00:00.000 --> 00:03.317
Speaker 1: With you Mr. Chair,
Madam Vice Chair, colleagues.

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Thanks for being here today for
the record. Seth Howard, I'm

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pleased to present HB 664. Just
very quickly, I'm joined today

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by representatives of the
Maryland Retailers Association

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and Bankers Association, the
Maryland cash campaign, as well

00:19.771 --> 00:24.105
as Luis Peck, Director of Public
Policy for the Lending Club. 6x

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four establishes a regulatory
framework for businesses that

00:28.235 --> 00:32.230
engage in sales based financing
transactions which the bill

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defines as financing
transactions are paid over time

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is a percentage of sales or
revenue where the payment may

00:39.814 --> 00:44.012
increase or decrease decrease
depending on the volume of sales

00:44.079 --> 00:47.939
made, or revenue received by the
recipient. The bill also

00:48.007 --> 00:52.408
prohibits a person from engaging
in the business of making you're

00:52.476 --> 00:56.809
soliciting sales based financing
transactions, unless the person

00:56.877 --> 01:01.075
is licensed. In recent years,
and especially in the last year,

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small businesses have
increasingly been turning to a

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controversial type of financing
called online lending. Online

01:08.929 --> 01:13.128
lending comes in several forms,
with what is commonly referred

01:13.195 --> 01:16.581
to as merchant cash advances
being one of the most

01:16.649 --> 01:20.982
problematic and prominent online
lenders provide a business with

01:21.050 --> 01:25.180
an immediate influx of cash but
the consequences can often be

01:25.248 --> 01:29.040
devastating for the business
owners and their creditors.

01:29.107 --> 01:32.899
Online lending is the merchant
to merchant equivalent of

01:32.967 --> 01:36.894
consumer payday lending and
industry that is notorious for

01:36.962 --> 01:41.025
its predatory practices and
abusive rates of interest, which

01:41.092 --> 01:45.155
is why this body banned the
practice a few years ago, online

01:45.223 --> 01:49.082
lenders have managed to get
around lending regulations by

01:49.150 --> 01:52.942
calling what they do merchant
cash advances not loans, a

01:53.009 --> 01:56.734
distinction with very little
difference. Online lenders

01:56.801 --> 02:00.661
advance a lump sum of money to a
business in exchange for

02:00.729 --> 02:04.317
repayment repayment paid from
the borrower's accounts

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receivables. Many of these
online lenders call this

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practice a sale. For example, a
merchant borrows $1,000 from

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online online lender, the lender
sells the $1,000 to the merchant

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in exchange for a percent of the
merchants credit card sales.

02:20.703 --> 02:24.698
Each day the lender takes 20% of
the merchants credit cards

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transactions until the 1000
hours is paid back along with

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$400 for the sellers fee. It's
not uncommon for the interest

02:32.824 --> 02:36.886
rates on these transactions to
be anywhere from 100 to 400%.

02:36.954 --> 02:41.084
Because online lenders structure
their financing as a sale as

02:41.152 --> 02:45.215
opposed to a loan, they can
circumvent the crushing interest

02:45.282 --> 02:49.548
rates. Limitations placed on via
the state's, online lending is

02:49.616 --> 02:53.950
so costly and draconian and the
repayment obligation and opposes

02:54.017 --> 02:57.741
it can often lead to default and
insolvency. This is an

02:57.809 --> 03:02.007
interstate whose business model
was clearly focused on preying

03:02.075 --> 03:06.341
on vulnerable small mom and pop
businesses that are desperately

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needed quick financing. Problems
with online lending have caught

03:10.810 --> 03:14.737
the attention of the Federal
Reserve, which recently did a

03:14.805 --> 03:19.138
survey of small businesses about
the subject. The survey found a

03:19.206 --> 03:22.930
laundry list of concerns,
ranging from aggressive sales

03:22.998 --> 03:26.789
tactics and intentionally
confusing sales techniques and

03:26.857 --> 03:31.055
websites with well hidden fine
print that exposes the borrower

03:31.123 --> 03:35.253
to abusive interest rates and
opportunities for the lender to

03:35.321 --> 03:39.587
seize assets. If the business's
sales don't cover the repayment

03:39.655 --> 03:43.717
plan. I mean, to say this, I
want you to look at some of the

03:43.785 --> 03:47.509
inconsistencies for the verses
that in the opposition's

03:47.577 --> 03:51.030
testimony versus the
consistencies in the proponent

03:51.098 --> 03:54.754
testimony. You know, if you look
at innovative lending

03:54.822 --> 03:58.478
performance, testimony and
opposition, they talk about

03:58.546 --> 04:02.744
updated SmartBox metrics, which
include APR APR equivalent for

04:02.812 --> 04:06.739
products like matte, Merchant
cash advances. Then when you

04:06.807 --> 04:10.937
look at Rapid Finance, they talk
about there's no guidance or

04:11.005 --> 04:14.729
language applying to APR to
commercial financing, or to

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sales based transactions. When
you look at Innovative Lending

04:18.995 --> 04:23.261
talks about following the 2000,
this is paragraph four, five of

04:23.328 --> 04:27.323
their testimony it says unless
businesses were seeking more

04:27.391 --> 04:31.250
than 1 million in financing
banks, were not providing the

04:31.318 --> 04:35.178
financing small businesses
needed speaking directly about

04:35.245 --> 04:39.376
the 2008 crash. Well, that's
probably because local and state

04:39.444 --> 04:43.168
banks, which are heavily
federally federally regulated,

04:43.235 --> 04:47.298
it would you know they would be
providing these loans and it

04:47.366 --> 04:51.428
would be too aggressive for
them. And let me get to that. It

04:51.496 --> 04:55.220
says right here in rapid
finances' third paragraph line

04:55.288 --> 04:59.486
two of their testimony there is
no personal guarantee required

04:59.554 --> 05:03.278
to the business owner because
there are no there are no

05:03.346 --> 05:07.002
persons No guarantees the risk
is placed on the funder

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translation highly aggressive,
high interest rates. When you

05:11.200 --> 05:15.263
look at ETA's testimony, they
talk about May we all know the

05:15.330 --> 05:19.122
difference between May and
shall. And there's some other

05:19.190 --> 05:23.591
things in these testimonies that
as I'm sure as you pour through,

05:23.659 --> 05:27.451
you'll have plenty of questions.
For example, it says an

05:27.518 --> 05:31.581
effective regulatory enforcement
occurs and regulations only

05:31.649 --> 05:36.050
apply to a subset of an industry
and not the industry as a whole.

05:36.118 --> 05:39.977
We're concerned that the
proposed regulation suffers from

05:40.045 --> 05:44.379
this problem. And we would like
time to address the issue. Well,

05:44.446 --> 05:48.035
this is year two, we have had
time. And this would be

05:48.103 --> 05:51.556
statewide, and under careful
consideration from the

05:51.624 --> 05:55.415
subcommittee and the committee.
So it would apply to the

05:55.483 --> 05:59.749
industry as a whole in Maryland.
And with that, I would ask you

05:59.817 --> 06:02.864
to look closely at the
inconsistencies in the

06:02.931 --> 06:07.129
unfavorable testimonies and the
consistencies in the favorable

06:07.197 --> 06:11.192
testimonies. And with that, I
asked for a favorable report.

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Thank you, colleagues.

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Madam Chair: Questions were
delegate Howard, delegate

06:16.380 --> 06:16.980
prospering.

06:17.910 --> 06:19.950
Speaker 2: Thank you, Madam
Chair, a delegate Howard. I

06:19.950 --> 06:21.990
believe this is the bill last
year you had.

06:21.990 --> 06:25.260
Speaker 1: It is it is 1478 was
the bill number last year.

06:25.380 --> 06:27.810
Speaker 2: Right. And so last
year it was a ban, this is

06:27.810 --> 06:34.110
regulating it correct? So is it
now all commercial lending going

06:34.110 --> 06:38.040
to? Is they all going to honor
the same standard? Is it going

06:38.040 --> 06:42.360
to come one standard across the
commercial lending or just rapid

06:42.360 --> 06:43.230
finance?

06:43.380 --> 06:46.680
Speaker 1: No, I'm not trying to
target Rapid Finance. I mean,

06:46.680 --> 06:49.590
I'm not trying to single anybody
out. I'm trying to create a

06:49.590 --> 06:52.650
regulatory structure for any of
the loan lending mechanisms that

06:52.650 --> 06:55.560
fall under this language.

06:56.730 --> 07:00.540
Speaker 2: Okay, okay. Yeah. I
mean, I mean, if we single them

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out, because they're.

07:01.380 --> 07:03.240
Speaker 1: Yeah, no, I'm not
trying to do that. I'm not, you

07:03.240 --> 07:05.790
know, they're just their
testimonies here in front of me.

07:05.790 --> 07:10.320
I'm not trying to, you know,
beat them up. Personally, may be

07:10.320 --> 07:13.380
a great company. I don't know,
you know what I mean, but they

07:13.380 --> 07:17.220
might not be? I don't know.
Okay. But I'm not trying to

07:17.220 --> 07:18.000
single them out.

07:18.600 --> 07:22.380
Speaker 2: I guess my question
is, right, as we put the this in

07:22.380 --> 07:26.340
place, I mean, it is a form of
commercial lending. Would that

07:26.730 --> 07:29.910
apply across the board to all
other commercial lenders?

07:30.120 --> 07:32.670
Speaker 1: No, I think this was
specifically speak to merchant

07:32.670 --> 07:33.510
cash advance.

07:34.500 --> 07:36.030
Speaker 2: Okay. Alright. Thank
you.

07:37.500 --> 07:42.630
Madam Chair: Delegate Qi.
Thanks, madam chair.

07:42.870 --> 07:44.910
Delegate Qi: So I do want to
kind of understand from a

07:44.910 --> 07:48.180
sponsor, so we were looking at
this to ban it this year, and

07:48.180 --> 07:49.950
now you want to regulate it?

07:50.040 --> 07:53.880
Speaker 1: Yeah, I agree that an
outright ban maybe is not the

07:53.880 --> 07:59.430
way to go. But I think a
regulatory scheme, and a

07:59.430 --> 08:04.890
licensing scheme is, you know,
at a minimum, what we should be

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looking at.

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Delegate Qi: So so some of the
problems we had before with some

08:09.990 --> 08:13.320
of the issues with the banning
and why we were why we were

08:13.320 --> 08:17.640
thinking we were looking at it
was because people couldn't tell

08:17.640 --> 08:20.580
what they the transparency, they
really couldn't tell how much

08:20.580 --> 08:24.360
they were paying from APR, and
most people understand the APR.

08:25.920 --> 08:28.230
So have we overcome that too?

08:28.290 --> 08:31.620
Speaker 1: Well, I would have to
ask the, I'm sorry, Pam, you

08:31.620 --> 08:35.640
would have to ask the opponents
of the bill because under the

08:35.640 --> 08:39.870
Smart Box metrics, it will
include APR or APR equivalent.

08:40.080 --> 08:42.720
But according to testimony last
year, there was no way to set

08:42.720 --> 08:47.370
APR, we don't have an APR. So it
I'm getting the sense that

08:47.400 --> 08:50.460
that's some of the players
don't, you know, the left hand

08:50.460 --> 08:53.040
doesn't know what the right hand
is doing and some of the way in

08:53.040 --> 08:56.250
some ways so according to
innovative lending performance

08:56.250 --> 09:01.980
Association, it says that they
can include APR APR equivalent

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for products like MC A's, and
that don't have a defined term

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says that write their quote,
total cost purchase price around

09:09.780 --> 09:12.720
amount disbursement amount. And
then when you look at other

09:12.720 --> 09:18.480
testimony, it talks about the I
guess, Tila does not provide any

09:18.480 --> 09:21.450
guidance or language and
applying APR to commercial

09:21.450 --> 09:25.020
financing, or more specifically
to sales based financing

09:25.020 --> 09:28.200
transactions. So it looks like
some people were are sort of

09:28.200 --> 09:30.960
doing it and some people aren't
or, you know.

09:32.010 --> 09:34.650
Delegate Qi: But from your
perspective as this as a

09:34.650 --> 09:39.690
sponsor, you you want to be able
to tell what APR is, is that

09:39.720 --> 09:41.040
that's what you're looking for.

09:41.130 --> 09:43.020
Delegate Howard: Or something
equivalent. I think that people

09:43.020 --> 09:47.820
should be able to look at an
interest rate and make a

09:48.570 --> 09:49.860
decision based on.

09:49.860 --> 09:51.000
Delegate Qi: Yeah,
understanding. I'm trying to

09:51.000 --> 09:53.550
know because we went from
banning to regulating whether

09:53.550 --> 09:56.940
the regulations that are okay
with you as the sponsors what

09:56.940 --> 09:57.450
I'm asking,

09:57.630 --> 10:00.360
Speaker 1: Yeah, well, we talked
to you know, we talked in over

10:00.360 --> 10:05.730
the summer, and a little bit
about this, Senator Kramer and

10:05.730 --> 10:12.210
some others and, you know, yeah,
I think I think it's appropriate

10:12.210 --> 10:14.580
to have a regulatory and
licensing scheme.

10:16.020 --> 10:20.670
Delegate Qi: In this licensing
scheme. I guess the CFR would do

10:20.670 --> 10:26.670
that. Are they guideline on
limits to interest rates at all

10:26.700 --> 10:29.190
that we would be looking at? Or
some?

10:30.060 --> 10:31.740
Delegate Howard: I don't know,
I'd have to look, I honestly

10:31.740 --> 10:33.180
Pam, I don't know. I got to look
that up.

10:33.330 --> 10:36.150
Delegate Qi: I mean, look at
what is your desire there? As

10:36.150 --> 10:36.540
the sponsor.

10:37.380 --> 10:40.200
Speaker 1: Say the question
again. Would you be used. To cap

10:40.200 --> 10:40.500
it?

10:40.740 --> 10:42.930
Delegate Qi: Yeah. Would you be
interested in having some

10:42.930 --> 10:46.620
limits? Or capping it at some,
what is your desire as the

10:46.620 --> 10:47.820
sponsors what I'm asking?

10:49.380 --> 10:52.530
Speaker 1: Well, I mean, part of
me, it is a different industry,

10:52.530 --> 10:55.680
and it is a more aggressive
lending. So I understand that

10:55.680 --> 10:58.440
and taking that into account. I
also feel like there should be

10:58.440 --> 11:02.850
some type of cap. But I also
feel like that there is this is

11:02.850 --> 11:07.410
aggressive. And and I do know
that there in some cases, not

11:07.410 --> 11:14.400
all, that there are no personal
guarantees. To export. That's a

11:14.400 --> 11:16.290
good question. I have explored a
little bit more.

11:17.220 --> 11:19.470
Delegate Qi: Okay. Thank you.
Thank you, Madam Chair.

11:19.920 --> 11:21.930
Madam Chair: Sure. Any other
questions for delegate Howard?

11:23.460 --> 11:30.420
Alright, seeing none, we'll move
on to Robin McKinney. Miss

11:30.420 --> 11:36.060
McKinney seemed okay, there she
is.

11:37.020 --> 11:40.230
Robin McKinney: Everything
catching up. Members of the

11:40.230 --> 11:43.260
economic matters committee. My
name is Robin McKinney. I'm the

11:43.260 --> 11:47.580
co founder and CEO of the Cash
Campaign of Maryland. We help

11:47.580 --> 11:49.620
low to moderate income
individuals across the state to

11:49.620 --> 11:53.250
become more financially secure.
And we work with a host of small

11:53.250 --> 11:57.090
business owners to help them to
be tax compliant and to make

11:57.090 --> 11:59.850
sure that they are able to
access capital in the ways that

11:59.850 --> 12:04.230
they want. And we are here in
support of this bill, mostly for

12:04.230 --> 12:08.280
three reasons. One is the cost
of capital. We are very

12:08.280 --> 12:12.330
concerned about how expensive
these loans are. We need

12:12.330 --> 12:15.240
guardrails, which is why we're
supporting the regulation to

12:15.240 --> 12:19.020
make sure that these businesses
know exactly how much the cost

12:19.020 --> 12:22.410
of capital is going to be. We
have seen through this committee

12:22.410 --> 12:24.780
in the great leadership of the
General Assembly that we have

12:24.780 --> 12:27.990
put caps in the past. So from
the cash perspective, it's

12:27.990 --> 12:30.930
really important that there is a
cap on rates, we have said that

12:30.960 --> 12:35.040
33% for a personal loan, which
is already high is high enough

12:35.040 --> 12:38.610
on a personal loan. So we think
that having a cap again, just to

12:38.610 --> 12:41.790
have some guardrails on this
industry is important. And we

12:41.790 --> 12:47.250
have heard of a lot of targeting
specifically of minority owned

12:47.250 --> 12:50.160
businesses, black and Latino
businesses, particularly in

12:50.160 --> 12:52.920
Prince George's in Montgomery
County, where people are going

12:52.920 --> 12:56.280
door to door pushing on
businesses, who would they know

12:56.280 --> 12:59.160
or that are having tough
economic times. And I can say

12:59.160 --> 13:02.430
that cash has personally been
targeted, because we have free

13:02.430 --> 13:06.210
tax preparation sites at some
small business locations, which

13:06.210 --> 13:09.480
are listed on our website. And
so we have been actually

13:09.480 --> 13:14.220
targeted by some of these, these
businesses also. So the last so

13:14.220 --> 13:17.580
it's cost to capital, it's
targeting black and Latino

13:17.610 --> 13:21.690
businesses. And then also on the
note of disclosure, the timing

13:21.690 --> 13:24.780
of the disclosure is incredibly
important that it's not at the

13:24.780 --> 13:28.080
end once everything's signed,
but before someone commits to a

13:28.080 --> 13:31.410
deal, they understand exactly
how much it's going to cost. And

13:31.410 --> 13:33.660
for those reasons, we urge a
favorable report.

13:35.160 --> 13:36.750
Madam Chair: Thank you, Mr.
McKinney questions for Mr.

13:36.750 --> 13:40.560
McKinney. Alright, seeing none.

13:43.110 --> 13:45.960
Robert Anton: Thank you, Madam
Chairman, Robert Anton on behalf

13:45.960 --> 13:49.080
of the Maryland Bankers
Association, and we do support

13:49.080 --> 13:53.010
this legislation we supported it
last year, you know, we are

13:53.010 --> 13:56.580
lenders, and we've spent a lot
of time looking at this and

13:56.580 --> 14:00.960
considering it. No bank, no bank
in the state of Maryland,

14:01.230 --> 14:07.320
engages in this type of
transaction at all. The we spent

14:07.320 --> 14:10.830
a lot of time last year
discussing the federal reserve

14:10.830 --> 14:14.700
study which this sponsor
mentioned. And if any of you

14:14.700 --> 14:18.360
have questions or concerns about
this legislation, I'd urge you

14:18.360 --> 14:22.290
to take a look at the federal
reserve study, which I forget

14:22.290 --> 14:25.680
how many pages long it is, but
it really runs through it. I

14:25.680 --> 14:28.140
think, you know, the question
that you're going to get I think

14:28.140 --> 14:31.380
are the concerns you're going to
get particularly is about the

14:31.380 --> 14:38.010
APR and as the sponsor said that
the APR can't be calculated on

14:38.010 --> 14:44.010
these transactions. And I think
the key here is to be able to

14:44.010 --> 14:47.700
have a small business and I
would point out that this only

14:47.700 --> 14:53.310
applies to transactions were the
amount of the quote loan unquote

14:53.310 --> 14:58.800
if you want to call it that or
that is $500,000 or less. So

14:58.800 --> 15:01.260
we're not talking about you
know, have big transactions for

15:01.260 --> 15:04.770
talking about small businesses.
And the whole purpose, I think

15:04.770 --> 15:10.740
of the bill more than anything
is to be able to have a small

15:10.740 --> 15:14.790
business person, look at the
transaction, and be able to

15:14.790 --> 15:18.420
compare it to what he can get
someplace else. And you know,

15:18.420 --> 15:22.950
it's confusing how these
transactions work. This bill

15:22.950 --> 15:26.550
calls for I think, as much as
anything. Regulation. This

15:26.550 --> 15:31.470
industry is totally unregulated,
and calls for disclosure so that

15:31.470 --> 15:34.470
small businesses can take a look
and know what they're what

15:34.470 --> 15:37.650
they're getting. You know, there
are a lot of different things in

15:37.650 --> 15:40.200
this bill to address concerns
that have been raised all over

15:40.200 --> 15:45.330
the country. And we think it's a
it's a fair ability to good bill

15:45.330 --> 15:49.110
for small business lending and
we'd urge a favorable report.

15:49.140 --> 15:49.560
Thank you.

15:50.400 --> 15:56.580
Madam Chair: Thank you.
Questions for Mr. Anton? Seeing

15:56.580 --> 15:59.010
none, Miss Lachlear.

16:00.630 --> 16:02.700
Haley Lachlear: Haley Lachlear
here on behalf of the Maryland

16:02.700 --> 16:05.700
Retailers Association. Last year
the legislation that was

16:05.700 --> 16:08.940
introduced, or correct was an
outright ban on these types of

16:08.940 --> 16:12.600
products. We clearly heard from
the industry over the interim,

16:12.630 --> 16:15.060
and even some concerns on this
committee that we should be

16:15.060 --> 16:18.390
regulating these products
instead, which is a bill that

16:18.390 --> 16:21.780
we're here in support of and
presenting to you today. I'd

16:21.780 --> 16:26.040
again draw your attention to and
the the sponsor of the bill

16:26.070 --> 16:28.620
started to talk about this a
little bit. The massive

16:28.620 --> 16:32.190
reporting series Bloomberg
Businessweek has released with

16:32.190 --> 16:35.550
story after story about the
problems with sales based

16:35.550 --> 16:39.240
financing companies and their
predatory nature. They are now

16:39.240 --> 16:42.360
one of the most visible and well
marketed lending products and

16:42.360 --> 16:45.840
businesses are suckered in
completely unclear about what

16:45.840 --> 16:49.350
they're getting themselves into
with quick and easy cash. The

16:49.350 --> 16:52.560
sick reality is that they end up
then having to pay back and

16:52.560 --> 16:57.390
upwards of 400% interest with
massive upfront fees. And you

16:57.390 --> 16:59.790
heard what this bill does from
the sponsor, but I want to hit

16:59.790 --> 17:03.120
on two important areas in the
bill, the cap, and it is

17:03.120 --> 17:06.780
incredibly important as the
interest rates these unregulated

17:06.780 --> 17:09.990
companies are getting away with
is flat out criminal and it

17:09.990 --> 17:13.140
traps a small business into a
cycle of debt that they will

17:13.140 --> 17:16.770
never escape, with many having
to take out another advance to

17:16.770 --> 17:20.370
try to cover the first. Banning
confessions of judgment is also

17:20.370 --> 17:23.460
highly important. Before
borrowers get a loan, they have

17:23.460 --> 17:25.830
to sign a statement giving up
their right to defend

17:25.830 --> 17:28.950
themselves. If the lender takes
them to court. It's like an

17:28.950 --> 17:33.120
arbitration agreement, except
the borrower always loses. Armed

17:33.120 --> 17:36.240
with a confession the lender can
without proof accused borrowers

17:36.240 --> 17:39.570
of not paying and legally seize
their assets before they even

17:39.570 --> 17:42.540
know what's happened. In dozens
of interviews and court

17:42.540 --> 17:46.020
pleadings, borrowers describe
lenders who forged documents

17:46.170 --> 17:49.320
lied about what they were owed
or fabricated defaults out of

17:49.320 --> 17:51.990
thin air. And finally, these
FinTech lenders are

17:51.990 --> 17:54.390
intentionally doing anything and
everything they can to kill

17:54.390 --> 17:59.520
these bills. Do not be fooled.
Maryland shouldn't be along with

17:59.760 --> 18:03.330
New York and California that
have moved legislation. And I'd

18:03.330 --> 18:07.320
also mentioned that the FTC is
stepping in as well. We urge

18:07.320 --> 18:09.840
Maryland to do the same and urge
a favorable reporting.

18:10.800 --> 18:12.810
Madam Chair: Thank you. Any
questions for Miss Lachlear?

18:14.670 --> 18:16.920
Okay, see none. Mindy Lehman?

18:21.330 --> 18:23.640
Robert Anton: I believe she's
testifying in another committee,

18:23.640 --> 18:24.240
Madam Chair.

18:24.690 --> 18:30.660
Madam Chair: Alright, Louis
Cadencepeck. Thank you. Sorry, I

18:30.660 --> 18:31.530
mispronounced your name.

18:31.560 --> 18:33.270
Louis Candencepeck: Oh, it's
Louis Candencepeck members of

18:33.270 --> 18:37.110
committee. Thank you so much for
this opportunity to be here. No

18:37.110 --> 18:39.030
problem at all right. So my name
is Louis Cadencepeck. I'm the

18:39.030 --> 18:42.690
Director of Public Policy at
Lending Club. Lending Club is a

18:42.690 --> 18:46.530
fintech company and a bank. Over
the last decade, we facilitated

18:46.530 --> 18:49.050
about one and a half billion
dollars of financing to

18:49.050 --> 18:52.830
borrowers in Maryland. We're
also online lending and fintech.

18:52.830 --> 18:56.250
So I would just want to propose
that what makes online lending

18:56.490 --> 18:59.160
responsible or irresponsible
isn't whether it's online or

18:59.160 --> 19:02.310
not, it's the cost and the
transparency and the sorts of

19:02.310 --> 19:06.150
problems that Kaylee and
delegate Howard were describing.

19:06.810 --> 19:09.420
When I launched Lending Club
small business lending program

19:09.450 --> 19:13.710
in 2014, offering lower cost
transparent loans to small

19:13.710 --> 19:18.870
businesses underserved by banks.
We saw very immediately that

19:18.900 --> 19:21.030
many of our small business
customers were being dragged

19:21.030 --> 19:24.420
down by a wave of new predatory
small business financing

19:24.420 --> 19:28.620
products, which this bill
focuses on. And today it is much

19:28.620 --> 19:31.260
worse because small businesses
are struggling already on the

19:31.260 --> 19:35.160
ropes with the struggles related
to COVID. This is happening all

19:35.160 --> 19:38.730
over the country. But very glad
to see today Maryland taking

19:38.730 --> 19:42.660
steps to do something about it.
I've worked with legislators in

19:42.660 --> 19:45.840
California and in New York to
pass Small Business truth and

19:45.840 --> 19:51.360
lending laws on which House Bill
664 is partially based. Those

19:51.360 --> 19:54.750
laws passed with overwhelming
bipartisan support, as well as

19:54.780 --> 19:57.420
broad support from the small
business community nonprofit

19:57.420 --> 20:00.810
advocacy groups, and industry.
We all agree that small

20:00.810 --> 20:03.660
businesses simply deserve to be
told the price they're going to

20:03.660 --> 20:07.230
be charged in a transparent way.
So I'm here especially to answer

20:07.230 --> 20:09.870
any questions you may have about
the truth and lending portion of

20:09.870 --> 20:14.610
the bill. As Mr. Hinton
referenced, Federal Reserve

20:14.610 --> 20:17.850
research in no less than four
reports has found that small

20:17.850 --> 20:21.750
businesses are often misled by
the pricing matrix commonly used

20:21.750 --> 20:25.620
today in sales based financing.
And in fact, Federal Reserve

20:25.620 --> 20:28.470
research specifically describes
merchant cash advance with the

20:28.470 --> 20:31.980
words potentially higher cost
and less transparent credit

20:31.980 --> 20:34.830
product. Those are the words of
the Federal Reserve researchers.

20:35.670 --> 20:38.460
As a quick note, these merchant
cash advance products are quite

20:38.460 --> 20:40.920
different than traditional
factoring. If that's a helpful

20:40.920 --> 20:44.370
distinction, we can do it.
Federal Reserve research has

20:44.370 --> 20:46.950
also found that black and
Hispanic owned businesses are

20:46.950 --> 20:50.580
about twice as affected by these
higher costs less transparent

20:50.580 --> 20:55.680
credit products, just as Robin
and Maryland cash described. So

20:55.680 --> 20:58.290
why has the Federal Reserve
research and New York and

20:58.290 --> 21:02.580
California and now Maryland
proposed that APR in particular,

21:02.880 --> 21:05.670
be the standard of transparent
disclosure as opposed to some

21:05.670 --> 21:11.070
other metric? It's because APR
is the only metric that enables

21:11.070 --> 21:14.550
apples to apples comparison of
products with different amounts,

21:14.760 --> 21:18.030
different charges and different
lengths. That's why APR has

21:18.030 --> 21:21.150
become the standard of
transparent pricing vetted over

21:21.150 --> 21:24.690
50 years of the federal Truth in
Lending Act. You really can't

21:24.690 --> 21:27.210
say it better than delegate Pipi
did in discussing the last

21:27.210 --> 21:30.330
legislation saying the APR is
big and bright, the borrower can

21:30.330 --> 21:33.060
see what it costs and they can
decide for themselves whether to

21:33.060 --> 21:36.210
take the loan or not. To
calculate APR for sales based

21:36.210 --> 21:39.540
financing. Providers simply use
the formula and the Federal

21:39.540 --> 21:43.110
Truth in Lending Act. That same
formula works for sales based

21:43.110 --> 21:46.170
financing, the leader plugins,
some estimates and the Truth in

21:46.170 --> 21:48.960
Lending Act at the federal level
doesn't describe how to do those

21:48.960 --> 21:53.310
estimates. But that's what House
Bill 664 does. It provides two

21:53.310 --> 21:56.100
methods to guide those
estimations, which is the same

21:56.100 --> 21:58.980
approach that New York and
California took. I'd encourage

21:58.980 --> 22:02.100
Maryland's do the same, I'd also
encourage you to consider not

22:02.100 --> 22:05.580
capping APR is below 36% based
on other standards around the

22:05.580 --> 22:09.930
country, and also to apply the
street and lending standards not

22:09.930 --> 22:12.870
only to sales based financing,
but to loans lines of credit

22:12.870 --> 22:14.910
factoring in the other product,
small businesses are making

22:14.910 --> 22:18.150
choices between which California
and New York have done. Thank

22:18.150 --> 22:18.720
you very much.

22:19.140 --> 22:22.650
Madam Chair: Thank you. Any
questions for Mr. Candencepeck?

22:24.840 --> 22:26.820
Seeing none, Kimberly Ford?

22:27.960 --> 22:30.000
Louis Candencepeck: Yes, Vice
Chair Domaine members of the

22:30.000 --> 22:32.700
committee. I'm Kim Ford, Senior
Vice President of Government

22:32.700 --> 22:36.720
Relations with Fiserv. Some of
you know Fiserv, we acquired

22:36.720 --> 22:39.360
first data, which was a large
Maryland company as well, we

22:39.360 --> 22:42.870
have about 2000 employees in the
state. One of Fiserv's core

22:42.870 --> 22:46.380
business offerings is a payment
is payment processing. So that

22:46.380 --> 22:49.830
means we sign businesses up who
want to take some form of

22:49.830 --> 22:53.550
electronic payment like a credit
or debit card. And we also are a

22:53.550 --> 22:57.030
point of sale terminal
manufacturer. So our product in

22:57.030 --> 23:01.140
the market is called Clover. So
Clover has one of these merchant

23:01.140 --> 23:04.200
cash advance products called
Clover capital. And I just

23:04.200 --> 23:06.810
wanted to share a little bit
about how that product works.

23:06.810 --> 23:09.870
But before I do that, I want to
just, you know, assert to this

23:09.870 --> 23:13.320
committee that we are favorable
with amendment. So we are fully

23:13.320 --> 23:16.320
supportive of you know, the
licensing regime and more

23:16.320 --> 23:18.990
disclosure, understand some of
the complaints that are in the

23:18.990 --> 23:24.150
market out there. But we do have
some concerns with the cap. But

23:24.150 --> 23:26.910
again, let me just quickly talk
about how Clover capital works.

23:26.910 --> 23:30.960
So it is available only to
existing Clover customers. So

23:30.960 --> 23:33.420
it's not an online lender, we're
not going out there and

23:33.420 --> 23:36.960
soliciting, you know, customers
for this. These have to be

23:36.960 --> 23:39.390
existing businesses that are
processing transactions with

23:39.390 --> 23:43.410
clover. And when they apply for
this merchant cash advance, we

23:43.410 --> 23:46.410
look at their daily receivables.
So what have they been bringing

23:46.410 --> 23:49.770
in in terms of debit and credit
transactions, and then we come

23:49.770 --> 23:52.920
up with an amount with them
based on what that those daily

23:52.920 --> 23:56.910
receivables have been. We as a
payment processor feel like

23:56.910 --> 23:59.730
we're ideally situated to be
able to provide this type of

23:59.730 --> 24:03.180
product, because we can see the
economic health of that business

24:03.210 --> 24:05.370
again, based on their their
debit and credit card

24:05.370 --> 24:08.460
transactions that are coming in.
So we tell our Merchant

24:08.460 --> 24:10.770
customers on the front of the
agreement, what the purchase

24:10.770 --> 24:14.550
price is, how much they'll
receive, how much this will cost

24:14.550 --> 24:17.970
them and then the total
repayment amount. And what we do

24:17.970 --> 24:21.150
is we work with that business to
set a percentage of how much

24:21.150 --> 24:24.540
they want us to pull from their
daily earnings in order to pay

24:24.540 --> 24:28.560
that advance back. So to be
clear, this transaction is not a

24:28.560 --> 24:31.680
loan, it's not subject to an
interest rate or a fixed payment

24:31.680 --> 24:35.700
schedule or a fixed repayment
term. We fund this product on

24:35.700 --> 24:39.450
our own and if the business
closes, that's a loss to us. We

24:39.450 --> 24:43.500
do not engage in confessions of
judgment. So again, this is

24:43.500 --> 24:46.590
really based on daily
receivables and if the business

24:46.590 --> 24:49.890
is not bringing in anything,
then they're not going to repay

24:49.920 --> 24:53.700
an amount that day. So, again,
you know, we do think this

24:53.700 --> 24:56.100
legislation is workable. We
would encourage you know,

24:56.100 --> 24:58.890
continuing to work with Delegate
Howard and members of the

24:58.890 --> 25:01.890
committee on the case up issue
so that this product can still

25:01.890 --> 25:04.650
be available in the market. And
I'm happy to answer any

25:04.650 --> 25:05.280
questions.

25:05.820 --> 25:06.570
Madam Chair: Thank you.

25:06.870 --> 25:07.290
Kim Ford: Thank you.

25:08.130 --> 25:13.110
Madam Chair: Any questions for
Miss Ford? Alright, seeing none.

25:13.980 --> 25:14.940
Mr. DiPietro.

25:15.780 --> 25:17.790
Chris DiPietro: Madam Chair,
Chris DiPietro, on behalf of

25:17.790 --> 25:22.800
Pfizer, I'm here with with Kim.
I think Kim did a great job in

25:22.830 --> 25:27.000
explaining a little bit how
Fiserv's product is a little

25:27.000 --> 25:29.610
different that you might hear
from some of the other folks

25:29.610 --> 25:33.330
that you're going to hear
testimony from, again, we only

25:33.570 --> 25:37.740
offer this product offering to
people who are availing

25:37.740 --> 25:42.150
themselves of the of the clover
platform. So we have that track

25:42.150 --> 25:46.860
record. We know what their daily
receivables are, are made. So we

25:46.860 --> 25:51.030
do have amendments that we have
drafted. We are finalizing some

25:51.060 --> 25:56.040
explanation to those amendments,
we will get that to the sponsor,

25:56.040 --> 25:58.440
Delegate Howard, as well as
committee staff and the

25:58.440 --> 26:01.740
subcommittee chair for a review,
we'd be happy to sit down and

26:01.740 --> 26:06.210
discuss our main issue. We think
most of the bill is workable. We

26:06.210 --> 26:09.570
are with you on the the
licensing aspect, we think the

26:09.570 --> 26:13.740
disclosure piece, it all can be
worked out, we agree that there

26:13.740 --> 26:16.500
needs to be some rules to the
road about how this product is

26:16.500 --> 26:20.610
offered. And it's disclosed
properly. And businesses do

26:20.610 --> 26:23.130
understand what they're entering
into when they do these. But you

26:23.130 --> 26:27.960
have to understand this is a
different type of vehicle that a

26:27.960 --> 26:31.110
business would avail themselves
if they had to go to a bank. And

26:31.110 --> 26:33.480
I used to be a commercial
lender. Before I was a lobbyist,

26:33.480 --> 26:36.930
I was a commercial lender, for a
large financial institution for

26:36.930 --> 26:40.170
10 years, we didn't make loans,
commercial loans unless there

26:40.170 --> 26:44.220
was some form of collateral. And
I think a lot of the folks that

26:44.250 --> 26:48.210
avail themselves of this type of
product, do so because they

26:48.210 --> 26:51.480
don't have the collateral or the
personal guarantee that they can

26:51.480 --> 26:55.740
make to get the access quick
capital, especially if you're a

26:55.740 --> 26:59.970
small business in a cash crunch
that may be approaching a period

26:59.970 --> 27:02.970
of busy time where you know,
those receipts are going to be

27:02.970 --> 27:07.380
coming in and you can repay that
that advance. So we are here

27:07.380 --> 27:10.590
favorable with amendment. I'm
happy to answer any questions.

27:10.710 --> 27:12.690
And we look forward to working
with the sponsor and the

27:12.690 --> 27:14.220
proponents of the bill. Thank
you.

27:14.820 --> 27:16.740
Madam Chair: Thank you.
Questions for Mr. DiPietro?

27:17.070 --> 27:17.850
Delegate Howard.

27:18.900 --> 27:20.400
Delegate Howard: Chris, I look
forward to seeing those

27:20.400 --> 27:25.080
amendments. I appreciate your
phone call. But on that same

27:25.080 --> 27:29.220
token, I understand what you're
saying about you know cap. And I

27:29.220 --> 27:31.380
understand this is a more
aggressive lending because you

27:31.380 --> 27:34.650
aren't looking at his country.
Clover is clearly I don't know

27:34.650 --> 27:37.380
what the history they're looking
at, or as I know what they're

27:37.380 --> 27:39.510
looking at. They're looking at
their daily receipts.

27:39.570 --> 27:41.160
Chris DiPietro: Exactly. That's
what they are looking at.

27:41.280 --> 27:43.200
Delegate Howard: Yeah, but for
how long? And those type of

27:43.200 --> 27:44.160
things? I don't know.

27:44.190 --> 27:44.550
Chris DiPietro: Right.

27:44.790 --> 27:49.080
Delegate Howard: But I mean, let
me ask you this, just two people

27:49.080 --> 27:52.650
talking over a fence post? I
mean, do you really think fair

27:52.650 --> 27:54.090
that somebody's charged 400%?

27:56.400 --> 27:57.960
Chris DiPietro: Um, I.

27:58.470 --> 28:03.480
Delegate Howard: Do you think I
mean, is is 100% enough. I

28:03.480 --> 28:05.610
that's what I'm getting at with
some of the caps

28:05.670 --> 28:08.700
Chris DiPietro: Understood. I
think the problem when you get

28:08.700 --> 28:13.050
into the cap, it just doesn't
fit into the product offering. I

28:13.050 --> 28:16.080
mean, what happens and Kim can
probably answer this a little

28:16.080 --> 28:19.230
bit better than I can because
she's more intimately familiar

28:19.230 --> 28:24.180
with how it works at Fiserv. But
but my understanding is that if

28:24.180 --> 28:28.350
your your small business, your
tobacco shop, needed in advance

28:28.350 --> 28:32.250
for for $10,000, to get you
through a period of time, you're

28:32.250 --> 28:37.230
going to know that 10,000 plus a
factor of the fee, so you're

28:37.230 --> 28:42.450
gonna know what that is upfront.
So how you repay that is through

28:42.480 --> 28:47.970
a portion of your daily receipts
that are going to be taken,

28:48.000 --> 28:51.600
we're going to take a portion of
that, and you can decide is by

28:51.600 --> 28:54.570
understanding you can decide
whether you as a business owner

28:54.570 --> 28:58.800
want to be aggressive, inverting
that money, and do up to 20% of

28:58.800 --> 29:01.500
your daily receipts through the
through the terminal. And to

29:01.500 --> 29:04.770
repay that. Or if you want to be
less aggressive, and you want to

29:04.800 --> 29:08.220
maybe do five or 10% of your
daily receipts. And I think

29:08.250 --> 29:12.180
therein lies the rub. Because if
you go the longer route, and

29:12.180 --> 29:15.420
you'd take longer to repay,
because that's more comfortable

29:15.420 --> 29:19.200
for you, as a business owner,
that's going to change this APR

29:19.200 --> 29:24.690
calculation. Or if you run into
a period where your daily

29:24.780 --> 29:28.380
receipts aren't what you think
they're going to be, that also

29:28.380 --> 29:31.320
is going to impact the length of
time it's going to take you to

29:31.320 --> 29:35.610
repay that. So that's where we
get into the problem of if we go

29:35.610 --> 29:39.480
with a 24% cap, we're gonna run
into problems and we're not

29:39.480 --> 29:43.500
going to be able to meet that
because it's dependent on other

29:43.500 --> 29:47.400
factors, the the lifecycle of
your business, how much you

29:47.400 --> 29:50.010
decide you want to have, how
aggressive you want the

29:50.010 --> 29:53.340
repayment to be. Can I turn it
over to you and see if I

29:53.730 --> 29:55.020
adequately stated that?

29:55.590 --> 29:57.390
Delegate Howard: I think we got
a good sense of it. I want to

29:57.390 --> 30:01.110
ask Louis, can you weigh in on
this on how This was done on all

30:01.110 --> 30:04.890
these other states, you've
worked closely with them.

30:04.950 --> 30:09.600
Obviously, this question has
come up, how did they breach

30:09.600 --> 30:10.230
this hurdle?

30:11.070 --> 30:13.470
Louis Candencepeck: Sure, with
respect to the hurdle of

30:13.470 --> 30:18.060
calculating an APR for sales
based financing products, that

30:18.060 --> 30:21.480
hurdle is reached. Many
providers of these kinds of

30:21.480 --> 30:26.190
products already do calculate
APRs. As someone referenced,

30:26.250 --> 30:31.710
it's part of the Smart Box, for
example. And the truth and

30:31.710 --> 30:35.580
lending, APR formula, all you
have to do to use it is just

30:35.580 --> 30:38.820
plug in how much money goes in
and how much money comes out.

30:38.940 --> 30:44.070
And when those things happen.
And to Chris's point when he

30:44.070 --> 30:47.550
described when a, when a small
business decides whether they're

30:47.550 --> 30:49.560
going to what portion of their
sales are going to go to

30:49.560 --> 30:52.110
repayment, that just changes the
numbers that you plug into the

30:52.110 --> 30:54.810
formula. And then you plug them
in, and you get an APR. And that

30:54.810 --> 30:58.170
allows you to make a comparison,
as Chris described, you know,

30:58.170 --> 31:02.070
you don't, these these products,
the payments, you don't know

31:02.070 --> 31:04.320
what they're going to be
exactly, you have to estimate

31:04.320 --> 31:06.870
it. Because if a small business
sells more, they repay you

31:06.900 --> 31:09.780
quicker, they sell less, they
repay slower, that's an

31:09.780 --> 31:12.720
advantage of these products in
some ways. Not everything is bad

31:12.720 --> 31:17.190
about them. But the bill is able
to incorporate that by just

31:17.190 --> 31:21.030
saying here's a framework for
estimations. And this is the

31:21.030 --> 31:23.040
same framework that California
and New York have used.

31:23.190 --> 31:25.020
Chris DiPietro: And just to be
clear, I have to say this, the

31:25.020 --> 31:27.990
California, and we're operating
in California in New York. So we

31:27.990 --> 31:31.710
can operate in this question. We
are operating in those states.

31:31.710 --> 31:35.850
But but but they do not have
rate caps in these states, this,

31:35.850 --> 31:39.840
if passed would be the most
aggressive legislation in the

31:39.840 --> 31:43.440
country, we want to keep this
product available to small

31:43.440 --> 31:47.580
businesses in Maryland. Because
again, if we cannot offer this

31:47.580 --> 31:50.340
product with because of the rate
cap, that's going to force these

31:50.340 --> 31:54.660
small businesses to go to a
traditional lending institution

31:54.660 --> 31:58.650
like Mr. Anton represents on
this on this issue. And they may

31:58.650 --> 32:01.980
not be able to qualify because
they don't have the collateral.

32:02.820 --> 32:06.660
Or they may not be able to act
with the speed that these

32:06.660 --> 32:09.870
products can act with. I mean,
with these products, because we

32:09.870 --> 32:14.940
have a history of what your your
tobacco store sales are, through

32:15.060 --> 32:18.540
that run through the clover
terminal, we know we can predict

32:18.540 --> 32:21.990
pretty accurately how much we're
willing to advance to you. And

32:22.020 --> 32:26.580
again, Miss Ford can can give
much more detail to to that

32:26.580 --> 32:27.180
process.

32:27.330 --> 32:29.670
Speaker 1: Let's let's I
appreciate it. I think we got a

32:29.670 --> 32:32.670
good sense of it. I'm good
Madam, Vice Chair.

32:32.910 --> 32:34.170
Madam Chair: Thank you. Delegate
Qi.

32:36.570 --> 32:38.520
Delegate Qi: Thank you, Madam
Chair. Just just quickly, it may

32:38.520 --> 32:44.400
be if you don't have details you
can get to me later. Are there

32:44.790 --> 32:48.420
significant differences between
the California and the New York

32:48.420 --> 32:54.150
bill? Or are they pretty much
the same? You say they neither

32:54.150 --> 32:57.660
one have caps. But I know they
both do transparency. Anything

32:57.660 --> 33:00.240
else that may be different
between the two?

33:00.630 --> 33:04.050
Chris DiPietro: I would turn
that over to Kim to answer I

33:04.050 --> 33:07.830
believe I'm not sure if
California has the estimated APR

33:07.860 --> 33:11.190
or not. But I know New York
does. And I think Kim might have

33:11.190 --> 33:12.000
more detail on that.

33:12.540 --> 33:14.100
Louis Candencepeck: Sure
delegate, I would just say so

33:14.370 --> 33:17.610
both of them are do have
disclosure requirements. So

33:17.610 --> 33:20.670
California has not actually
finalized its regulation on

33:20.670 --> 33:23.550
this. So there is some change
that could still happen. And the

33:23.550 --> 33:26.910
state of New York has not yet
issued regulations. So we're

33:26.910 --> 33:30.120
still trying to figure that out.
So we'll have to get back to you

33:30.120 --> 33:33.360
on that. But they do provide.
Again, it's a disclosure, but

33:33.360 --> 33:36.030
they provide some flexibility,
like delegate, Howard mentioned

33:36.030 --> 33:39.240
where you can do, essentially,
what's more of an estimated APR.

33:40.110 --> 33:43.830
Speaker 1: Thank you, Louis, as
you work on both those is that I

33:44.730 --> 33:46.140
mean is there, did we miss
anything?

33:46.380 --> 33:49.020
Louis Candencepeck: No, that's
accurate. The text of 664 draws

33:49.020 --> 33:51.360
primarily on the New York bill,
which basically takes the good

33:51.360 --> 33:54.000
ideas in California that didn't
fit into the statute that are

33:54.000 --> 33:56.220
now being moved forward in the
regulation and putting them in

33:56.220 --> 33:59.100
the statute, which is what
you're all be doing in 664.

33:59.670 --> 34:01.530
Chris DiPietro: And to be
completely fair, some of our

34:01.530 --> 34:04.440
amendments address is because
some of those requirements of

34:04.440 --> 34:07.170
the New York merging the New
York and California together

34:07.230 --> 34:10.200
that are in the bill as
introduced just don't quite work

34:10.200 --> 34:13.140
and we are offering some
amendments to clean up some of

34:13.140 --> 34:16.350
that not to do harm to the bill,
but just to clean it up and make

34:16.350 --> 34:17.580
it work more effectively.

34:17.820 --> 34:18.180
Louis Candencepeck: Okay.

34:21.750 --> 34:25.230
Madam Chair: Any other
questions? Alright, we will move

34:25.230 --> 34:27.990
on to the opposition. Patrick
Sigfried.

34:33.150 --> 34:34.830
Patrick Sigfried: Good
afternoon, Madam Chair, members

34:34.830 --> 34:37.050
of this committee. My name is
Patrick Sigfried and I'm here

34:37.350 --> 34:40.350
today on behalf of Rapid
Financial Services. Rapid was

34:40.350 --> 34:43.290
founded in 2006 and has been
headquartered in Montgomery

34:43.290 --> 34:46.380
County since its inception. To
date, we have provided over $2

34:46.380 --> 34:49.170
billion in working capital to
small businesses throughout the

34:49.170 --> 34:53.400
United States. We employ nearly
200 employees at our Bethesda

34:53.400 --> 34:57.240
office. Our financing products
include but are not limited to

34:57.690 --> 35:01.710
sales based financing which is a
subject of 664 This type of

35:01.710 --> 35:04.140
financing allows small
businesses to sell a portion of

35:04.140 --> 35:07.680
their future revenue in exchange
for immediate working capital,

35:07.740 --> 35:10.440
in a sales based financing
transaction there is no

35:10.440 --> 35:14.160
repayment term, there is no
interest rate. And there are no

35:14.160 --> 35:16.680
set payment amounts. And most
importantly, there is no

35:16.680 --> 35:20.070
personal guarantee required of
the business owner. Because

35:20.070 --> 35:22.560
there's no personal guarantee
the risk is placed on the

35:22.560 --> 35:25.740
funder. Rapid takes the risk of
the business slowing down or

35:25.740 --> 35:28.830
even failing. Last year, I
testified to these benefits of

35:28.830 --> 35:31.830
sales based financing. And
unfortunately, the COVID

35:31.830 --> 35:34.560
pandemic has proven just how
important they can be to small

35:34.560 --> 35:38.490
businesses, as many businesses
were shut down due to COVID.

35:38.730 --> 35:41.880
Those businesses with a sales
based financing product were not

35:41.880 --> 35:46.650
required to make any payments.
Moreover, if these businesses

35:46.650 --> 35:49.800
had to shut their doors forever,
the business owners will not be

35:49.800 --> 35:52.410
responsible for any remaining
balance because there's no

35:52.410 --> 35:56.760
personal guarantee. In contrast,
small business loans and line of

35:56.760 --> 35:59.250
credit products that are not
regulated by this bill and would

35:59.250 --> 36:03.360
not be subject to this bill,
would they were required to to

36:03.390 --> 36:06.060
continue to make payments on the
terms of those transactions

36:06.090 --> 36:08.640
throughout COVID. And the
business owners who guarantee

36:08.640 --> 36:11.310
those transactions are going to
still be obligated to ensure

36:11.310 --> 36:15.690
that the lender is repaid.
Nationwide Rapid has over 290

36:15.690 --> 36:18.330
customers with sales based
financing accounts that

36:18.330 --> 36:21.450
experience decreased revenue as
a result of COVID. In the event

36:21.450 --> 36:24.600
that these businesses ultimately
fail, rapid would take the loss

36:24.600 --> 36:28.650
of over $9 million. However, the
owners of these businesses would

36:28.650 --> 36:32.490
not owe Rapid anything, in
Maryland rapid has 10 customers

36:32.490 --> 36:35.310
that have been severely impacted
by COVID. If these businesses

36:35.310 --> 36:38.580
unfortunately, do not survive
the pandemic, their owners will

36:38.580 --> 36:42.480
walk away debt free. While we
oppose HB 664, we are committed

36:42.480 --> 36:44.910
to working with this committee
and the sponsors to create

36:44.910 --> 36:47.130
thoughtful and comprehensive
legislation to regulate

36:47.130 --> 36:48.090
commercial financing.

36:50.820 --> 36:53.790
Madam Chair: Any questions for
Mr. Sigfried? Delegate Howard?

36:55.080 --> 36:57.540
Delegate Howard: Thanks, Madam
Vice Chair, Patrick, you said

36:57.540 --> 37:02.640
that these guys walk away, scot
free. You know, last year I

37:02.640 --> 37:05.850
referenced I was very upset.
Last year, I referenced that

37:05.850 --> 37:08.820
there's hundreds of lawsuits on
your behalf filed throughout the

37:08.820 --> 37:12.510
United States. I mean, that 20
pages and at the top of the

37:12.510 --> 37:16.770
Maryland judiciary case search,
it says big letters can't fit

37:16.770 --> 37:21.840
anymore. On the search. I mean,
these folks aren't walking away

37:21.840 --> 37:24.600
scot free. You want to walk me
through that or?

37:25.170 --> 37:27.570
Patrick Sigfried: Sure. Sure
delegate Howard. Actually most

37:27.570 --> 37:30.780
of those accounts are actually
loans, which again, are not

37:30.780 --> 37:33.480
subject to the bill that you're
proposing. You're right. In some

37:33.480 --> 37:36.780
instances, there were sales
based financing transactions

37:37.080 --> 37:40.170
that resulted in a judgment. But
that's only because there was a

37:40.320 --> 37:42.630
default of the contractual
provisions regarding the

37:42.630 --> 37:46.020
guarantee as to the performance
of the contract, not the

37:46.020 --> 37:49.590
repayment, but that the merchant
would continue to cross, process

37:49.590 --> 37:53.970
their credit cards as they were
doing prior to being funded. And

37:53.970 --> 37:57.300
because of some instance,
sometimes where they are adding

37:57.360 --> 38:00.210
an additional credit card
processing terminal in order to

38:00.210 --> 38:04.080
avoid getting, sending rapid any
portion of the transaction. And

38:04.080 --> 38:07.350
those instances, that's when the
performance guarantee of the

38:07.350 --> 38:10.290
business owner comes into play.
But again, there is no personal

38:10.290 --> 38:14.460
guarantee of the business owner
that they ensure that the the

38:14.490 --> 38:17.250
MCA or sales based financing
transaction is repaid.

38:17.820 --> 38:19.800
Delegate Howard: There would be
a personal guarantee based on

38:19.800 --> 38:21.360
the outcome of the court case,
correct?

38:22.290 --> 38:22.680
Patrick Sigfried: No.

38:22.740 --> 38:25.050
Delegate Howard: I mean, so the
judge wouldn't award you any

38:25.050 --> 38:27.300
financial monetary damages?

38:28.110 --> 38:30.270
Patrick Sigfried: Not as to the
guarantor, again, if there was

38:30.390 --> 38:33.390
if there is no violation of the
of the covenant to continue to

38:33.390 --> 38:36.270
operate their business as they
had been operating it, there

38:36.390 --> 38:38.850
would be no liability for the
business owner. And again,

38:38.910 --> 38:44.310
that's exactly what happened in
COVID. Again, 290, 293 customers

38:44.310 --> 38:47.880
throughout the country, if they
ultimately fail, if we were to

38:47.880 --> 38:50.610
sue them in court, we would not
legally be allowed to get a

38:50.610 --> 38:52.800
judgment against them, because
again, that's the way this

38:52.800 --> 38:53.880
transaction works.

38:54.810 --> 38:55.290
Delegate Howard: Thank you.

38:56.790 --> 39:00.570
Madam Chair: Any other questions
for Mr. Sigfried? See none, we

39:00.570 --> 39:02.010
will move on to Chris Grimm.

39:05.250 --> 39:07.530
Chris Grimm: Members of the
Committee My name is Chris Grimm

39:07.530 --> 39:10.650
on behalf of the Innovative
Lending Platform Association. I

39:10.650 --> 39:14.880
appreciate the opportunity to
testify today. While we do

39:14.880 --> 39:17.790
support a lot of what's in this
bill, particularly the

39:17.790 --> 39:20.580
disclosure portion,
unfortunately, we do have to

39:20.580 --> 39:25.200
oppose because of the rate cap
ILP believes very strongly in

39:25.200 --> 39:30.330
disclosure, we created the Smart
Box in 2016, to give small

39:30.330 --> 39:34.440
business financing providers an
easy way to provide key

39:34.440 --> 39:38.700
disclosure metrics to their
potential customers. We work

39:38.700 --> 39:42.300
very, very closely with Louis
and Lending Club and the

39:42.300 --> 39:45.030
Responsible Business Lending
Coalition on the legislation in

39:45.030 --> 39:48.120
New York. We worked very hard
over two years to get that bill

39:48.120 --> 39:52.350
passed, we feel is the gold
standard in regulating small

39:52.350 --> 39:55.650
business financing and believe
very, very strongly that

39:55.650 --> 40:00.210
disclosure is the best way to
regulate this industry. We

40:00.210 --> 40:03.540
testified last year in
opposition because that bill

40:03.540 --> 40:08.040
would have banned these products
for Maryland small businesses.

40:09.240 --> 40:12.570
Putting an arbitrary rate cap
has the same impact, you are

40:12.570 --> 40:15.480
essentially going to ban the
product, because it is not

40:15.480 --> 40:19.290
economically feasible to offer
these products under that

40:19.290 --> 40:23.280
arbitrary ban. Or they'll only
be available to the businesses

40:23.550 --> 40:26.790
that have the collateral or the
credit history or the banking

40:26.790 --> 40:30.510
relationship, to take advantage
of them. And there are other

40:30.510 --> 40:33.690
financing options for those
businesses. So we support

40:33.690 --> 40:36.330
disclosure, we think it's very,
very important. We supported New

40:36.330 --> 40:40.170
York's law, from start all the
way through to the finish, we

40:40.170 --> 40:43.830
are opposed to rate caps, it
ends up taking away a valuable

40:43.830 --> 40:47.580
choice for Maryland, small
businesses. Our members offer

40:47.640 --> 40:50.850
these products as well as
traditional term loans, lines of

40:50.850 --> 40:54.300
credit, factoring, so our
members run sort of the full

40:54.300 --> 40:59.850
gamut of products in this space.
But again, rate caps are

40:59.850 --> 41:02.310
essentially a ban and we have to
oppose this bill because of

41:02.310 --> 41:05.700
that, but would love to work on
a solution that brings greater

41:05.700 --> 41:08.250
disclosure and transparency for
Maryland small businesses.

41:09.270 --> 41:11.580
Madam Chair: Thank you, Mr.
Grimm. Any questions for Mr.

41:11.580 --> 41:13.680
Grimm? Delicate Howard.

41:14.310 --> 41:17.670
Delegate Howard: Thank you,
Madam Vice Chair. Mr. Grimm, we

41:17.670 --> 41:20.940
heard testimony earlier that
customers walk away. Have you

41:20.940 --> 41:24.150
ever, from these loans, and
should they default on them? As

41:24.180 --> 41:27.300
per seized? And Patrick, maybe
you want to weigh on this too,

41:27.300 --> 41:32.070
have you ever seized any account
or locked any accounts or gone

41:32.070 --> 41:35.820
in and gotten money out of any
accounts of customers that

41:35.820 --> 41:39.780
breach their contract with you
and then were found in court to

41:39.780 --> 41:41.730
not have breached their
contract? I guess where I'm

41:41.730 --> 41:42.360
going with that.

41:43.290 --> 41:45.750
Chris Grimm: I don't believe so.
But I can check some of our

41:45.750 --> 41:49.140
members, right, we have a dozen
members, all with different

41:49.140 --> 41:52.680
business models. I can check on
that. And happy to get back to

41:52.680 --> 41:58.200
you. I do not believe so. Part
of our Association's sort of

41:58.200 --> 42:02.400
ethical guidelines are to not
use confessions of judgment. And

42:02.400 --> 42:04.410
so you know, I will double
check.

42:04.830 --> 42:09.180
Speaker 1: Yeah, and I think
everybody here agreed, even last

42:09.180 --> 42:13.650
year, that confessions of
judgment were horrible. We had a

42:13.650 --> 42:16.500
good starting point there, and
we're objective moving forward

42:16.500 --> 42:20.280
there. But I guess my question
is, is that what is your

42:20.280 --> 42:25.140
recourse? I mean, you know,
you're not looking at a

42:25.140 --> 42:27.510
business's history, you're not
looking at a business's credit,

42:27.510 --> 42:30.390
you're not looking, you're just
you know, some guy, some guy or

42:30.390 --> 42:34.680
gal has been in business 30, 30
days, they want 10 grand, and

42:34.980 --> 42:37.380
then they default, what is your
recourse to get your get your

42:37.380 --> 42:37.710
money.

42:38.400 --> 42:41.460
Chris Grimm: So our members do
do an underwriting. So even if

42:41.460 --> 42:44.490
they are doing a merchant cash
advance or sales based financing

42:44.490 --> 42:48.780
product, they are looking at
past receivables. And most of

42:48.780 --> 42:51.600
our concurs customers have been
in business for at least a year.

42:51.600 --> 42:56.010
So there's at least a year of
events to look at. But some are

42:56.010 --> 42:58.770
in business for shorter, some
are looking for potentially

42:58.770 --> 43:02.310
startup capital. Part of the
product in front, and one of the

43:02.310 --> 43:04.770
benefits of the product is that
there is no recourse.

43:05.280 --> 43:07.200
Delegate Howard: So they
determine a pay back or interest

43:07.200 --> 43:09.930
rate based on some type of
underwriting but they large,

43:10.080 --> 43:12.300
your point is, is that they have
a formula determined to

43:12.300 --> 43:13.500
determine an interest rate?

43:16.110 --> 43:19.020
Chris Grimm: So that's a
complicated question. So in the

43:19.020 --> 43:21.960
underwriting process, right, our
members who offer these products

43:21.960 --> 43:25.860
are looking at you know previous
sales history, previous bank

43:25.860 --> 43:29.040
account data, and are estimating
about how long it's going to

43:29.040 --> 43:32.370
take them to get paid back.
Right, they have an idea. And

43:32.370 --> 43:36.780
that's why in our updated
SmartBox, you know, after

43:36.780 --> 43:40.140
California passed their law and
working in New York, we have a

43:40.140 --> 43:42.990
mechanism for calculating an
estimated APR. And that's

43:42.990 --> 43:45.510
because when doing the
underwriting, or if you provide

43:45.690 --> 43:48.870
$10,000 in financing to a
business, you're expecting them

43:48.870 --> 43:53.760
to pay you back $14,000, you're
going to take 1.5% of their

43:53.760 --> 43:57.240
daily sales, you can crunch the
numbers looking at what their

43:57.240 --> 44:00.330
average daily sales are, and
come up with an estimated term

44:00.330 --> 44:04.290
and with that estimated term,
can provide an estimated APR.

44:04.560 --> 44:06.540
Speaker 1: I think that's
exactly what Louis was talking

44:06.540 --> 44:10.530
about earlier, a little bit. Um,
but what is your legal recourse?

44:10.560 --> 44:14.850
I mean, it's, you know, I got to
imagine, you know, and what's

44:14.850 --> 44:18.750
your average interest rate? I
mean, you talk about risky, and

44:18.750 --> 44:20.730
I know that there's some
underwriting that goes into

44:20.730 --> 44:23.910
this, but, you know, new
businesses, everybody fancies

44:23.910 --> 44:27.180
themselves a business owner
until it's time to really do it,

44:27.180 --> 44:33.660
it's tough. Recourse as far as
regaining funds lent.

44:33.930 --> 44:36.390
Chris Grimm: So so the legal
recourse is breach of contract,

44:36.420 --> 44:39.780
right, a sales based financing
is a contract. The small

44:39.780 --> 44:43.920
businesses agreeing for to pay a
percentage of their daily or

44:43.920 --> 44:48.300
weekly sales to the provider. If
they are no longer providing

44:48.300 --> 44:50.970
those daily or weekly sales,
they are in breach of contract.

44:51.510 --> 44:54.990
So it is not a traditional loan.

44:54.990 --> 44:57.090
Speaker 1: How many loans how
many loans do you have that

44:57.090 --> 44:57.570
fail?

44:59.040 --> 45:03.150
Chris Grimm: So across our
entire across our entire

45:03.180 --> 45:08.160
membership, I believe the number
is is 4 to 6%. I don't remember

45:08.160 --> 45:11.310
off the top of my head. But I
can I can find that out and get

45:11.310 --> 45:12.870
that to you as well.

45:13.200 --> 45:15.060
Delegate Howard: Yeah, I'd like
to see that because I'm just

45:15.060 --> 45:17.490
trying to get a sense of what
the business model is. I mean,

45:17.850 --> 45:20.520
there's no legal recourse, we
can't go in and get the money.

45:21.420 --> 45:26.340
But we loan all this money out.
I mean, I just I can't see.

45:26.850 --> 45:29.640
Chris Grimm: It's so the
business model is actually more

45:29.640 --> 45:33.630
akin to taking on an investor.
Right? So I'm a small business

45:33.630 --> 45:34.170
my dad was,

45:34.170 --> 45:36.460
Delegate Howard: That's what you
are. But that's what gets to a

45:36.460 --> 45:40.000
little bit more to the secondary
part. Part of my argument, which

45:40.000 --> 45:43.630
is, with any investment comes
risk, and the financing is based

45:43.630 --> 45:46.480
on that risk. And the higher the
risk, the higher the financing,

45:47.230 --> 45:49.240
what we're trying to get to the
meat of here.

45:49.870 --> 45:52.330
Chris Grimm: Correct, correct.
But But what I mean is, it's

45:52.330 --> 45:56.680
more like taking on an investor,
if I own a small business, and I

45:56.710 --> 46:00.280
take out a sales based financing
product. In exchange for that

46:00.280 --> 46:04.000
funding, I am promising to pay a
portion of my revenue to the

46:04.030 --> 46:06.970
provider just as I can fund an
investor, but instead of that

46:06.970 --> 46:10.090
investor, you know, having a
portion of my revenue for the

46:10.090 --> 46:13.510
life of my business, it is just
until I reach a set amount of

46:13.510 --> 46:15.130
money going back to them.

46:17.020 --> 46:19.960
Delegate Howard: Okay, so I need
more clarification on what you

46:19.960 --> 46:22.630
do when that set amount of money
is not reached, because I can't

46:22.630 --> 46:27.820
imagine that $9 billion, which
was quoted earlier. Just sort of

46:27.820 --> 46:29.290
like if if people default on
that this sort of we shrug our

46:29.290 --> 46:32.890
shoulders and I just I can't I
can't imagine that that's the

46:33.070 --> 46:39.970
case. So I don't want to take up
the committee any more the

46:39.970 --> 46:42.520
committee's time. I think that's
another testimony to get to

46:42.520 --> 46:44.680
mountain vice chair. So, thank
you.

46:45.760 --> 46:49.570
Madam Chair: Oh man, I see no
other questions for Mr. Grimm.

46:49.660 --> 46:55.600
Catherine Fisher. Is miss Fisher
still here?

46:56.260 --> 46:57.010
Katherine Fisher: I'm here.

46:57.280 --> 46:57.730
Madam Chair: Okay.

46:57.910 --> 47:03.670
Katherine Fisher: Thank you very
much. My name is Kate Fisher,

47:03.700 --> 47:06.490
and I'm a partner with the
Maryland based law firm Hudson

47:06.490 --> 47:10.840
Cook. I'm also a residents of
district resident district 42 B.

47:12.700 --> 47:15.310
And I'm here today representing
the commercial finance

47:15.310 --> 47:18.640
Coalition, a group of
responsible finance companies

47:18.640 --> 47:21.580
that provide capital to small
and medium sized businesses

47:21.580 --> 47:25.540
through innovative method. The
commercial finance coalition

47:25.540 --> 47:28.720
supports disclosures and
licensing and the ban on

47:28.720 --> 47:32.860
confessions of judgment. The
commercial finance coalition

47:32.890 --> 47:38.470
does not support and opposes an
APR disclosure, and an APR cap.

47:39.100 --> 47:41.140
There are four points I would
like to make and then I'd like

47:41.140 --> 47:44.410
to briefly address two of the
comments that have been made so

47:44.410 --> 47:49.150
far. First, a sales based
financing transaction is not a

47:49.150 --> 47:53.290
loan. It is a form of factoring,
which is a sale transaction that

47:53.290 --> 47:58.630
is regulated under the Uniform
Commercial Code. Second, because

47:58.660 --> 48:01.600
a sales based financing
transaction is not a loan, the

48:01.600 --> 48:05.410
requirement to disclose an
estimated APR will result in a

48:05.410 --> 48:10.480
misleading disclosure because it
will be wrong. APR is short for

48:10.480 --> 48:13.570
annual percentage rate and is a
requirement of the federal Truth

48:13.570 --> 48:17.080
in Lending Act for consumer
credit transactions. We're all

48:17.080 --> 48:20.320
familiar with the term APR
because we see it and see it

48:20.320 --> 48:23.470
disclosed anytime we finance the
purchase of a car or look at our

48:23.470 --> 48:27.640
credit card statements. But an
APR calculation is highly

48:27.640 --> 48:34.690
technical and complicated. I
want to share my is it possible

48:34.690 --> 48:37.120
for me to share my screen I was
going to show the.

48:38.500 --> 48:40.450
Madam Chair: I don't think we
have that capability.

48:41.020 --> 48:43.720
Katherine Fisher: Okay. Well,
let me hold it up. But it won't

48:43.720 --> 48:48.310
be as, if you can see this, is
the formula.

48:48.640 --> 48:51.580
Madam Chair: You don't have
anything in the window. Oh,

48:51.580 --> 48:54.790
really? Yeah. Alright. Now you
do but. Okay. Initially, all we

48:54.790 --> 48:58.510
saw was blank paper. Okay, can
you see this? This is we can see

48:58.510 --> 49:00.100
how complicated that looks. Yes.

49:00.240 --> 49:02.130
Katherine Fisher: Thank you, I'd
hope to show you that the

49:02.130 --> 49:06.810
complicated math formula. And
this APR calculation takes

49:06.810 --> 49:09.990
information such as interest
rate, the required payment

49:09.990 --> 49:14.340
schedule and the loan term and
creates the APR disclosure in a

49:14.340 --> 49:16.950
sales based financing
transaction there is no interest

49:16.950 --> 49:20.130
rate, there is no required
payment schedule or loan term.

49:20.760 --> 49:24.360
As a result, the APR disclosure
will be made up of guesses that

49:24.360 --> 49:27.150
will be run through that
equation I showed you. This will

49:27.150 --> 49:30.090
not result in a helpful
disclosure for business owners.

49:30.660 --> 49:33.570
Third, requiring financing
providers to give a disclosure

49:33.570 --> 49:37.230
that they know will be wrong
create significant litigation

49:37.230 --> 49:40.920
risks. The result will be that
many providers of financing for

49:40.920 --> 49:44.520
small businesses will stop doing
business in Maryland, and an APR

49:44.520 --> 49:49.470
cap will have the same result.
Finally, small business finance

49:49.470 --> 49:53.040
is complicated. Last call the
Office of the Commissioner of

49:53.040 --> 49:56.730
financial financial regulation
formed a workgroup to gather

49:56.730 --> 50:00.390
information and address this
issue. Unfortunately, the

50:00.390 --> 50:03.810
workgroup was disbanded after
only one meeting and little

50:03.810 --> 50:08.670
input opportunity was available
to industry. Rather than pushed

50:08.670 --> 50:11.430
to implement legislation on a
complicated issue that will

50:11.430 --> 50:14.130
result in limiting access to
capital for Maryland small

50:14.130 --> 50:16.950
businesses. We ask that the
commissioner of financial

50:16.950 --> 50:20.100
regulation be authorized to
reform the workgroup and conduct

50:20.100 --> 50:24.390
a study to provide guidance on
meaningful legislation. Then,

50:24.420 --> 50:27.390
just quickly, two points, I'd
like to briefly address.

50:27.420 --> 50:29.160
Madam Chair: You are overtime,
so very quickly.

50:29.520 --> 50:32.460
Katherine Fisher: Thank you. The
Federal Reserve study mentioned

50:32.460 --> 50:35.910
by a couple of folks this study
is called browsing to borrow.

50:36.210 --> 50:41.340
And it looks at the need for
disclosure and Small Business

50:41.340 --> 50:45.810
Finance, which we agree with. It
did not say that APR is the most

50:45.810 --> 50:49.260
important disclosure rather, it
said broadly that disclosures

50:49.260 --> 50:53.040
are needed. In addition,
question about New York and

50:53.040 --> 50:57.690
California. No state has yet
figured out how to apply an APR

50:57.690 --> 51:00.810
to a sales based financing
product. California's

51:00.810 --> 51:05.400
legislation requires an annual
rate but not APR. The regulator

51:05.400 --> 51:07.680
has spent several years working
through how that might be

51:07.680 --> 51:12.030
disclosed. The New York
legislation does require an APR.

51:12.030 --> 51:15.870
But we have not seen how the
regulator will implement this.

51:15.870 --> 51:20.070
So as of yet, no state has done
this. And thank you so much for

51:20.130 --> 51:20.550
the time.

51:21.090 --> 51:23.850
Madam Chair: Okay. Any questions
for Miss Fisher? Delegate

51:23.850 --> 51:24.210
Howard.

51:25.650 --> 51:27.570
Delegate Howard: It's just a
suggestion. I mean, he said that

51:27.570 --> 51:30.240
they can't do an APR. We've
already heard testimony from a

51:30.240 --> 51:33.360
couple of businesses here today
that they are even in their

51:33.360 --> 51:37.710
underwriting formula, I would I
would call them and get with

51:37.710 --> 51:40.620
them on that, because it seems
like some members of the

51:40.620 --> 51:43.050
community are already doing.

51:43.050 --> 51:44.170
Katherine Fisher: Well, I just I
disagree, respectfully delegate

51:44.170 --> 51:47.023
Delegate Howard: What we're
talking about. We're talking

51:47.023 --> 51:51.399
Howard, because they are
disclosing at an estimated

51:51.485 --> 51:54.060
calculation. However, that is.

51:55.630 --> 51:56.530
about an estimate.

51:56.680 --> 51:59.290
Katherine Fisher: That's right.
But it will be wrong when it is

51:59.290 --> 52:03.700
disclosed to a small business
owner, the calculation will not

52:03.700 --> 52:07.630
be a true reflection of the cost
of capital. That was my point.

52:08.950 --> 52:10.690
Delegate Howard: Well, they're
already doing it, though. So

52:10.690 --> 52:16.150
they're already disclosing wrong
rates. Is that your testimony?

52:16.180 --> 52:20.140
So the people that have talked
about already doing this, or

52:20.470 --> 52:22.900
better yet, take it one step
further, the people that are

52:22.900 --> 52:25.750
doing this as far as
underwriting concern are wrong?

52:25.750 --> 52:28.300
Katherine Fisher: I don't
believe that they're calculating

52:28.300 --> 52:32.560
an APR during underwriting,
they're calculating some of the

52:32.560 --> 52:37.330
other metrics. As far as
disclosing an APR. It is a very

52:37.330 --> 52:40.990
technical calculation and the
it's a little bit garbage in

52:40.990 --> 52:47.440
garbage out, when you are making
guesses about what the payments

52:47.440 --> 52:51.460
will be what the loan term will
be. transaction without these

52:51.460 --> 52:54.070
types of requirements. You're
not going to get a good

52:54.070 --> 52:56.320
disclosure. There are other
better, more helpful

52:56.320 --> 52:57.310
disclosures.

52:58.900 --> 52:59.680
Delegate Howard: Okay, thank
you.

53:01.330 --> 53:03.760
Madam Chair: See, Delegate
Rogers, you had your hand up?

53:07.630 --> 53:11.200
Delegate Rogers: Yes, Madam
Chair, but I think delegate

53:11.200 --> 53:15.010
Howard got my quote that day. I
just got them all.

53:15.040 --> 53:18.220
Madam Chair: Alright. Thank you.
I see no further questions for

53:18.220 --> 53:25.810
Miss Fisher. And we'll move to
Stephen Dennis. Stephen Dennis

53:25.810 --> 53:26.440
still here?

53:26.440 --> 53:28.747
Steve Denis: Yeah, I'm here.
Sorry. My name is Steve Dennis.

53:28.805 --> 53:32.079
I'm the executive director of
the Small Business Finance

53:32.137 --> 53:33.980
Association. First, I want to
thank this committee for your

53:33.980 --> 56:35.645
Thank you for your testimony
questions for Mr. Dennis? Seeing

53:35.645 --> 53:39.269
leadership in response to this
pandemic. Your work is critical

53:39.327 --> 53:42.776
to ensuring small businesses
have equal access to all types

53:42.835 --> 53:45.933
of financing and, and all
support as they continue to

53:45.991 --> 53:49.674
recover. It is this reason among
many others, we are opposed to

53:49.732 --> 53:53.006
this bill. As you know from
testimony this bill narrowly

53:53.064 --> 53:56.396
targets one particular product
of many with new rules and

53:56.455 --> 53:59.728
regulations that would make it
impossible to continue to

53:59.786 --> 54:03.060
provide this as an option and
create a mess of different

54:03.118 --> 54:06.275
disclosures and rules for the
many products offered in

54:06.333 --> 54:09.899
Maryland. One example of this
confusion was evident last year

54:09.958 --> 54:13.582
before this committee last year,
a small business testified in

54:13.640 --> 54:16.797
support of a ban on sales based
financing products. In

54:16.855 --> 54:20.187
actuality, this business
received a traditional loan from

54:20.246 --> 54:23.870
a supporter of this legislation
that would be that wouldn't be

54:23.928 --> 54:27.436
subject to this bill. These
loans are made through federally

54:27.494 --> 54:31.177
chartered banks based in Utah or
other places designed to avoid

54:31.235 --> 54:34.801
state laws. This is the same
loophole that payday lenders use

54:34.859 --> 54:38.191
to continue lending in Maryland
despite the band and this

54:38.250 --> 54:41.582
legislation wouldn't impact
these transactions. You know,

54:41.640 --> 54:44.797
the pandemic has hit both
businesses and people really

54:44.855 --> 54:48.479
hard. Credit scores have dropped
and many in Maryland struggle

54:48.538 --> 54:51.811
simply to put food on the table,
let alone finance their

54:51.870 --> 54:55.377
businesses. Traditional loans
require personal credit checks

54:55.436 --> 54:58.826
collateral, and for some that
isn't an option. Sales based

54:58.884 --> 55:02.158
financing is focused on the
success of your business and

55:02.216 --> 55:05.665
less about previous financial
mistakes, we've all had them.

55:05.724 --> 55:09.231
This is why the approval rate
for these types of products is

55:09.289 --> 55:12.914
84% over the last year in the
during the pandemic, compared to

55:12.972 --> 55:16.538
just over 50% for traditional
loans. Lastly, I want to go off

55:16.596 --> 55:20.045
the cuff here a little and
address some something mentioned

55:20.104 --> 55:23.611
by delegate Howard. You know,
these products are designed to

55:23.669 --> 55:27.118
be flexible, the terms change
and to accurately reflect the

55:27.177 --> 55:30.392
cost APR can be misleading
because it isn't an interest

55:30.450 --> 55:34.250
rate, it's a measure of the time
value of money term is extremely

55:34.308 --> 55:37.698
important. You know, Delegate
our for as an example, if we

55:37.757 --> 55:40.972
were to go to lunch, which I
hope to do some day, and I

55:41.030 --> 55:44.772
bought you lunch for for $9 and
a month later I saw you you gave

55:44.830 --> 55:48.454
me $10 To repay simple enough
you pay me back one extra dollar

55:48.513 --> 55:51.786
that's roughly 10%. After a
month on the loan on on that

55:51.845 --> 55:55.293
loan, that would be almost a
250% APR. If you didn't see me

55:55.352 --> 55:59.093
for about a year. You know, next
year when we're at this hearing

55:59.151 --> 56:02.893
again, and you gave me $10 back
for that lunch I bought you that

56:02.951 --> 56:05.932
APR would be only 21%. With
respect to our industry

56:05.991 --> 56:09.264
opponents on this bill. We
firmly support disclosure. We

56:09.323 --> 56:13.005
wrote the bill to ban COJ's in
New York. We worked with Senator

56:13.064 --> 56:16.396
Glaser in California to help
draft a majority of the bill

56:16.454 --> 56:19.377
that passed. We support
meaningful disclosure that

56:19.435 --> 56:23.060
applies to all products equally.
Thank you for your time. Yes.

56:28.670 --> 56:31.910
none, we will go to our last
witness Alexis Shapiro.

56:34.030 --> 56:36.250
Alexis Shapiro: Yes, good
afternoon. My name is Alexis

56:36.250 --> 56:40.750
Shapiro and I'm the General
Counsel at Ford Financing. We

56:40.750 --> 56:44.290
are also a member of the SP FA.
We're a fintech company that has

56:44.290 --> 56:48.550
provided nearly $1 billion in
working capital to 26,000 small

56:48.550 --> 56:51.760
businesses across the country.
In Maryland, we've funded over

56:51.760 --> 56:55.750
450 small businesses totaling
more than $21 million in

56:55.750 --> 57:01.000
financing. We provide our small
business customers with what 664

57:01.000 --> 57:04.090
refers to a sales based
financing. Our product is one

57:04.090 --> 57:07.060
through which customers receive
quick upfront capital and an

57:07.060 --> 57:10.450
exchange they pay us a
percentage, typically 10% of

57:10.450 --> 57:14.050
their gross receipts over time
until the amount purchased is

57:14.050 --> 57:17.920
remitted and fall because we are
only entitled to 10% of daily

57:17.920 --> 57:21.340
revenues if our customers
revenues decrease, so to do that

57:21.340 --> 57:25.030
are required daily or weekly
payments to us. Unlike with a

57:25.030 --> 57:28.870
loan there are no fixed
payments. The unique structure

57:28.870 --> 57:31.750
of sales based financing has
proven critical to a large

57:31.750 --> 57:34.210
percentage of our customers
throughout the COVID 19

57:34.210 --> 57:39.520
pandemic. For example, in March
2020, Ford financing funded and

57:39.520 --> 57:44.320
Annapolis based Home Remodeling
Company RAM construction. Just

57:44.320 --> 57:47.650
days after this funding, the
country shut down due to COVID

57:47.650 --> 57:50.650
and RAM was no longer able to
get into people's homes to work

57:50.650 --> 57:53.830
on their projects. Pursuant to
our funding contract Ford

57:53.830 --> 57:57.550
financing paused all payments
due from RAM and kept that pause

57:57.550 --> 58:01.330
in place until May 2020, When
RAM was finally able to restart

58:01.330 --> 58:04.930
work on some of their projects.
Because RAM's ramp up was slow.

58:04.930 --> 58:07.840
However, Ford Financing worked
with them to arrange payment

58:07.840 --> 58:12.250
terms consistent with their now
decreased revenue flow. Sam

58:12.280 --> 58:16.870
Allura, the owner of RAM stated,
and this is on our website. If

58:16.870 --> 58:19.750
you are a business owner, you
cannot go through hurdles and

58:19.750 --> 58:22.990
wait weeks to get capital, we
needed money for materials and

58:22.990 --> 58:26.440
payroll. And since we have to
hit certain benchmarks of a

58:26.440 --> 58:30.040
project before we get paid, we
needed money to bridge the gap.

58:30.220 --> 58:33.490
He described COVID as a scary
time and said he was grateful

58:33.490 --> 58:36.340
for the flexible financing
product because that allowed his

58:36.340 --> 58:39.250
company to break and payments
when they needed it. Mr. Allura

58:39.280 --> 58:44.230
has renewed with us four times.
In conclusion, foreign financing

58:44.230 --> 58:48.250
opposes HB 664 is written the
complexity of the bill,

58:48.250 --> 58:51.280
including its rate cap and other
provisions will simply make it

58:51.280 --> 58:54.970
impossible for us to comply and
less thus force us to tell

58:54.970 --> 58:58.030
customers like RAM construction
that we can no longer help them.

58:58.240 --> 59:01.540
That said we do support efforts
to improve transparency and

59:01.540 --> 59:04.300
promote good behavior in the
alternative financing industry.

59:04.450 --> 59:07.330
And we look forward to working
with the committee to that end.

59:08.350 --> 59:08.950
Thank you.

59:09.250 --> 59:10.750
Madam Chair: Thank you, Delegate
Howard.

59:11.100 --> 59:13.500
Speaker 1: Thank you, Madam Vice
Chair, how will it be impossible

59:13.500 --> 59:16.740
to comply in other states? You
said you're doing a billion

59:16.740 --> 59:21.150
dollars throughout the country.
I got to think as just you know,

59:21.270 --> 59:26.520
having served my college term
and Marine Corps that nobody's

59:26.520 --> 59:30.720
just going to walk away from a
billion dollars, not including

59:30.720 --> 59:33.120
interest, they're gonna find a
way to make it work. And

59:33.120 --> 59:37.740
evidently, California and New
York are doing just that. So I

59:37.740 --> 59:41.070
mean, you say you oppose the
bill, but largely what we're

59:41.070 --> 59:44.190
trying to establish is a
regulatory structure. So you're

59:44.190 --> 59:48.060
outright opposing your
regulatory structure and

59:48.090 --> 59:51.300
disclosures. I mean, that's what
I'm that's what I'm hearing. So

59:51.330 --> 59:54.600
I mean, what that's what you
said we oppose the bill. A lot

59:54.600 --> 59:57.570
of people here have talked
about, you know, caps and these

59:57.570 --> 01:00:00.000
types of things and how some of
those things would net

01:00:00.000 --> 01:00:03.900
negatively affect them. And
that's a discussion that's going

01:00:03.900 --> 01:00:09.210
to be had, I would imagine for
all sides moving forward. But,

01:00:10.170 --> 01:00:14.400
you know, I guess I just don't
understand some of that we just,

01:00:14.400 --> 01:00:16.620
it's going to be impossible for
us to continue, it's going to be

01:00:16.620 --> 01:00:18.810
impossible. They're already
doing it in a couple of states.

01:00:19.140 --> 01:00:22.440
And you just talked about
yourself about a billion dollars

01:00:22.440 --> 01:00:27.660
loaned out. And, you know, I
didn't go to Berkeley or I

01:00:27.660 --> 01:00:30.750
didn't, but I just can't imagine
businesses throughout the United

01:00:30.750 --> 01:00:34.020
States, loaning this type of
capital with this type of fast

01:00:34.020 --> 01:00:37.230
return. And this type of
flexibility and providing this

01:00:37.230 --> 01:00:40.290
great service that you're
talking about walking away from

01:00:40.290 --> 01:00:44.340
that, because simply, a handful
of states so far have put in a

01:00:44.340 --> 01:00:46.170
regulatory and licensing scheme.

01:00:47.950 --> 01:00:51.280
Madam Chair: Yes, if I, if I
could respond. The APR

01:00:51.280 --> 01:00:53.980
disclosure schemes in California
in New York haven't been spelled

01:00:53.980 --> 01:00:56.770
out specifically yet, as I
believe Miss Fisher was

01:00:56.770 --> 01:01:02.950
discussing earlier. What we're
saying is, if you fought for in

01:01:02.950 --> 01:01:06.040
the example, I used the RAM
construction example, if we were

01:01:06.040 --> 01:01:09.370
forced to disclose an APR for
them on day one, the day they

01:01:09.370 --> 01:01:12.190
took out their financing, we
would have had to assume they'd

01:01:12.190 --> 01:01:15.760
pay us back in some finite
period, say six months, which

01:01:15.760 --> 01:01:18.640
would lead to an APR disclosure
that sounded higher than it

01:01:18.640 --> 01:01:23.710
turned out to be. As it turns
out, in that, in that scenario,

01:01:23.710 --> 01:01:28.330
rather, pay us back because
COVID hit them badly. So we gave

01:01:28.330 --> 01:01:31.420
them the time a more traditional
lender might not have but

01:01:31.420 --> 01:01:34.540
because we gave them more time,
their APR turned out to be way

01:01:34.540 --> 01:01:39.730
different than we could possibly
have calculated on day one. That

01:01:39.730 --> 01:01:43.000
harm supposed to the customer
and depending on what the

01:01:43.630 --> 01:01:47.770
liability scheme or otherwise is
laid out in a particular state,

01:01:47.770 --> 01:01:51.370
it might make it so that if we
won't be willing to take the

01:01:51.370 --> 01:01:55.120
risk, if we're going to be found
liable for miscalculating an

01:01:55.120 --> 01:01:58.180
APR, that's impossible to
calculate to begin with, how

01:01:58.180 --> 01:02:02.800
could we possibly continue doing
business in that state, we do

01:02:02.800 --> 01:02:06.790
support them, we absolutely
think it should say on the front

01:02:06.820 --> 01:02:10.060
arm, the front page of our
contracts say this is how much

01:02:10.060 --> 01:02:12.550
money you're receiving. This is
how much money you're going to

01:02:12.550 --> 01:02:16.450
pay us back. And this is the fee
we charge. So that is front and

01:02:16.450 --> 01:02:18.910
center on the front of every one
of our contracts. So there's no

01:02:18.910 --> 01:02:21.910
hiding what the customer is
going to be paying us back.

01:02:25.170 --> 01:02:28.680
Delegate Howard: So looks like
the other example that was used

01:02:28.680 --> 01:02:31.980
about going to lunch and $1
being 250% within the first

01:02:31.980 --> 01:02:36.870
month. So this now we're at the
heart of the matter. So the

01:02:36.870 --> 01:02:40.650
longer these things are carried
out, the less the APR. And we're

01:02:40.650 --> 01:02:43.110
I think I've gotten to it so
we're a little worried that with

01:02:43.110 --> 01:02:48.000
six months of financing, you're
looking at a 200% AC a APR,

01:02:48.120 --> 01:02:52.080
okay. And in the RAM. And that's
what's going on. So it's six

01:02:52.080 --> 01:02:57.330
months at a high interest rate.
And on a high volatility loan,

01:02:57.360 --> 01:03:01.560
essentially, potentially high
high volatile. So that's what

01:03:01.560 --> 01:03:05.820
we're, okay. Thank you. Very
enlightening. Thank you.

01:03:06.060 --> 01:03:10.350
Madam Chair: Okay. Alright.
Seeing no further questions.

01:03:11.730 --> 01:03:15.000
Thank you all very much. That
concludes the bill hearings for

01:03:15.000 --> 01:03:19.920
today. And we will see everyone
back at hopefully 130 tomorrow

01:03:19.950 --> 01:03:24.510
depending upon how the fork
goes. Anyway, thank you all very

01:03:24.510 --> 01:03:28.560
much. Thanks for hanging out
till 513 and we will see you

01:03:28.560 --> 01:03:28.830
tomorrow.