have from this religious history, we
have the residual in 21st century America, regulation
of the price of one commodity, money. We don't regulate

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the price of milk of clothing or food, only money for
reasons that have only a biblical antecedent. That's
it's kinda weird.

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Catherine Brennan: It's kind of weird. So in addition
to the rate disclosure, we'll also have this cost
disclosure because as you know, in commercial lending,

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you will have maybe an origination fee, you might have
other fees associated. So New Jersey's proposing these
many ways to disclose that. So, again, as Bob pointed

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out, the disclosure legislation, inconvenient kind of
annoying, but it is not something that's going to kill
your business. We're going to skip ahead a little bit

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because we want to get to this bill, because this bill
has a licensing provision. But it also has kind of a
savior aspect to it as well. And both of these bills

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for the people who are New Jersey voters have been
assigned to financial institutions and insurance. So
you want to look that up, figure out who your people

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are, and you want to go talk to them. So under this
bill, which was introduced after the other one, it will
define merchant cash advances alone. And this one,

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unlike the New York legislation will require brokers to
get a license. So currently, if you're only brokering
merchant cash advances in many places, you do not need

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a license. This would add a licensing requirement for
you. Just want to add licensing requirements, they come
with fingerprint requirements that come with criminal

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background checks. So it can be inconvenient for many
people, but it is not necessarily a deal killer. And
then in this legislation, specifically, if you become

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licensed as a merchant cash advance broker or merchant
cash advance company, you are exempt from New Jersey
usury limits. Currently in New Jersey, there are usury

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limits for loans to businesses. But this if you become
a merchant cash advance broker, you can still continue
doing what you're doing. So that's positive. Right,

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Bob?

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Bob Zadek: Well, a word about licensing, licensing,
depending upon the audience's worldview, you either
would mildly support licensing, or vehemently oppose

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it. Now, why might you mildly support it? First of all,
if you get to be a licensee, it means somebody who
wants to be your competitor has to get a license. And

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once you have a licensing regime, it limits the
competition. All professional licensing is builds like
a guild, it limits competition. So if you have that

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worldview, then you would mildly support licensing. On
the other hand, licensing means if you do something
wrong, you now are denied the privilege of earning an

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honest living, and to many other people, the mere
concept of needing a license to do something that is
otherwise a lawful activity, is aberrant to you. So depending

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upon your worldview, and I'm going to speak in
a moment about the California licensing regime to help
you focus your thinking, you know, Samuel Johnson

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who wrote the first American dictionary, observe
that nothing focuses the mind like a good hanging
And he was right in 1723, when he observed it, and

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nothing will focus the mind like a good licensing
regime. And I will explain to you the California
licensing regime, to help you focus your mind on l

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censing.

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Catherine Brennan: But before we get to California,
there's two other things in this New Jersey bill that
are very important to know. One is that the disclosures

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that we've been talking about, you would have to
provide them between three and 10 days prior to
funding. So this eliminates 24 hour funding, instant

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funding. So you will all be at the same competitive
disadvantage in New Jersey if this is adopted. So
that's something that I think is important to

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highlight. The other thing that is very interesting,
and it's adopting a test from consumer statutes is the
merchant cash advance company has to provide a quote,

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economic benefit to the merchant. So there's going to
be some sort of analysis that will need to be done to
show why the merchant cash advance product is useful to

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the merchant and provides an economic benefits. So
those two things are also things when you talk to your
legislator, because I know you're all going to do this

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now. Because you're all very motivated, you will want
to raise those things. So we're going to move from the
east coast and head on over to the left coast, because

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California has so much stuff happening right now that a
lot of people are not fully aware of because it's
particularly the Privacy Act. There's a lot in it. So

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Bob, can you tell us a little bit about the privacy
act?

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Bob Zadek: The consumer Privacy Act, I think in the
interest of time, I'd like to put that aside for a
minute only because initially California has the brave

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new world. It has moved four-square. First day to do
so into a very, very wide ranging statute to protect
privacy, this is not special to lending. It's

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all privacy, all online and consumer to business
transactions. The reason I want to skip over it it.
Initially, the act is focusing on very large

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maintainers of personal information. So therefore, for
most of the audience, this act at first was in big
effect for a couple years, give people time to get used

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to it or move out of the state. Both of which are
happening,

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Catherine Brennan: Yes.

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Bob Zadek: But this will only affect very large
businesses, not the business that services the small
and medium size borrowing community.

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Catherine Brennan: All right. So then we want to talk
about the disclosure legislation, which we talked about
last year, if you were at the Broker Fair. So Bob,

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what's going on with that legislation?

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Bob Zadek: The good, there's good news and bad news,
California, first in the nation, enacted a disclosure
regulation. The first time an attempt has been made

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successfully, to require financial disclosures in
commercial transactions. We all have most of the people
who were born after Reg Z, the first federal consumer

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financial regulation was required. It was a big deal at
the time. The world of consumer lending has learned to
live with it. It's not been, excuse me, a problem.

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California, borrowing from the experience and making
the not so far fetched analysis that, well, if we're
focusing on bargaining power, and if we have to protect

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consumers, because they're much smaller than banks,
then the same legislative approach intellectually
applies to a small business, which has also very little

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bargaining power, disproportionate levels of
sophistication. So the concept, as a concept makes
sense. It also has a history it goes back to 1978. When

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then, Governor then set it to Oliver Wolcott, former
Governor of Connecticut, tried to impose commercial
disclosure on businesses. It wasn't the right time, it

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was beat down California has now done it. Well,
California passed a in some ways, silly, in some ways
full of loopholes, but it's there nevertheless. A

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commercial financial disclosure statute, it's on the
books. It was passed effective January of this year,
however, it's really a statute, It's more like a

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constitution than a statute. It has broad principles
and then defers to the Department of Business
Oversight. You deal with the regulations, we another

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things to do. DBO doesn't move that fast. The statute
is not going to be effective. Until DBO finishes the
regs expected due date, mid year, next year of 2020. So

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it does require disclosures. The disclosures are we
can't speak about them because they're not drafted yet
the regs aren't drafted yet. It will be the law. The

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danger, if you call it that is other states will look
enviously at how effectively California has annoyed
lenders. And we'll say we want some of the action as is

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happening in New Jersey. So there's going to be a me to
effect ultimately, in my opinion, there will be a
crying out for federal legislation to replace all the

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state legislations. So California, it's on the books,
it's not a fact of life, next year will authorize you
to start worrying about it. But not quite yet.

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Catherine Brennan: You don't have to worry about that
right now. And you don't have to worry about
confessions and judgment, because we're not talking

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about that in this session. But we just want to leave
you we have a minute left. But we want to leave you
with this case, which you do need to worry about. This

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case came up in the context of a uniform Voidable
Transactions Act, which has been adopted in maybe like
47-48 states. And what that Act does it allows creditor

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or it allows certain transactions to be set aside if
the debtor did not have a benefit come to them from the
transaction. So that's what happened in this Minnesota

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Court of Appeals case. So that's all like legal, nerdy
and interesting. But what happened in this case is the
court said a merchant cash advance was not a loan was a

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loan, because the merchant made identical payments. And
because there is no reconciliation process that
actually happens. So Bob, can you talk about this in 20

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seconds or less

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Bob Zadek: I can. The court the court said it's a loan
because it looks a lot like a loan, which is the test
courts always use. The key factor is even if it is a

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lone, the law is clear. If you cannot calculate the APR
at the moment the loan is signed, usury cannot be an
issue because you don't know the interest rate until

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the end of the process. And where you have
reconciliations, that is, the contract says we will
adjust the daily ACH debit based upon last month

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performance which the lender cannot control. The lender
is clueless what the APR will be. The lender is taking
a rate risk. Therefore, even if it's a loan, who cares

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if you can't calculate APR.

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Catherine Brennan: And the upshot of this case is that
the merchant cash advance company lost everything
because it was a loan. So you need to pay attention to

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case law in addition to state law regulation, and I
think that we are done. So hopefully you're not too
terrified to take the actions we talked about today and

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thank you for your time.

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Bob Zadek: Thanks a lot.