00:00.000 --> 00:03.090 Senator Kramer: eGood afternoon, Madam Chair, Mr. Vice Chair, 00:03.090 --> 00:07.830 members of Finance Committee, Kramer to introduce Senate Bill 00:07.860 --> 00:16.110 532, which deals with regulating and licensing, sales based 00:16.140 --> 00:23.370 financing products. These transactions are not currently 00:23.370 --> 00:28.050 regulated by Maryland law. And colleagues, hopefully this 00:28.050 --> 00:33.300 legislation will sound somewhat familiar to you. As I introduced 00:33.300 --> 00:40.050 legislation last year on the same subject. I have had some 00:40.050 --> 00:44.430 conversations with representatives of the industry. 00:44.850 --> 00:49.170 And there has been some limited meeting of the minds 00:49.170 --> 00:57.060 predominantly around the idea of regulating the industry rather 00:57.060 --> 01:03.540 than prohibiting the industry. But the regulating part is where 01:03.540 --> 01:08.940 we are going to have to agree to disagree. Last year's 01:08.940 --> 01:12.120 legislation that I brought to the committee would have 01:12.120 --> 01:18.480 prohibited prohibited merchant cash advances in Maryland. 01:20.370 --> 01:25.920 Merchant cash advances are just one type of sales based 01:25.920 --> 01:32.910 financing. The industry made their case that they believe 01:32.910 --> 01:39.180 there is a market for this kind of financing and Maryland and 01:39.210 --> 01:44.550 those folks who have are concerned about the predatory 01:44.550 --> 01:50.910 nature of this industry, and I accepted the notion that all 01:50.910 --> 01:56.550 right, maybe there is a place for it, if it is properly 01:56.970 --> 02:02.460 licensed and regulated. So the legislation before you this 02:02.460 --> 02:07.770 year, does not prohibit the practice, it regulates in 02:07.770 --> 02:12.810 licenses generate not just merchant cash advances, but all 02:12.810 --> 02:19.620 forms of sales based cash advances, and other similar 02:20.220 --> 02:25.620 pardoning online financing, which is also referred to as 02:25.650 --> 02:32.490 FinTech lending. The bill is limited in its scope, to 02:32.490 --> 02:39.300 financing and amounts of $500,000 or less. The reason for 02:39.300 --> 02:45.420 that is that we are looking to protect small businesses in the 02:45.420 --> 02:51.210 state, mom and pop businesses in the state. This is not about 02:51.300 --> 02:58.200 Martin Marietta, or Lockheed Martin, or Marriott. This is 02:58.200 --> 03:04.680 about our small mom and pop businesses. And currently, there 03:04.680 --> 03:09.210 is no regulation of this industry, and it is the Wild 03:09.210 --> 03:17.580 West. So the way these deals work, is that in exchange for an 03:17.580 --> 03:26.430 amount of money, let's say it's $100,000. The online lender 03:27.270 --> 03:35.790 agrees to sell that small business $100,000 And a small 03:35.790 --> 03:43.020 business obligates itself to pay back that 100,000 And another 03:43.170 --> 03:53.700 $100,000 on top. And what the lender does, is they have access 03:54.150 --> 04:00.750 to the business's credit card and bank accounts, and they suck 04:00.750 --> 04:06.270 their money every day at the close of business right off the 04:06.270 --> 04:12.990 top until their $100,000 is paid back over whatever period of 04:12.990 --> 04:20.010 time they've agreed to do it. And the $100,000 interest that 04:20.010 --> 04:27.240 they've charged is also paid back. So they consider this a 04:27.270 --> 04:34.440 sale. So it is not in their definition a loan and therefore 04:34.440 --> 04:39.960 is not governed by federal and state regulations. The way banks 04:39.960 --> 04:42.360 and credit unions are right now. 04:43.740 --> 04:47.310 As the industry grows and flourishes and it has 04:47.340 --> 04:52.530 dramatically based on its ability to charge Unlimited, 04:52.830 --> 04:57.060 unlimited interest rates and frequently mislead and 04:57.060 --> 05:02.370 fraudulently Miss characterize their Financing products. The 05:02.370 --> 05:07.440 stories of businesses ruined as a consequence are springing up 05:07.590 --> 05:14.400 like mushrooms after a summer storm. Stories of 400% interest 05:14.400 --> 05:19.050 rates are more common than not stories of aggressive 05:19.050 --> 05:24.600 confessions of judgment. Were part of the documents that the 05:24.600 --> 05:29.730 small business sign allows the lender to go into court and just 05:29.730 --> 05:33.660 present the document and claim that the small business has 05:33.660 --> 05:39.690 failed to make a payment allows them to seize the assets of the 05:39.690 --> 05:43.800 business without the business having any opportunity to go 05:43.800 --> 05:47.490 into court or get a lawyer to come in and say no, wait a 05:47.490 --> 05:51.540 minute, this is not accurate. I'm current on my payments. 05:51.540 --> 05:52.650 Speaker 2: I'm ready to testify. 05:53.370 --> 05:57.720 Senator Kramer: Cold calls. aggressive sales tactics with 05:57.720 --> 06:01.260 misleading information are hallmarks of the industry and 06:01.260 --> 06:05.760 harassing follow up calls, pushing small business owners to 06:05.760 --> 06:10.800 take deals that are too good to be true because they are too 06:10.800 --> 06:15.330 good to be true. Our standard operating procedures of this 06:15.330 --> 06:22.470 industry, the industry as a whole is to the mom and pop 06:22.470 --> 06:27.480 businesses and merchants what payday loans were to consumers. 06:28.020 --> 06:33.210 That is why we banned them in Maryland. But this business, I 06:33.210 --> 06:39.720 mean, this bill doesn't ban it, license and regulate. Businesses 06:39.720 --> 06:43.740 begin a death spiral as their profits are sucked off the top 06:43.740 --> 06:48.720 by the FinTech lenders that are connected connected directly to 06:48.720 --> 06:53.610 their bank accounts. The Federal Reserve conducted a study which 06:53.610 --> 06:58.800 has raised significant red flags and alarms about this industry, 06:58.980 --> 07:03.360 and its frightening and dangerous practices. Bloomberg 07:03.510 --> 07:08.520 has had a months and months long, ongoing investigation 07:08.850 --> 07:12.750 about vulnerable and unsuspecting businesses being 07:12.750 --> 07:17.190 destroyed due to the predatory practices of these lenders. And 07:17.190 --> 07:21.870 in their most recent chapter, Bloomberg offered the following 07:21.870 --> 07:26.040 about one of the small businesses that they 07:26.040 --> 07:31.200 interviewed. And they say, the company advanced the business a 07:31.200 --> 07:41.160 total of $250,000, the business paid back more than $600,000. 07:41.370 --> 07:47.070 And the company still still seize their assets and put them 07:47.070 --> 07:51.480 out of business. It is imperative that we act this 07:51.480 --> 07:55.950 session to implement the protections in this bill, with 07:55.950 --> 08:00.870 the exception of the rate cap, which I will discuss in greater 08:00.870 --> 08:07.170 detail as we go along. The bill before you right now matches 08:07.170 --> 08:11.730 what has been done in California, the fourth largest 08:11.730 --> 08:18.240 economy on planet Earth. And in New York, California and New 08:18.240 --> 08:22.290 York have adopted these regulations. Much of the 08:22.290 --> 08:26.910 language of this bill has been lifted verbatim from the New 08:26.910 --> 08:33.570 York law, including annual percentage rate requirements 08:33.600 --> 08:37.830 estimates of an annual percentage rate, the industry 08:37.830 --> 08:44.640 will be whining to you all about how it is not possible to do an 08:44.640 --> 08:50.340 estimated APR. Well, it is possible. And if the industry 08:50.340 --> 08:55.680 wants to sell its products in California and New York, they 08:55.680 --> 09:00.660 will be providing an estimated APR to the businesses that they 09:00.660 --> 09:04.860 are profiting from. And the reason New York and California 09:04.860 --> 09:10.410 are requiring this is so that the small business owners will 09:10.410 --> 09:15.870 have a better idea of what it is that they are signing and what 09:15.870 --> 09:20.790 they're going to be paying and obligating themselves to. So 09:20.790 --> 09:26.370 what's in the bill. It's not a whole lot. The first 20 pages 09:27.330 --> 09:33.360 deal with number one, the licensing regime. And that will 09:33.360 --> 09:36.150 come under the Office of the Commissioner of financial 09:36.150 --> 09:40.350 regulation, when that office is intimately familiar with the 09:40.350 --> 09:45.270 language of this bill. They have been very involved during the 09:45.270 --> 09:53.460 interim in working through this language. Number two in the bill 09:53.820 --> 09:59.460 is the required estimated APR that I just Made mentioned to, 09:59.970 --> 10:05.700 and it comes straight out of what New York has already passed 10:05.700 --> 10:12.210 into law. So when they tell you it can't be done, it can be 10:12.210 --> 10:12.750 done. 10:16.050 --> 10:22.890 Number three disclosures, what kind of disclosures? It's pretty 10:22.890 --> 10:27.870 simple stuff. The total amount of the funds provided the 10:27.870 --> 10:34.530 estimated annual percentage rate, the term of the loan, the 10:34.530 --> 10:39.540 method, frequency and amount of payments, fees that will be 10:39.540 --> 10:45.930 charged that may not be currently disclosed a copy of 10:45.930 --> 10:50.580 the transaction documents to the small business owner and a 10:50.580 --> 11:00.570 description of collateral requirements. Number four, the 11:00.570 --> 11:05.010 bill would prohibit the use of confessions of judgment and 11:05.010 --> 11:07.890 you're going to have some of these folks in the industry 11:07.890 --> 11:11.820 today say no, we don't use these. And that's great if it's 11:11.820 --> 11:15.420 part of their business model not to use confessed judgment. 11:16.200 --> 11:21.120 That's great. But there are too many in the industry as a whole 11:21.420 --> 11:28.440 that do use confessions of judgment. Finally, that and this 11:28.440 --> 11:31.890 is different. I'm going to be 100% upfront with the committee 11:31.890 --> 11:40.260 about this. The bill establishes a great cap. In the bill, 11:40.260 --> 11:44.520 currently it says 24% There is an amendment and I will discuss 11:44.520 --> 11:51.840 that a little bit further, that will allow up to 36% interest. 11:52.140 --> 11:56.160 And this is going to be a policy decision community. At what 11:56.160 --> 12:05.400 point is it too much is 100%. Too much is 300%. Too much is 12:05.400 --> 12:10.920 400%. Too much interest. That's going to be a policy committee. 12:11.130 --> 12:18.270 Currently, no state has a cap in this bill. It as well. If 12:18.270 --> 12:23.670 adopted with the amendment, the cap will be 36% interest. And I 12:23.670 --> 12:27.210 welcome the opportunity, madam chair when the committee takes 12:27.210 --> 12:31.710 the bill up for a vote to discuss the rate cap, and if we 12:31.710 --> 12:37.500 think it is, in fact appropriate to put a cap on the users 12:37.500 --> 12:43.110 interests, that is currently being charged right now. So I 12:43.110 --> 12:49.230 mentioned there are going to be amendments. In fact, there are 12:49.230 --> 12:52.920 two one of which the committee has already received. It 12:52.920 --> 12:57.930 clarifies a bill drafting error that the bill applies to 12:57.930 --> 13:04.740 commercial lending. And number two, the amendment that will be 13:04.740 --> 13:11.070 coming as a consequence of the bill hearing on the House side 13:11.520 --> 13:18.690 will adopt in full the New York regulations governing all of 13:18.690 --> 13:28.170 this online lending. And and it also there is a the Attorney 13:28.170 --> 13:32.250 General's Office indicating that they felt they should not have a 13:32.250 --> 13:38.040 role to play in this legislation. So in the second 13:38.040 --> 13:41.490 amendment that I mentioned, the Attorney General's office will 13:41.490 --> 13:47.280 be taken out of the legislation and all of it will rest entirely 13:47.790 --> 13:51.510 within the commissioner of financial regulations office. 13:51.780 --> 13:57.660 With that, Madam Chair, I thank you all very much. We have the 13:57.660 --> 14:03.120 leadoff witness, Mr. Cat, its Peck is someone who is 14:03.150 --> 14:08.340 intimately familiar with this industry, because he's been in 14:08.340 --> 14:13.710 it. And he knows how important it is to do exactly what is in 14:13.710 --> 14:18.390 the bill before you because he had to compete with the bad 14:18.390 --> 14:24.420 actors. And, and he knows how important it is to put these 14:24.420 --> 14:31.320 regulations into place. So that legitimate, honest fair of folks 14:31.320 --> 14:37.140 in this industry will be the ones competing, not the bad 14:37.140 --> 14:39.120 actors. So thank you, Madam Chair. 14:40.140 --> 14:47.700 Thank you. Are there questions of the sponsor? Okay, and we're 14:47.700 --> 14:55.200 going to your need witness? Who is the noise cat it's that you 14:55.200 --> 14:58.620 have witnesses, we'll have two and a half. 14:59.580 --> 15:02.580 Speaker 4: Thank you so much. Senator Kramer, thank you so 15:02.580 --> 15:05.310 much for that introduction and Senators. I'm happy to be here. 15:05.850 --> 15:08.130 My name is Louis Caditz-Peck. I'm the Director of Public 15:08.130 --> 15:12.360 Policy at Lending Club. Lending Club is a fintech company. And 15:12.360 --> 15:15.720 we're also a bank. Over the last decade, we've facilitated about 15:15.720 --> 15:18.870 one and a half billion dollars in loans to borrowers in 15:18.870 --> 15:22.050 Maryland. I launched lending clubs small business lending 15:22.050 --> 15:26.160 program in 2014, to offer lower cost transparent loans to 15:26.160 --> 15:30.060 businesses underserved by banks. And we soon saw that small 15:30.060 --> 15:33.270 businesses struggle to access capital has really changed. 15:34.350 --> 15:38.040 Small businesses are now inundated with offers of 15:38.040 --> 15:41.520 capital, often from high cost financing companies that don't 15:41.520 --> 15:44.400 transparently disclose the rates, they'll charge. 15:45.180 --> 15:47.430 Committee, I'm going to apologize my video doesn't seem 15:47.430 --> 15:53.040 to be working, but I've joined for video on my cell phone. I 15:53.040 --> 15:55.830 can switch the sound to that if that makes it easier to follow 15:57.120 --> 16:03.330 my videos elsewhere. So it's really easy actually to imagine 16:03.330 --> 16:05.520 yourself facing the kind of situation that is small 16:05.520 --> 16:08.280 businesses in that the senator described. If you needed 16:08.280 --> 16:12.000 capital, would you take financing from a company 16:12.000 --> 16:15.900 offering a 15% purchase percentage or a loan with a 20% 16:15.900 --> 16:21.840 APR? It might not be clear, but what it helps to know if if if 16:21.840 --> 16:24.870 you were told that the first option has an APR of 120%. 16:25.680 --> 16:28.380 Without this bill, you would likely never be told that 16:28.830 --> 16:31.470 predatory lending is taking down small businesses in your 16:31.470 --> 16:35.640 districts. I spoke yesterday to a woman and Kara DiPietro, CEO 16:35.640 --> 16:38.580 of a company and Senator Zonies district. I don't know if she's 16:38.580 --> 16:42.960 a relation to Chris on the call. They build commercial interiors, 16:42.960 --> 16:46.620 including for Johns Hopkins and for the US Capitol. She is a 16:46.620 --> 16:50.490 savvy businesswoman. Mr. piatra was named Maryland's small 16:50.490 --> 16:54.810 business owner of the Year by the SBA, and she told me that 16:54.810 --> 16:57.240 when she took a new round of financing the contracts 16:57.240 --> 16:59.370 initially they seemed clear, it seemed like they told her 16:59.370 --> 17:02.700 everything they were supposed to, but they turned into a whack 17:02.700 --> 17:06.420 a mole of lies. A series of interrelated financing companies 17:06.510 --> 17:09.210 hooked her first by sending less money than they told her they 17:09.210 --> 17:11.370 were going to send. And then as she tried to get the full 17:11.370 --> 17:14.640 amount, they pulled her through this goose chase of refinances 17:14.730 --> 17:18.270 adding fees each time. There are industry words for these kinds 17:18.270 --> 17:21.570 of practices. The contract focused on an initially on a 17:21.570 --> 17:25.890 price of 10%. That was not actually the APR. Her lawyers 17:25.890 --> 17:30.360 later figured out that the APR was 200% and included these 17:30.360 --> 17:33.660 confessions of judgment that the senator described. At the end of 17:33.660 --> 17:36.990 the day. This cost her hundreds of 1000s of dollars of business, 17:37.110 --> 17:40.320 and the company just spent three years in survival mode, just 17:40.320 --> 17:42.840 trying to stay afloat fighting off these predatory lenders, 17:43.020 --> 17:47.100 instead of growing and creating jobs in Maryland. As the senator 17:47.100 --> 17:50.040 described, I work with the legislators in California in New 17:50.040 --> 17:53.940 York to pass the Small Business truth and lending laws on which 17:54.000 --> 17:57.570 Senate Bill 532 is largely based. Those laws passed with 17:57.570 --> 18:00.720 overwhelming bipartisan support very broad support from the 18:00.720 --> 18:04.050 small business community nonprofit advocacy and industry. 18:04.350 --> 18:07.230 Everyone agreed that small businesses just deserve to be 18:07.230 --> 18:09.540 told the price they're going to pay in a transparent way. 18:10.440 --> 18:13.590 Federal Reserve research has found in at least four different 18:13.590 --> 18:16.200 research studies, that small businesses today are often 18:16.200 --> 18:19.950 misled towards higher cost financing. With pricing metrics 18:19.950 --> 18:22.410 used in the market today that are not transparent 18:22.470 --> 18:25.710 sufficiently. The Fed specifically describes merchant 18:25.710 --> 18:30.120 cash advance it with the words potentially higher cost less 18:30.120 --> 18:32.640 transparent credit product, those are the Federal Reserve 18:32.640 --> 18:35.910 researchers words not mine. They also found that black and 18:35.910 --> 18:38.760 Hispanic owned businesses are twice as affected by these 18:38.880 --> 18:43.830 higher cost less transparent credit products. So why does the 18:43.830 --> 18:47.250 Federal Reserve research and California and New York and now 18:47.250 --> 18:51.210 Maryland all agree that APR is the standard for transparent 18:51.210 --> 18:55.590 disclosure rather than some other metric? It's because APR 18:55.590 --> 18:59.640 is the only metric that enables apples to apples comparisons of 18:59.640 --> 19:02.700 products of different types, amounts and likes. It's the 19:02.700 --> 19:06.570 standard embedded over 50 years of the Truth in Lending Act. As 19:06.570 --> 19:09.660 the senator described, you might hear opposition, saying that 19:09.660 --> 19:14.550 they can't estimate an APR. In fact, providers of this kind of 19:14.550 --> 19:18.450 financing already do estimate and disclose APRs. To calculate 19:18.450 --> 19:22.260 APR, whatever the form of financing, companies can use the 19:22.260 --> 19:24.870 formula that's in the federal Truth in Lending Act, it's 19:24.870 --> 19:28.470 algebra, you plug in how much money you get, and how much 19:28.470 --> 19:32.880 money you pay back. And when and it's at an APR. For sales based 19:32.880 --> 19:36.360 financing, you'd have to plug in some estimates. And these 19:36.360 --> 19:39.210 companies have the estimates, financing companies don't give 19:39.210 --> 19:41.670 away money with no expectation of when that money is going to 19:41.670 --> 19:45.630 come back to them. SB 532 provides two methods to guide 19:45.630 --> 19:48.480 these estimations to make sure there's no funny business. But 19:48.480 --> 19:51.150 also it's flexible. This is the same approach that New York and 19:51.150 --> 19:55.560 California took. Some companies with high APRs may argue that 19:55.560 --> 19:59.580 APR is not a helpful disclosure, and that quoting cost and just 19:59.580 --> 20:03.210 dollar amount should be enough, like, why isn't enough to just 20:03.210 --> 20:06.270 to tell you that the fee is going to be $10,000? It's 20:06.270 --> 20:09.510 because that does not allow you to make a comparison between 20:09.510 --> 20:12.990 financing of different amounts and different lengths to just to 20:12.990 --> 20:15.780 quickly illustrate before I close, consider you're renting a 20:15.780 --> 20:20.910 house for $10,000. Is that a good deal? You need to know how 20:20.910 --> 20:25.590 long you get to use that house for $10,000. Paying $10,000 For 20:25.590 --> 20:29.490 six months of a house or financing is more expensive than 20:29.490 --> 20:33.750 paying $10,000 for five years, what's the all in cost per year? 20:34.020 --> 20:37.380 That's what the APR tells you. I urge you to advance Senate Bill 20:37.410 --> 20:40.680 532, with the amendments that the senator described. Small 20:40.680 --> 20:42.510 businesses are really depending on it. Thank you. 20:44.220 --> 20:47.430 Madam Chair: Thank you. Are there questions of this witness? 20:47.850 --> 20:49.260 Senator Feldman? 20:49.260 --> 20:52.270 Senator Feldman: It just I apologize because I don't have 20:52.270 --> 20:58.720 access right now. With testimony but so was just so unclear 20:58.720 --> 21:00.490 because I heard a couple of different things. And I just 21:00.490 --> 21:02.500 want to make sure I got the facts and probably could ask 21:02.560 --> 21:06.820 Kramer. But, okay. Disclosure, so just back on the New York 21:06.820 --> 21:11.200 California laws, which Senator Kramer mentioned this bill's 21:11.200 --> 21:14.740 model of so I understand about the disclosure, just so I'm 21:14.740 --> 21:18.820 clear. So do those, those particular states have caps, 21:19.480 --> 21:25.270 like this one on APR, this bill is 24%. Because I heard you talk 21:25.270 --> 21:29.380 a lot about disclosures and disclosing what the deal is. But 21:29.380 --> 21:36.310 you didn't mention those states having a specific APR cap? Maybe 21:36.310 --> 21:41.380 I missed it, and I don't have. So it's not a catch, should they 21:41.440 --> 21:44.050 catch a thing? I just want to make sure I understand New York 21:44.050 --> 21:46.750 and California relative to this bill. 21:47.010 --> 21:48.780 Speaker 4: Yeah, thank you for highlighting that those bills 21:48.780 --> 21:51.090 did not include a rate cap. And as the senator pointed out, 21:51.090 --> 21:54.090 that's a really important public policy decision and frankly, a 21:54.090 --> 21:55.830 complicated one to consider. 21:56.490 --> 21:59.250 Senator Feldman: Okay, that's really pretty specific. Thank 21:59.250 --> 21:59.880 you, Madam Chair. 21:59.910 --> 22:03.510 Madam Chair: And Senator Feldman, I did by when I 22:03.660 --> 22:08.880 introduced that we do not have this makes us unique if we were 22:08.880 --> 22:10.680 to adopt this. Okay. 22:10.920 --> 22:13.740 Senator Feldman: I just wanted to make sure I heard it 22:14.160 --> 22:15.630 accurately. Right. Thank you, thanks. 22:15.630 --> 22:17.460 Madam Chair: Okay. Senator Jennings. 22:17.980 --> 22:20.650 Senator Jennings: Thank you, Madam Chair. So, Louis, you're 22:20.650 --> 22:23.200 with Lending Club? 22:24.330 --> 22:24.930 Speaker 5: That's correct. 22:25.810 --> 22:28.990 Senator Jennings: So my question is, so you say you don't do 22:28.990 --> 22:31.090 these types of loans, but you do lend in Maryland? 22:32.730 --> 22:34.830 Speaker 5: That's when I say we don't do these types of loans, 22:34.830 --> 22:37.200 I'm referring to merchant cash advances, we offer other loan 22:37.200 --> 22:37.830 products. 22:38.470 --> 22:40.870 Senator Jennings: So what I see is most people that are going to 22:40.870 --> 22:44.440 use these are businesses that are truly suffering, and are 22:44.440 --> 22:47.950 probably on the teater of going out. And this is kind of a Hail 22:47.950 --> 22:50.710 Mary pass, that some of them are going to throw to try to save 22:50.710 --> 22:55.030 their business, which has a lot of risk to the lender. So my 22:55.030 --> 22:58.330 question to you is, do you have a product that you could offer 22:58.510 --> 23:03.250 one of these businesses that knowing that going into this, 23:03.460 --> 23:05.890 that your probability of getting paid back is going to be very 23:05.890 --> 23:09.220 limited? Because of you know, the business really isn't in 23:09.220 --> 23:12.040 good shape? I'm trying to figure out what what the industry would 23:12.040 --> 23:13.120 offer a customer. 23:13.120 --> 23:18.370 Speaker 5: Senator? Yes, we do. Yes, we do. The small business 23:18.370 --> 23:22.270 financing we offer is also focused on underserved small 23:22.270 --> 23:26.110 businesses, it sees five times the representation of minority 23:26.110 --> 23:28.960 owned small businesses as compared to traditional banking. 23:29.290 --> 23:32.380 There is a risk spectrum here. And so I don't want to, you 23:32.380 --> 23:35.230 know, delude you that there's a point where a business is 23:35.230 --> 23:40.030 really, really risky and hard to lend to. And much of this 23:40.030 --> 23:43.120 industry is focused on that segment of the market. And I 23:43.120 --> 23:45.970 think the question is, are they focused on that in a way with 23:46.150 --> 23:49.510 where a, the small business knows what they're getting into? 23:49.540 --> 23:52.180 They have transparency in the documents so that they are 23:52.180 --> 23:56.020 making an informed choice? That, yes, they're making a Hail Mary 23:56.020 --> 23:59.620 pass where they know they're going to pay a 400% APR to try 23:59.620 --> 24:03.070 to resurrect their business? And second, are the products being 24:03.070 --> 24:06.520 offered by this industry offered in a way where there's oversight 24:06.640 --> 24:09.490 by the regulator so that when they try to run a scam, like 24:09.490 --> 24:13.660 they did on Ms. DiPietro's business that there's someone 24:13.660 --> 24:18.220 who can help help hold that scam to account? And third, I think 24:18.220 --> 24:21.370 you'd consider are the products at a certain level actually 24:21.370 --> 24:24.190 structured in a way that can that can help a business. I 24:24.190 --> 24:28.360 think that with the way that the senators described, this bill 24:28.360 --> 24:29.380 would help on all accounts. 24:30.330 --> 24:33.090 Senator Jennings: And then my last question, doing research on 24:33.090 --> 24:37.830 this was dealt with accounts receivable factoring. Could you 24:37.830 --> 24:41.010 consider this factoring for receivables that you're getting 24:41.010 --> 24:44.910 paid in advance for future sales? I'm just trying to figure 24:44.910 --> 24:47.100 out what the difference between this and what factoring is 24:47.100 --> 24:49.800 because research I went down a whole different rabbit hole. 24:50.110 --> 24:56.800 Speaker 4: Sure. So legally, merchant cash advance products 24:57.130 --> 25:00.160 like to associate themselves with factoring from a legal 25:00.160 --> 25:02.920 perspective, from the perspective of the business, the 25:02.920 --> 25:06.580 products are really pretty different. If you're using 25:06.580 --> 25:11.560 factoring, you actually have an invoice that you're trying to 25:11.590 --> 25:15.100 get paid on. And when you get paid on it, that's the end of 25:15.100 --> 25:18.850 the transaction for you, you got paid, the factor collects on the 25:18.850 --> 25:23.080 invoice. And that's really short term financing. That's like 3060 25:23.110 --> 25:27.490 days, maybe 90 days, typically, in Merchant Cash events, you 25:27.490 --> 25:31.510 don't have an invoice and it's really much more like a loan, 25:31.540 --> 25:34.510 I'll be at the except that the payment is variable, you're 25:34.510 --> 25:36.850 getting money, and then you're repaying it in the future over 25:36.850 --> 25:41.140 time, it tends to be the terms on these tend to be six to 18 25:41.140 --> 25:46.570 months. And they tend to be used by different classes of business 25:46.570 --> 25:51.130 to some extent. So one thing that the bill does very well to 25:51.130 --> 25:55.630 your question, Senator, is that it kind of it just avoids a lot 25:55.630 --> 25:59.020 of the legal mucky muck of whether you call these things, 25:59.710 --> 26:02.110 whether you call them merchant cash advance a loan or not, 26:02.500 --> 26:05.200 that's a hot issue. It's a legal issue that's really important to 26:05.200 --> 26:08.260 companies that don't want to be covered by lending law. And your 26:08.260 --> 26:11.530 bill basically stays out of this bill stays out of that fight by 26:11.530 --> 26:15.130 using this term sales based financing. So it doesn't really 26:15.130 --> 26:18.940 apply on whether the stuff is a loan or not alone. It just says 26:19.030 --> 26:21.850 whatever it is, it's financing. And if it's financing, we think 26:21.850 --> 26:25.090 a small business should be able to go into it informed with 26:25.090 --> 26:27.580 their eyes wide open, able to make an apples to apples 26:27.580 --> 26:28.780 comparison of the cost. 26:29.320 --> 26:30.940 Speaker 1: Right, thank you, thank you, Madam Chair. 26:31.770 --> 26:34.560 Madam Chair: I'll tell you other questions for this witness. 26:35.880 --> 26:40.710 Alright, we're going next to Kaylee Lachlear. 26:40.710 --> 26:43.150 Kaylee Lachlear: Good afternoon, honorable members of the 26:43.213 --> 26:46.776 committee, Kaylee Locklear here on behalf of the Maryland 26:46.838 --> 26:50.589 Retailers Association. Last year, the legislation introduced 26:50.651 --> 26:54.277 as you've heard was an outright ban on these types of loan 26:54.340 --> 26:58.090 products. Very clearly, we heard from industry and even some 26:58.153 --> 27:01.966 concerns on this committee, that we should be regulating them 27:02.029 --> 27:05.529 instead, which is the bill we are hearing supportive and 27:05.592 --> 27:09.405 presenting to you today. I draw your attention to the massive 27:09.468 --> 27:13.031 reporting series Bloomberg's Businessweek has released in 27:13.093 --> 27:16.532 your written testimony with story after story about the 27:16.594 --> 27:20.032 problems with sales based financing companies and their 27:20.095 --> 27:24.033 very predatory nature. They are now one of the most visible and 27:24.095 --> 27:27.909 well marketed lending products and businesses are suckered in 27:27.971 --> 27:31.784 completely unclear about what they're getting themselves into 27:31.847 --> 27:35.535 with quick and easy cash. But the sick reality is that they 27:35.598 --> 27:39.286 can end up paying back and upwards of 450% in interest with 27:39.348 --> 27:43.037 massive upfront fees. You heard what the bill does from the 27:43.099 --> 27:47.100 sponsor, but I just want to hit on two important areas. A cap is 27:47.162 --> 27:50.913 incredibly important as the interest rates these unregulated 27:50.976 --> 27:54.789 companies are getting away with is flat out criminal. What it 27:54.851 --> 27:58.352 does, Senator Jennings your points earlier is it traps a 27:58.415 --> 28:02.165 small businesses in a cycle of debt, they will never escape, 28:02.228 --> 28:06.041 with many actually having to take out another advance just to 28:06.104 --> 28:09.542 try to cover that first. And then I'll point to banding 28:09.604 --> 28:13.105 confessions of judgment. And it's also highly important. 28:13.168 --> 28:16.793 Before borrowers get a loan, they have to sign a statement 28:16.856 --> 28:20.669 giving up their right to defend themselves. If a lender takes 28:20.732 --> 28:24.482 them to court. It's like an arbitration agreement except the 28:24.545 --> 28:28.233 borrower always loses. Armed with a confession a lender can 28:28.296 --> 28:32.296 without proof and you heard this earlier accuse borrowers of not 28:32.359 --> 28:36.297 paying and legally seize their assets before they've even known 28:36.360 --> 28:39.985 what happened. In dozens of interviews and court pleadings 28:40.048 --> 28:43.986 borrowers describe lenders who forged documents, lied about how 28:44.049 --> 28:47.487 much they were owed, or fabricated defaults out of thin 28:47.549 --> 28:50.487 air. Finally, many of these online lenders have 28:50.550 --> 28:54.238 intentionally done anything and everything they can to kill 28:54.301 --> 28:58.114 these bills, not the narrative that you're about to hear from 28:58.176 --> 29:01.927 many of them. Again, New York and California have moved very 29:01.990 --> 29:05.553 similar legislation with regulations that are rolling out 29:05.615 --> 29:09.116 shortly. And finally, even the FTC is stepping in at the 29:09.178 --> 29:13.054 federal level. We urge Maryland to do the same and I'm glad to 29:13.117 --> 29:14.430 answer any questions. 29:16.590 --> 29:22.530 Madam Chair: Questions for this witness? Okay, we're going next 29:22.530 --> 29:26.010 to Robert Anton, Maryland Bankers Association. 29:27.380 --> 29:29.540 Robert Anton: Thank you very much, Madam Chairman, members of 29:29.540 --> 29:32.900 the committee, Robert Anton on behalf of the Maryland Bankers 29:32.900 --> 29:37.160 Association, and on behalf of our banks all over the state of 29:37.160 --> 29:40.580 Maryland, we'd like to thank Senator Kramer for sponsoring. 29:40.730 --> 29:44.960 We think it's important legislation. The I'm not going 29:44.960 --> 29:47.720 to repeat what the other witnesses have said. I think 29:47.720 --> 29:51.530 what I'd like to do is to call the committee's attention. You 29:51.530 --> 29:55.430 can find it online and I'll be happy to send a link, in 29:55.430 --> 30:00.320 December of 2019 the United States Federal Reserve Bank did 30:00.320 --> 30:05.960 a study on online lending. It's a lengthy document. It's a 36 30:05.960 --> 30:11.600 page, single spaced document. But it has some important things 30:11.600 --> 30:14.420 in it. What they did is they convene two different study 30:14.420 --> 30:20.240 groups with 80 small businesses, in each study group. And they've 30:20.240 --> 30:25.610 met and they discussed this and they went through it. And what 30:25.610 --> 30:30.920 they determined and I'm going to quote from the, the study, the 30:31.220 --> 30:35.720 businesses said, quote, it is difficult to compare when they 30:35.720 --> 30:39.320 are using different models and different terminology, quote, 30:39.710 --> 30:42.710 they don't like to use the word interest, and they dress it up 30:42.710 --> 30:46.460 in other ways to conceal the real cost of the loan, unquote, 30:46.940 --> 30:51.080 quote, I don't know what a factor rate is, quote, full 30:51.080 --> 30:54.680 disclosure, like on credit cards or mortgages, it's what's 30:54.680 --> 31:02.180 necessary, they need to state the actual APR, unquote, when 31:02.180 --> 31:05.390 you go down and scroll down further in this study, they took 31:05.390 --> 31:09.950 an example says table three represents APR equivalents for a 31:09.950 --> 31:15.500 common scenario in which $50,000 is repaid in six months, 31:15.650 --> 31:20.030 according to the terms and rates promoted on the lender site. So 31:20.030 --> 31:24.680 one of them advertised on the site, a 1.15, factor rate, 31:24.680 --> 31:29.360 whatever that means. The estimated APR for that loan was 31:29.360 --> 31:35.210 approximately 70%. One of them quoted a 4% fee rate, whatever 31:35.210 --> 31:40.520 that means. That was approximately a 45% APR. Another 31:40.520 --> 31:46.070 one quoted 9% simple interest. But when you calculated the APR, 31:46.310 --> 31:52.340 it was 46%. They quote that many of these loans ends up depending 31:52.340 --> 31:56.330 on when you're repaid. In triple figures, if you put it into an 31:56.330 --> 32:02.390 APR, so we support the legislation, our members do not 32:02.390 --> 32:05.060 make these loans, I don't believe they will ever make 32:05.060 --> 32:08.780 these loans. They make traditional business loans, you 32:08.780 --> 32:12.710 get a note that has a rate of interest, there's an APR, you 32:12.710 --> 32:15.530 repay it over ever, how many months you're going to repay it. 32:15.830 --> 32:19.370 And you can say I went to this bank, and they gave quoted me 32:19.370 --> 32:22.220 this rate. And I went to this bank, and they quoted me that 32:22.220 --> 32:26.660 rate, and they can compare what the rates are. And as you often 32:26.660 --> 32:28.970 heard me saying, there's no industry, I don't believe 32:28.970 --> 32:31.370 anywhere in the state of Maryland, we're in the country 32:31.370 --> 32:34.280 that's suddenly regulated as the banking industry at the state 32:34.520 --> 32:37.760 and federal level. So thank you very much. We urge the committee 32:37.760 --> 32:39.470 to give the bill a favorable report. 32:39.510 --> 32:43.830 Madam Chair: Okay, Senator Battle has a question for you. 32:44.160 --> 32:46.740 Senator Battle: Thank you, Madam Chair. And thank you, Mr. Anton. 32:46.980 --> 32:51.900 So my question isn't that I oppose having a cap on the rate. 32:51.900 --> 32:55.500 But as you and I both know, a lot of banks will not loan to 32:55.500 --> 32:59.520 the small businesses that don't have the assets. And so this is 32:59.520 --> 33:02.580 an option for some of these businesses that really don't 33:02.580 --> 33:07.680 have another way to achieve loans. So I'm not sure if we, we 33:07.680 --> 33:10.080 need to find a middle ground somewhere. So these small 33:10.080 --> 33:13.890 businesses can continue to get the money they need, you know, 33:13.890 --> 33:14.580 when they need it. 33:15.449 --> 33:18.059 Robert Anton: Let me just say, certified, I'll be happy to sit 33:18.059 --> 33:21.239 down with you and show you the actual statistics. And the 33:21.239 --> 33:24.479 programs that Maryland banks are doing for small business 33:24.479 --> 33:28.559 lending. Once again, we're very heavily regulated. And we have 33:28.559 --> 33:33.629 to comply with myriad federal and state regulations. But we 33:33.629 --> 33:38.009 are supporting a number of bills this year, both in the Senate 33:38.009 --> 33:42.599 and in the house to facilitate small business lending and as a 33:42.869 --> 33:46.169 top priority for the banking industry. I think the real 33:46.169 --> 33:50.219 question here and the challenge is, you know, can you come up 33:50.219 --> 33:53.189 with something and other states have and the Federal Reserve 33:53.189 --> 33:57.719 seems to think you can to establish something that small 33:57.719 --> 34:02.489 businesses can use to compare this transaction to another 34:02.489 --> 34:05.219 transaction. And not all the small business lenders use the 34:05.219 --> 34:09.329 same one line lenders use the same terms. They use a whole 34:09.329 --> 34:13.199 variety of terms, we need a consistent term that people can 34:13.199 --> 34:16.139 compare. And then the question I guess you have to answer is what 34:16.139 --> 34:20.729 is an appropriate app for these transactions? So but I'd be 34:20.729 --> 34:26.279 happy to sit down and with our staff at the NBA and show you 34:26.279 --> 34:29.189 exactly and anybody else on the committee, what we're doing in 34:29.189 --> 34:31.199 the in the world of small business lending. 34:32.580 --> 34:36.750 Madam Chair: So these online lenders have the ethereal terms 34:36.750 --> 34:42.900 they just come down as to what the terms on an average person 34:43.080 --> 34:46.920 who's unsophisticated and trying to make the loan no matter how 34:46.920 --> 34:50.490 bad off they are, doesn't want to end up worse off and very 34:50.520 --> 34:59.310 often they are going to be under this scenario. Great. Are there 34:59.310 --> 35:02.910 other questions? Senator, Senator Reid? 35:02.910 --> 35:06.020 Senator Reid: Thank you, Madam Chair. And I think my question 35:06.020 --> 35:10.940 is maybe for Bob. I think so, in the bill, we it talks about a 35:10.940 --> 35:13.280 limit on you have to have a certain amount of money 35:13.280 --> 35:24.620 available as liquid capital. I, I guess. I'm curious. You can't 35:24.620 --> 35:28.520 get a loan from a bank without some level of capital, usually 35:28.550 --> 35:31.760 correct? I mean, not a commercial loan to help you 35:31.790 --> 35:35.990 correct? I mean, your your clients would not. That's my 35:35.990 --> 35:37.880 experience. I mean, am I correct in saying that? 35:38.470 --> 35:44.530 Robert Anton: I think you know, once again, we're required by 35:44.530 --> 35:49.300 both federal and state regulators, to make sure that we 35:49.300 --> 35:54.490 properly evaluate a borrower's ability to repay. And part of 35:54.490 --> 35:57.760 that ability to repay just like when you apply for a mortgage, 35:58.180 --> 36:00.430 they want to know, How much money do you have in the bank? 36:01.150 --> 36:05.230 What is your income? What assets do you have? Because they're 36:05.230 --> 36:10.900 lending out their depositors money. And they and then they 36:10.960 --> 36:17.740 are obligated to make sure that that depositor's money is repaid 36:17.800 --> 36:19.780 to the bank. So. 36:19.780 --> 36:22.900 Senator Reid: It isn't part of, but don't we, at times a 36:22.900 --> 36:26.830 business will go get a loan on the potential of what they're 36:26.830 --> 36:29.380 going to be able to do, correct. I mean, it can't just be 36:29.380 --> 36:33.880 potential, usually. But what was the difference? And I look, it's 36:33.880 --> 36:35.800 clear to me looking at some of the things you're obviously 36:35.800 --> 36:38.200 there's some issues with this. I'm not I'm not suggesting that 36:38.200 --> 36:42.850 anybody, everybody engaged in this practices is doing the 36:42.850 --> 36:49.180 right thing. You know, but aren't we at times? Or we? 36:49.360 --> 36:51.790 Wouldn't it be wrong to just try to get rid of this entirely? It 36:51.820 --> 36:54.400 sounds like we're trying to basically say you can't do it 36:54.400 --> 36:56.230 unless you have a certain amount of capital available? 36:56.990 --> 36:59.600 Robert Anton: No, I think what I think what what we're trying to 36:59.600 --> 37:02.360 say what Senator Kramer's trying to say, and what they've said in 37:02.360 --> 37:08.930 other states, is, we want some consistency, you know, in in the 37:08.930 --> 37:13.670 terms so that borrowers you know, can, you know, I don't 37:13.670 --> 37:17.360 know what a factor rate is, a fee rate is, to the borrowers 37:17.360 --> 37:21.680 can can look at it and, and comparison shop, and maybe they 37:21.680 --> 37:24.800 can get a better deal from this one line lender versus that one 37:24.800 --> 37:28.760 line lender, but it's not apples and oranges. It's all apples 37:28.760 --> 37:32.060 when they compare. I think it's in your industry and with banks 37:32.060 --> 37:36.290 as well, I think the other issue really is, you know, it's I 37:36.290 --> 37:39.650 think you have to decide, you know, you know, is should there 37:39.650 --> 37:45.470 be a cap whatever amount that is, and should they be 37:45.530 --> 37:49.670 regulated? I think that the opponents are whether signup 37:49.670 --> 37:52.250 tables amendments or not, I don't know, they're not 37:52.250 --> 37:56.480 necessarily objecting to being regulated. I don't know that 37:56.480 --> 38:03.020 they're necessarily objecting to having an APR. I know they 38:03.020 --> 38:08.060 object to having any capital. And I see Krista keto nodding 38:08.060 --> 38:14.840 his head. But, you know, I think that, you know, we need to have 38:14.840 --> 38:19.160 a discussion about, you know, how should this industry be, be 38:19.160 --> 38:19.910 regulated? 38:20.240 --> 38:22.370 Senator Reid: And well, I think that's fair, I just, I feel 38:22.370 --> 38:25.580 like, my my impression from the hearings is that we think they 38:25.580 --> 38:29.720 really are just, you know, bad and shouldn't exist. I mean, a 38:29.720 --> 38:33.890 glossary of terms makes sense to me, I don't, I just am concerned 38:33.890 --> 38:36.950 about, look, I don't think it's right, that people can go in and 38:36.950 --> 38:39.890 get a loan on their credit card at Walmart, you know, but and 38:39.890 --> 38:42.980 it's a terrible financial habit to get into, but we don't make 38:42.980 --> 38:47.180 it illegal. So. But there are terms I get to a point about 38:47.180 --> 38:49.130 terms, certainly, and being able to compare apples and apples, 38:49.130 --> 38:51.320 there's terms those people can find out what the term is, but 38:51.500 --> 38:51.890 thank you. 38:52.170 --> 38:55.650 Senator Kramer: Senator Reid, if I can clarify, I think what. 38:57.480 --> 39:01.560 Yeah, no, he asked this question about this need to have certain 39:01.590 --> 39:06.090 assets, this is not the business that has to have the assets, the 39:06.090 --> 39:09.540 business looking to get the loan, these elements of the 39:09.540 --> 39:14.370 financial institution taking the loan. So that madam chair that 39:14.370 --> 39:15.480 needs to be clarified. 39:15.600 --> 39:16.770 Senator Reid: I misread that. Thank you. 39:17.820 --> 39:23.970 Madam Chair: And Bob and and Mr. Sponsor, would you agree, some 39:23.970 --> 39:29.130 people are in such bad shape in a loan that they will get will 39:29.130 --> 39:32.640 put them in worse shape. There are times when you in extreme 39:32.640 --> 39:35.940 loans, then there are other people that could get a loan, 39:35.940 --> 39:39.630 but they need to really understand the terms and not 39:39.630 --> 39:43.350 only to understand them orally, it ought to be down in writing 39:43.440 --> 39:46.920 with the imprimature of the entity that is offering a loan 39:46.920 --> 39:50.130 so you can have something to hold on to. 39:50.190 --> 39:53.070 Senator Kramer: And you're absolutely correct. Yes, that is 39:53.070 --> 39:53.550 correct. 39:53.890 --> 39:56.680 Robert Anton: If I could, Madam Chair, just very quickly, just 39:56.710 --> 39:59.650 you know, I would really urge you to look at the Federal 39:59.650 --> 40:03.340 Reserve of study, because that's not one side or the other. 40:03.340 --> 40:06.790 That's the Federal Reserve. And the three examples that they 40:06.790 --> 40:12.550 give the APR one was 70%, the APR on the other was 45%, the 40:12.550 --> 40:20.080 APR and others 46%. No bank is charging for APR 46% or 70% that 40:20.080 --> 40:20.680 I can tell you. 40:20.680 --> 40:23.010 Madam Chair: Okay, and Bob, you're gonna get me to Federal 40:23.010 --> 40:23.310 Reserve. 40:24.090 --> 40:25.770 Robert Anton: Yes, ma'am. I'll send it to every member of the 40:25.770 --> 40:29.100 committee with the link. I see Senator Augustine smiling. You 40:29.100 --> 40:30.540 can't wait to read it. I know. 40:32.550 --> 40:39.330 Unknown: Okay, that's next to, wait a minute, yeah Robin 40:39.330 --> 40:39.840 McKinney. 40:41.880 --> 40:43.920 Robin McKinney: Madam Chair, Mr. Vice Chair, members of the 40:43.920 --> 40:46.620 committee. My name is Robin McKinney. I'm the co founder and 40:46.620 --> 40:49.500 CEO of the cash campaign of Maryland. Cash stands for 40:49.500 --> 40:51.720 creating assets, savings and hope. And we help low to 40:51.720 --> 40:55.140 moderate income individuals and families to be more financially 40:55.140 --> 40:59.880 secure here in strong support of Senate Bill 532. This committee 40:59.880 --> 41:02.790 well knows and has anyone who's been around for a while has seen 41:02.790 --> 41:06.720 me and this can be a lot talking about access to capital at what 41:06.720 --> 41:10.260 cost. And that's really what this bill comes down to for me 41:10.440 --> 41:13.530 is that at the end of the day, yes, people need access to 41:13.530 --> 41:16.710 money. But if that money puts them in a worse financial 41:16.710 --> 41:21.210 situation, then we need to put more guardrails around it. And 41:21.210 --> 41:25.290 that is really what Senate Bill 532 does is it puts guardrails 41:25.320 --> 41:28.470 around a current system that is unregulated, and as you've 41:28.470 --> 41:32.760 heard, has a very range of impacts. We've seen a lot of it, 41:32.760 --> 41:35.250 particularly on small businesses, I do want to mention 41:35.250 --> 41:38.820 that we are seeing from our partners, a targeting of black 41:38.820 --> 41:41.940 and Latino businesses in Prince George's and Montgomery County, 41:42.000 --> 41:46.890 people going door to door asking for, you know, people to take 41:46.890 --> 41:50.100 out these loans, folks that are getting in way over their head 41:50.100 --> 41:53.520 not understanding the set of terms or the terms actually 41:53.520 --> 41:57.750 changing. We have talked about online lending, which is a great 41:57.750 --> 42:01.050 opportunity for a lot of businesses and people to access 42:01.050 --> 42:04.200 capital. But if it's expensive, if it's having a disparate 42:04.200 --> 42:07.410 impact on black and Latino businesses, then we need to put 42:07.410 --> 42:10.650 against some guardrails. Personally, at the cash campaign 42:10.650 --> 42:13.080 of Maryland, we have on our website, a list of all of our 42:13.080 --> 42:16.590 partners, our free tax preparation locations across the 42:16.590 --> 42:21.150 state. Cash personally receives both marketing in the mail as 42:21.150 --> 42:25.320 well as electronically, like lead generation emails from a 42:25.320 --> 42:27.630 range of these different products, not because of 42:27.630 --> 42:30.450 anything that cash is doing. But on behalf of some of our 42:30.450 --> 42:33.240 businesses. And I will tell you, they are all either rural 42:33.240 --> 42:36.810 businesses, black owned or Latino owned businesses. So we 42:36.810 --> 42:39.900 at cash are being particularly targeted for us to take out 42:39.900 --> 42:42.510 these loans. For these businesses that aren't even our 42:42.510 --> 42:45.810 business, we just happen to offer a service there. So we are 42:45.810 --> 42:48.840 definitely seeing as a problem. The last thing I just want to 42:48.840 --> 42:52.020 mention is the importance of disclosure, putting out all of 42:52.020 --> 42:55.470 the terms is very important. But that timing of the disclosure is 42:55.470 --> 42:58.680 very key that it's before someone has signed on the dotted 42:58.680 --> 43:01.440 line that they really understand everything that they're getting 43:01.440 --> 43:04.590 into. And just to close with where I started with the cost of 43:04.590 --> 43:08.160 capital, this committee and the General Assembly has long stated 43:08.160 --> 43:12.630 on the personal lending side, that our usery cap of 33% is 43:12.630 --> 43:16.560 enough for these smaller dollar loans. And so as we think about 43:16.590 --> 43:21.030 a cap, and considering what a cost of capital can do for a 43:21.030 --> 43:24.090 small business, especially in these economic times, we ask 43:24.090 --> 43:27.180 that you remember that and urge a favorable report on Senate 43:27.180 --> 43:28.230 Bill 532. 43:30.960 --> 43:36.630 Madam Chair: Any questions for this witness? Okay, we're going 43:36.630 --> 43:38.220 next to Chris DiPietro. 43:39.860 --> 43:41.510 Chris DiPietro: Madam Chair, members of the committee, my 43:41.510 --> 43:45.890 name is Chris DiPietro. I'm here on behalf of Fiserv. Fiserv is a 43:45.890 --> 43:49.490 global financial services company, is probably one of the 43:49.490 --> 43:54.560 leading payment processors in the world. We are here favorable 43:54.560 --> 44:01.220 with amendment. I think 95% of what Senator Kramer described in 44:01.220 --> 44:05.180 his opening statement about the bill will be addressed with all 44:05.180 --> 44:09.140 the issues that we support about this bill. We have offered we're 44:09.170 --> 44:12.380 offering amendments, we will get them to committee counsel, I 44:12.380 --> 44:14.600 believe the proponents of the bill have a copy of our 44:14.600 --> 44:18.080 amendments already. But let me just talk about a few things we 44:18.080 --> 44:21.620 fully support licensing. I think that's the key. The commissioner 44:21.620 --> 44:25.310 of financial regulation has to know what the landscape is of 44:25.310 --> 44:27.980 the companies that are doing this type of product. That's 44:27.980 --> 44:31.970 number one. The estimated APR, there was a lot of talk about 44:31.970 --> 44:35.810 that, yes, New York and California require an estimated 44:35.810 --> 44:38.750 APR. We're doing business in those states. But let me be 44:38.750 --> 44:43.250 clear, the rules and regulations related to estimated APR have 44:43.250 --> 44:46.730 not been promulgated yet. Whatever they happen to be our 44:46.730 --> 44:50.060 company will will comply with that. And if that's the case in 44:50.060 --> 44:52.790 Maryland and you choose to go down this road, we will comply 44:52.790 --> 44:57.230 with those regulations as well. We fully agree that disclosure 44:57.260 --> 45:02.090 has to be a part of the issue and On the the confessions of 45:02.090 --> 45:05.180 judgments, we never did that anyway. So we are full support 45:05.180 --> 45:07.970 of that, where we draw the issue, and I'm going to focus 45:07.970 --> 45:12.920 most of my time on this is the is the cap on the APR. The other 45:12.920 --> 45:17.060 two states, as they everybody has said already do not have the 45:17.060 --> 45:22.700 cap. I argue this, if you include a cap, I think it's 45:22.700 --> 45:26.480 going to get rid of most of this this industry in this 45:26.480 --> 45:29.600 availability of this product in the state of Maryland. So it 45:29.600 --> 45:32.900 will basically have the effect of the bill that Senator Cramer 45:32.900 --> 45:37.670 introduced last year. So I think Senator Abidal was spot on a 45:37.670 --> 45:41.780 little bit earlier, when she says, If companies cannot get 45:41.810 --> 45:45.860 this type of availability of capital, they're going to be 45:45.860 --> 45:48.890 forced to go into the traditional lending commercial 45:48.890 --> 45:52.130 lending market. I know a little bit about this, because before I 45:52.130 --> 45:55.250 was a lobbyist in Annapolis, that was a commercial lender for 45:55.250 --> 45:58.850 a major financial institution for 10 years, they do not make 45:58.850 --> 46:03.410 loans unless there is collateral on that loan. And they do not 46:03.410 --> 46:07.970 make loans to businesses, unless there's a personal guarantee. 46:08.030 --> 46:10.910 And there's a net worth sufficient to cover the 46:10.910 --> 46:14.480 extension of the credit. If you fall into that bucket, which 46:14.480 --> 46:18.290 many small businesses do, you're not going to you're not going to 46:18.290 --> 46:21.650 get capital from a bank, like bobbins said, there's there's 46:21.830 --> 46:25.670 you're lending depositors money out there stronger regulations 46:25.670 --> 46:28.850 and rules that apply to that, and there should be. So I think 46:28.850 --> 46:31.490 you need to consider that. Senator Jennings talked a little 46:31.490 --> 46:34.340 bit earlier about these are people that are teetering on the 46:34.340 --> 46:36.290 edge, and that they're gonna, you know, they're on their way 46:36.290 --> 46:39.530 out, you know, might, their businesses might fail. Two 46:39.530 --> 46:43.700 things I want to understand. In our model, we only, you know, 46:43.700 --> 46:47.360 the clover system, you probably seen it in, in merchants that 46:47.360 --> 46:49.670 you frequent in your neighborhood, it's a very 46:49.670 --> 46:52.970 popular piece of hardware that merchants use to process 46:52.970 --> 46:56.600 payments, credit and debit payments through their their 46:56.600 --> 47:02.330 businesses, we only advanced this type of capital to people 47:02.330 --> 47:06.890 that we do business with, through the clover product. So 47:06.890 --> 47:09.770 we're not out there, like Miss McKinney said, knocking on 47:09.770 --> 47:13.130 doors, trying to sell these products to individuals that we 47:13.130 --> 47:18.140 don't have a relationship with. We do that also. Because we know 47:18.140 --> 47:21.020 how that the what the business flow is of that business, 47:21.020 --> 47:24.650 because we see their daily receipts. So we know what their 47:24.650 --> 47:28.310 highs and lows are, we have a good sense of how they're going 47:28.310 --> 47:32.360 to be able to repay that. And I think I think it's key A lot of 47:32.360 --> 47:35.960 people, a lot of small businesses use this to finance 47:35.960 --> 47:39.290 the ups and downs of their business cycle. If you are a 47:39.290 --> 47:43.940 heavily Christmas oriented company, and you're selling 47:43.940 --> 47:46.970 things at Christmas time, you might need one of these loans in 47:47.000 --> 47:50.180 August to buy your your inventory. But you'll know 47:50.180 --> 47:54.530 you'll be able to repay it back. The issue with the APR is that 47:54.530 --> 47:57.770 if you put a cap on it, even with all due respect to the 47:57.770 --> 48:02.210 sponsor, even at 36% will will basically eliminate this 48:02.210 --> 48:04.730 product, at least from our perspective from the Maryland 48:04.730 --> 48:08.480 market. So I really urge caution and not moving in that 48:08.480 --> 48:15.080 direction. I think we're 95% in alignment with the intent of the 48:15.080 --> 48:18.170 sponsor and the Maryland Retailers Association. We've met 48:18.170 --> 48:21.740 with him multiple times over the interim. I hope we can work this 48:21.740 --> 48:24.380 out. We've worked other issues out with him before, as this 48:24.380 --> 48:28.820 committee well knows. So we're here to do that. Kim Ford from 48:28.820 --> 48:31.910 Fiserv is going to follow behind me and she's going to talk a 48:31.910 --> 48:34.490 little bit more about the detail of actually how these 48:34.490 --> 48:38.450 transactions work to clear up I think some of the misconceptions 48:39.380 --> 48:42.980 or blanket statements about how all they all work. But I'm happy 48:42.980 --> 48:44.270 to answer any questions in the meantime. 48:44.270 --> 48:46.500 Madam Chair: Chris, would you say some of these businesses, 48:46.500 --> 48:51.840 though, are so fragile and had somebody taken out one of these 48:52.530 --> 48:56.580 just before the pandemic started last year, and they knew what 48:56.580 --> 49:00.000 they were getting it for the Thanksgiving or Christmas 49:00.000 --> 49:02.910 season. They're dead in the water. But. 49:02.940 --> 49:06.150 Chris DiPietro: That could be true, Senator, that could be 49:06.150 --> 49:09.810 true, Madam Chair. But But I think you might hear a story 49:09.810 --> 49:14.070 later that we heard in the House hearing of a company not ours. 49:14.220 --> 49:16.800 And I'll let them explain it because it's their story. But 49:17.280 --> 49:20.460 they they took on one of these advances right before the 49:20.460 --> 49:25.470 pandemic and they their business went to zero. And the company 49:25.470 --> 49:28.440 didn't say okay, you still owe us you still owe us for you 49:28.440 --> 49:33.540 know, pushing judgments on they the reputable companies will put 49:33.540 --> 49:38.520 this on hold. And I as far as I can explain this. We do not 49:38.520 --> 49:43.890 pursue these transactions in court for judgment if they are 49:43.890 --> 49:46.980 not able to repay. That's our policy for our company. 49:46.980 --> 49:47.940 Madam Chair: The thing though, Chris, is that when you're 49:47.940 --> 49:51.330 talking about online, you could be dealing with somebody in your 49:51.330 --> 49:52.980 locker. You don't know who it. 49:54.430 --> 49:56.740 Chris DiPietro: Well, that could be true. And I think that's 49:56.740 --> 49:58.840 where the regulation comes in. And that's where the 49:58.840 --> 50:02.140 commissioner comes in. That's not the case for us. You know, 50:02.140 --> 50:08.320 we're a US based company with worldwide reach. You know, we 50:08.320 --> 50:13.930 have over 2000 employees in the state of Maryland in Hagerstown. 50:14.950 --> 50:19.420 Our, Kim can talk more about this, our average loan amount or 50:19.480 --> 50:24.610 advance amount, I should say, is 18,800 in Maryland, that's our 50:24.610 --> 50:30.070 average, and the fee would never go over $5,200. And that's at 50:30.070 --> 50:32.650 the very high end, most are going to be much lower than 50:32.650 --> 50:37.270 that. So the problem with the estimated APR, I'm not saying 50:37.270 --> 50:43.270 we're opposed to estimating the APR, but it's a moving target. 50:43.480 --> 50:47.230 It depends on how well the business is doing. Because they 50:47.230 --> 50:51.100 decide upfront, well, I want to be aggressive and pay this back 50:51.130 --> 50:55.090 this back quickly. So I'm going to authorize you to take out 20% 50:55.090 --> 50:59.230 of my receipts every day, that which would be aggressive. Other 50:59.230 --> 51:03.940 businesses say I can't afford to do that, only take 5% out. And 51:03.970 --> 51:08.770 you know, we that that's just, you know, how the flexibility of 51:08.770 --> 51:11.020 the product for the customer. So. 51:11.760 --> 51:14.460 Madam Chair: When you are very, very needy. 51:14.460 --> 51:14.782 Chris DiPietro: Yes. 51:15.300 --> 51:18.480 Madam Chair: And not all that sophisticated, you're likely to 51:18.480 --> 51:22.920 be overly optimistic about what you can do and how you can. 51:24.580 --> 51:27.130 Chris DiPietro: And I'm sure there for lack of a better word 51:27.130 --> 51:32.020 is an underwriting process that Fizer undergoes to before they 51:32.020 --> 51:34.570 actually make a decision. I don't think we just give this to 51:34.570 --> 51:38.470 anybody. So I think Kim can talk a little bit about that and how 51:38.470 --> 51:38.980 it works. 51:39.060 --> 51:42.630 Madam Chair: We're going to Kim Ford right now. And you have to 51:42.630 --> 51:42.710 Chris DiPietro: Thank you Madam Chair. 51:43.190 --> 51:44.990 Kim Ford: Thank you, Madam Chair Kelly, Vice Chair Feldman, 51:44.990 --> 51:48.020 members of the committee, I am Kim Ford, SVP of Government 51:48.020 --> 51:51.200 Relations with Fiserv again, as Chris said, we're here as a 51:51.200 --> 51:54.470 favorable with amendment position, Chris covered a lot of 51:54.470 --> 51:57.740 the points, you know, but just to emphasize a few things. So 51:57.800 --> 52:00.080 again, we are not an online lender, we're a payment 52:00.080 --> 52:03.710 processing company, we set up the clover capital program, 52:03.710 --> 52:06.620 which is a merchant cash advance program just a couple of years 52:06.620 --> 52:10.340 ago, in direct response to requests that we were getting 52:10.340 --> 52:13.670 from our business clients. So our businesses, were saying 52:13.700 --> 52:16.550 there are times where we need money, we're not able to get a 52:16.550 --> 52:19.850 bank loan, for whatever reason. And you know, would this be 52:19.850 --> 52:22.340 something that you would be willing to set up. So the way 52:22.340 --> 52:26.090 that it works with our program, again, you have to be a clover 52:26.090 --> 52:31.220 customer, an existing customer of Fiserv and, you know, the 52:31.220 --> 52:34.370 business comes to us with they essentially apply for a funding 52:34.370 --> 52:37.910 amount. And then what we do is we look at their historical 52:37.910 --> 52:40.880 debit and credit card transactions. So if they've been 52:40.910 --> 52:44.450 a customer of ours for a year, we will look at that year, if 52:44.450 --> 52:47.060 they've been in business with us less than a year, we'll look 52:47.060 --> 52:49.700 less than a year. So we look at those credit and debit card 52:49.700 --> 52:53.270 transactions. And we come up with an amount that we think is 52:53.270 --> 52:56.240 appropriate based on the volume of transactions that they're 52:56.240 --> 53:00.950 getting on a daily base basis. So we come up with a percentage 53:01.100 --> 53:05.930 that that business will pay us back every day based on those 53:05.930 --> 53:09.230 debit and credit transactions. So again, that's going to 53:09.230 --> 53:12.950 fluctuate based on how well they're doing. If they are not 53:12.950 --> 53:17.150 bringing in money, we do not get that merchant cash advance paid. 53:17.150 --> 53:21.620 So they pay us when they get paid. And it's a percentage of 53:21.620 --> 53:24.440 their daily transactions, it's never going to be 100%, they're 53:24.440 --> 53:27.170 never going to not be able to put money in the bank because 53:27.170 --> 53:30.530 they were paying their merchant cash advance back. And as Chris 53:30.530 --> 53:35.150 said, you know, we do not do confessions of judgment. This is 53:35.150 --> 53:38.240 actually fi serves money that we're sending out. It's not it's 53:38.240 --> 53:41.930 not a bank that we're borrowing from to pay our business. And so 53:41.960 --> 53:45.680 if that business were to go out of business, we take that 53:45.680 --> 53:49.340 merchant cash advance as a loss, that's just money that comes out 53:49.370 --> 53:53.750 of our pocket. You know, when we have a statement, the agreement 53:53.750 --> 53:58.190 that the business signs, we say very clearly on that front of 53:58.190 --> 54:01.520 the agreement, what the purchase price is, how much the business 54:01.520 --> 54:04.400 will receive, how much the agreement will actually cost 54:04.400 --> 54:08.960 them, and then the total repayment amount. Again, we are 54:08.960 --> 54:12.770 very comfortable with the disclosures, especially if we 54:12.770 --> 54:15.230 can conform those to New York, we're comfortable with the 54:15.230 --> 54:18.230 licensing, it's really the cap that we struggle with. And 54:18.230 --> 54:21.140 again, I think part of that challenge is when you look at an 54:21.140 --> 54:25.820 APR, that's a generally a 12 month, you know, monthly type of 54:25.820 --> 54:29.030 payment over the course of a year. Whereas these products are 54:29.030 --> 54:33.020 generally paid back in six months or less. And so, you 54:33.020 --> 54:36.770 know, when you when you apply to a cap to that type of product, 54:36.770 --> 54:39.680 it's kind of apples and oranges, it skews the economics quite a 54:39.680 --> 54:42.110 bit. And I think the other piece that I'll just say before I 54:42.110 --> 54:45.980 close about having a cap is again, if the business is doing 54:45.980 --> 54:49.340 well, they may elect to pay more on that merchant cash advance so 54:49.340 --> 54:52.340 that they can just be done with it. And a cap would actually 54:52.340 --> 54:56.330 prevent that from happening. Because again, if they bring in 54:56.360 --> 54:59.840 you know, 10% of maybe 100,000 in revenue is a different 54:59.840 --> 55:04.340 amount. And then 10% of $1,000 in revenue. And so you know, if 55:04.340 --> 55:07.460 you're subject to a cap and that business wants to actually do 55:08.030 --> 55:10.490 faster payment, it's going to be difficult. Thank you. 55:10.950 --> 55:14.100 Madam Chair: Let me just say this. As I listen, and I'm 55:14.160 --> 55:17.190 trying to be very open minded, I believe you're running a 55:17.190 --> 55:21.990 legitimate business that knows for years. But you have one 55:21.990 --> 55:26.370 business, and 99% of the Marylanders who find themselves 55:26.370 --> 55:33.300 needing to go to market to look for a cash infusion, necessarily 55:33.300 --> 55:39.810 find any one company we want, we need something that can be 55:39.810 --> 55:45.270 there, no matter where they go. And because you are also online, 55:45.600 --> 55:50.490 and you can lend to people in other states, there's nothing 55:50.490 --> 55:53.820 that will stop you under the terms of other states from doing 55:53.820 --> 55:59.520 what you do. We need to know that the 99% of small businesses 56:00.240 --> 56:06.030 get into trouble and who need transparency, they need 56:06.060 --> 56:15.360 regulations. They need to know upfront what they will own, and 56:15.360 --> 56:22.800 that it is solid, need to have the regulatory help. But the 56:22.800 --> 56:25.680 bill basically is laying out. I don't think. 56:25.720 --> 56:27.790 Chris DiPietro: We support that, Madam Chair, we support that. 56:28.320 --> 56:31.830 Madam Chair: Anything against what you're doing. But because 56:32.190 --> 56:37.140 not everybody's going to find your one company. A lot of them 56:37.140 --> 56:40.260 would still enough if we were to say but your company is the 56:40.260 --> 56:43.140 model and insufficient and we don't need to do these other 56:43.140 --> 56:47.250 things. We'd have a lot more people still in trouble. 56:47.640 --> 56:49.560 Chris DiPietro: So again, just to be clear, we support 56:49.560 --> 56:52.440 everything about the bill except up Cap. That's the only thing we 56:52.440 --> 56:53.130 don't support. 56:53.490 --> 56:54.060 Madam Chair: Okay. 56:54.150 --> 56:55.590 Chris DiPietro: So we agree with you, Madam Chair. 56:55.680 --> 56:59.970 Madam Chair: Okay. Alright. Senator Kramer? 57:00.840 --> 57:03.930 Senator Kramer: Yes, thank you, Madam Chair. And Kim and Chris, 57:04.290 --> 57:08.100 first of all, I want to say thank you, you both have been 57:08.130 --> 57:14.100 very upfront in trying to work through the regulations to get 57:14.100 --> 57:18.900 this bill in a posture where you would feel comfortable 57:18.900 --> 57:23.400 supporting it. And and I do acknowledge that look, your 57:23.400 --> 57:28.290 business model, I don't think there's a lot of concern with as 57:28.290 --> 57:33.720 the chair was pointing out, but we're dealing with everyone in 57:33.720 --> 57:38.730 this industry that doesn't necessarily share your business 57:38.730 --> 57:45.060 model. So I get it, you support the bill in its entirety with 57:45.060 --> 57:49.860 one piece. And that's the cap. So let me ask you this, because 57:49.860 --> 57:53.610 as I stated in my introduction of the bill, I think this is a 57:53.610 --> 57:57.060 policy decision that the committee will need to take up 57:57.060 --> 58:02.040 at a voting session. But is there any point where you 58:02.040 --> 58:10.890 believe it's not too much? In other words, is 100% interest? 58:11.160 --> 58:18.300 Okay, is to send 300 Is there a point where you would say, All 58:18.300 --> 58:21.630 right, look, we get it. It's too much. 58:21.750 --> 58:24.390 Chris DiPietro: Yeah. Senator, I wish I wish we could simply 58:24.390 --> 58:27.720 answer that question. I agree with you. 100. I wish we could 58:27.720 --> 58:31.020 answer that question. But the variables for this type of 58:31.020 --> 58:33.960 product, because what you're talking about is a fixed amount 58:33.960 --> 58:37.800 that we're that we're advancing to the merchant. And then 58:37.800 --> 58:43.560 there's a fixed amount for the fee for that advance. So the APR 58:43.680 --> 58:49.500 all depends on how quickly or how slowly they repay that loan. 58:49.710 --> 58:54.810 So they're gonna be all gotchas situation. If you put too low of 58:54.810 --> 58:58.560 a cap one there, we're going to be in a gotcha situation, and 58:58.560 --> 59:01.470 we're not going to be compliant with the law. If we can't be 59:01.470 --> 59:04.380 compliant with the law with the cap. We're not going to make 59:04.380 --> 59:07.200 these types of advances in Maryland. That's the bottom 59:07.200 --> 59:07.530 line. 59:08.200 --> 59:11.020 Madam Chair: We have several unfavorables. And we need to 59:11.020 --> 59:17.260 hear those witnesses also. Let's go to Chris Graham, Innovation 59:17.260 --> 59:19.330 Lending Platform Association. 59:20.680 --> 59:21.400 Chris Graham: Madam Chairman. 59:21.400 --> 59:22.570 Madam Chair: You have two and a half minutes. 59:23.230 --> 59:25.060 Chris Graham: Chris Graham with Innovative Lending Platform 59:25.060 --> 59:27.550 Association. Thank you for allowing me to testify. 59:27.640 --> 59:29.950 Madam Chair: Mr. Graham. Are you unmuted? 59:30.520 --> 59:31.150 Chris Graham: I am. 59:33.310 --> 59:37.420 Madam Chair: Mr. Graham, I see your mouth moving but we can't 59:37.420 --> 59:37.990 hear you. 59:39.880 --> 59:40.990 Chris Graham: How about now, does that work? 59:40.990 --> 59:41.470 Madam Chair: Yes. 59:41.470 --> 59:45.200 Chris Graham: Yes technology. Chris Graham, Innovative Lending 59:45.200 --> 59:49.130 Platform Association. Our position is very similar to 59:49.160 --> 59:54.230 Firserv's. We fully support disclosure. We were in the 59:54.230 --> 59:58.460 driver's seat for a long time in New York along with Louis and 59:58.460 --> 01:00:01.070 the responsible business lending coalition on the bill that 01:00:01.070 --> 01:00:05.360 passed there. We fully supported we worked very closely with 01:00:05.390 --> 01:00:09.500 business advocacy groups with the sponsors to craft what we 01:00:09.500 --> 01:00:15.320 feel is sort of the gold standard model legislation. For 01:00:15.350 --> 01:00:19.040 for small business finance regulation, like Pfizer, we do 01:00:19.040 --> 01:00:22.130 have to oppose this bill because of the cap. And I just want to 01:00:22.130 --> 01:00:26.510 make a few a few quick points. There is absolutely a place in 01:00:26.510 --> 01:00:29.390 the market for these products, as I think has been mentioned 01:00:29.390 --> 01:00:33.770 earlier, banks are not filling the credit need of Maryland 01:00:33.770 --> 01:00:38.540 small businesses. For businesses that are not as established, do 01:00:38.540 --> 01:00:42.620 not have collateral do not have large cast assets. This is a way 01:00:42.620 --> 01:00:46.340 for them to get financing in return for a payment of a 01:00:46.340 --> 01:00:49.610 percentage of their future sales. I always equate this more 01:00:49.610 --> 01:00:57.050 to taking on an investor, where they're giving you a providing 01:00:57.050 --> 01:00:59.300 you with cash in return, they're getting a piece of your 01:00:59.300 --> 01:01:03.920 business. But with these products, it is just for a set 01:01:03.950 --> 01:01:09.590 amount, instead of forever. The cap is tantamount to a band for 01:01:09.590 --> 01:01:13.130 two reasons. One, it ignores the economics that I just laid out 01:01:13.820 --> 01:01:17.480 of these products primarily being utilized by companies that 01:01:17.480 --> 01:01:20.750 either don't have the assets or the collateral or the credit for 01:01:20.750 --> 01:01:24.680 traditional bank loan, or banks can't serve them fast enough. My 01:01:24.680 --> 01:01:28.160 dad owns a pizza place of his pizza oven breaks, he can't wait 01:01:28.400 --> 01:01:32.990 248 weeks for funding, right? You need a quick infusion of 01:01:32.990 --> 01:01:36.770 cash to invest in your business to get back to your business. 01:01:37.160 --> 01:01:41.960 The other thing that it ignores is the time factor. The question 01:01:41.990 --> 01:01:46.550 of is 100% Enough is 200% Enough, if the financing is 01:01:46.550 --> 01:01:51.740 really short, that percentage goes up dramatically. My dad 01:01:51.740 --> 01:01:54.980 pizza oven, if he gets the financing to get a new pizza 01:01:54.980 --> 01:01:58.670 oven in and business is booming, and he pays that financing back 01:01:58.670 --> 01:02:05.120 in two weeks, that APR may very well be well over 100%. And for 01:02:05.120 --> 01:02:09.590 those two reasons that cap is tantamount to a ban. And if you 01:02:09.590 --> 01:02:13.190 ban this product, what's going to happen? Right the banks are 01:02:13.190 --> 01:02:16.820 not filling the credit needs of the small businesses. If you ban 01:02:16.820 --> 01:02:20.840 the people who are someone mentioned offshore actors. If 01:02:20.840 --> 01:02:24.770 our members and five serve and other quality businesses cannot 01:02:24.770 --> 01:02:28.430 do this, offshore companies will step in and it'll be much worse 01:02:28.430 --> 01:02:29.390 for small businesses. 01:02:30.590 --> 01:02:33.530 Madam Chair: Thank you very much. Are there questions for 01:02:33.530 --> 01:02:38.840 this witness? Okay, we're going next to Patrick Sigfried thread, 01:02:39.080 --> 01:02:41.660 Rapid Financial Services LLC. 01:02:43.280 --> 01:02:44.390 Patrick Sigfried: Thank you Madam Chair, members of this 01:02:44.390 --> 01:02:47.510 committee. My name is Patrick Sigfried. I'm here on behalf of 01:02:47.510 --> 01:02:51.950 Rapid Financial Services. Rapid was founded in 2006. And we've 01:02:51.950 --> 01:02:55.520 been headquartered in montgomery county, maryland ever since. To 01:02:55.520 --> 01:02:58.730 date, we've provided over $2 billion of working capital to 01:02:58.730 --> 01:03:01.730 small businesses throughout the United States. And we employ 01:03:01.730 --> 01:03:06.500 nearly 200 employees at our Bethesda office. Our financing 01:03:06.500 --> 01:03:09.110 products include sales based financing, which is the subject 01:03:09.110 --> 01:03:12.440 of 532. Again, this type of financing allows small 01:03:12.440 --> 01:03:15.260 businesses to sell a portion of their future revenue in exchange 01:03:15.260 --> 01:03:18.140 for immediate working capital, and a sales based financing 01:03:18.140 --> 01:03:20.960 transaction. And I think this is important to reiterate, there is 01:03:20.960 --> 01:03:24.800 no repayment term interest rate or set payment amounts. And most 01:03:24.800 --> 01:03:27.380 importantly, there is no personal guarantee required of 01:03:27.380 --> 01:03:30.380 the business owner. And again, this is a I want to highlight 01:03:30.380 --> 01:03:33.650 this because this is not what you see when you have a loan 01:03:33.650 --> 01:03:37.550 product or a line of credit product. With because there's no 01:03:37.550 --> 01:03:41.180 personal guarantee the risk is placed on the funder rapid takes 01:03:41.180 --> 01:03:44.090 the risk of the business slowing down or even failing. And again, 01:03:44.090 --> 01:03:46.790 I was here last year, and I testified to the benefits of 01:03:46.790 --> 01:03:49.340 sales based financing. And unfortunately, the COVID 01:03:49.610 --> 01:03:52.040 pandemic has proven how important it can be to small 01:03:52.040 --> 01:03:55.370 businesses, especially for the lack of a personal guarantee, as 01:03:55.370 --> 01:03:58.700 many businesses were shut down due to COVID. Those businesses 01:03:58.700 --> 01:04:01.340 with a sales based financing product were required to make 01:04:01.340 --> 01:04:04.400 any payments. Moreover, if those businesses have to shut their 01:04:04.400 --> 01:04:07.460 doors forever, the business owners will not be liable for 01:04:07.460 --> 01:04:10.010 the remaining balance because there's no personal guarantee. 01:04:10.130 --> 01:04:12.500 And again, this is different than with a loan or line of 01:04:12.500 --> 01:04:14.960 credit product. Because with those products, the business 01:04:14.960 --> 01:04:16.970 owner is still required to make payments under the terms of the 01:04:16.970 --> 01:04:20.570 transaction throughout COVID. And if the business ultimately 01:04:20.570 --> 01:04:23.660 failed, the business owners who guaranteed those transactions 01:04:23.660 --> 01:04:26.690 are still liable to the lender for the amounts that need to be 01:04:26.690 --> 01:04:29.330 repaid. Again, that's not true with a sales based financing 01:04:29.330 --> 01:04:34.970 transaction. Nationwide, rapid has provided or has to over 290 01:04:34.970 --> 01:04:37.640 customers with sales bait financing accounts that 01:04:37.640 --> 01:04:40.640 experience decreased revenue as a result of COVID. In the event 01:04:40.640 --> 01:04:43.460 that these businesses ultimately failed, rapid would take the 01:04:43.460 --> 01:04:47.480 loss a loss of over $9 million. However, the owners of the small 01:04:47.480 --> 01:04:51.140 businesses but not rapid anything. In Maryland, we've had 01:04:51.140 --> 01:04:54.650 over 10 customers who were severely impacted by COVID. And 01:04:54.650 --> 01:04:57.110 in the event these businesses unfortunately do not survive 01:04:57.290 --> 01:05:00.050 their business. Their business owners will walk away debt free 01:05:00.620 --> 01:05:03.770 We are unable to support 532 as it would have strict access to 01:05:03.770 --> 01:05:07.010 the support and type of working capital. Moreover, I would apply 01:05:07.010 --> 01:05:09.380 the truth at the federal Truth in Lending Act to a commercial 01:05:09.380 --> 01:05:12.770 finance product that the act was never meant to cover. Tila does 01:05:12.770 --> 01:05:15.380 not provide any guidance or language and applying APR to 01:05:15.380 --> 01:05:18.200 commercial financing, and more specifically sales based 01:05:18.200 --> 01:05:22.460 financing, such as a financing and issue in 532. And again, 01:05:22.730 --> 01:05:26.150 while I know California and New York has passed some laws 01:05:26.150 --> 01:05:28.790 related to these products, the regulations implementing those 01:05:28.790 --> 01:05:33.740 laws have not been finalized. And if ultimately, I shall we 01:05:33.740 --> 01:05:37.340 oppose 532. We will, we are committed to work with this 01:05:37.340 --> 01:05:40.160 committee and the sponsor to create a comprehensive 01:05:40.160 --> 01:05:42.410 legislation to regulate commercial financing. 01:05:43.610 --> 01:05:44.270 Madam Chair: Thank you. 01:05:45.110 --> 01:05:46.070 Senator Kramer: Madam Chair. 01:05:46.130 --> 01:05:51.350 Madam Chair: Yes. There's one thing left, can I tell you one 01:05:51.350 --> 01:05:54.800 thing, and I'm gonna call it I just happened to look at the 01:05:54.800 --> 01:05:56.750 letter from the Attorney General, which is an 01:05:56.750 --> 01:06:00.530 informational letter. They didn't take a thought. But lets 01:06:00.530 --> 01:06:04.850 everybody take a look at the last sentence in paragraph one. 01:06:05.150 --> 01:06:08.840 And the rest of this letter, it comes up with some things that I 01:06:08.840 --> 01:06:12.080 think might require some amendment. And they I think 01:06:12.080 --> 01:06:15.170 there's some unintentional things that may happen in draft 01:06:15.170 --> 01:06:21.410 and take a look, I won't go further. But I think the bill is 01:06:21.410 --> 01:06:29.000 solid, innocent 10. And there is a need for regulation and just 01:06:29.000 --> 01:06:30.350 take a look at this to see. 01:06:30.350 --> 01:06:34.310 Senator Kramer: Madam Chair, if I may. In my introductory 01:06:34.310 --> 01:06:38.930 remarks, I indicated that there's an amendment coming in 01:06:38.930 --> 01:06:43.430 response to that letter from the Attorney General. He is off is 01:06:43.430 --> 01:06:48.770 completely out of the bill, put everything into the commissioner 01:06:48.770 --> 01:06:52.940 of financial rigging. Okay. All right. So that's gonna be coming 01:06:52.940 --> 01:06:55.370 to the committee. Yes. Thank you. And I appreciate your 01:06:55.370 --> 01:06:59.060 pointing that out. I do have a question for Mr. Sigfried, 01:06:59.060 --> 01:06:59.420 Madam. 01:06:59.420 --> 01:07:01.670 Madam Chair: And we got one more witness you want to hear it? 01:07:01.670 --> 01:07:02.240 Okay. 01:07:02.540 --> 01:07:05.570 Senator Kramer: And I suspect I'll have a question for Ms. 01:07:05.570 --> 01:07:10.940 Fisher as well. But real fast, Mr. Sigfried. Obviously, you've 01:07:10.940 --> 01:07:16.820 heard to this evening here, with everyone else who has testified 01:07:16.820 --> 01:07:22.280 this evening with regard to the legislation in that they have 01:07:22.280 --> 01:07:26.600 all agreed to all aspects of the bill with the exception of the 01:07:26.600 --> 01:07:31.700 cap. But you made the point of indicating there is no personal 01:07:31.730 --> 01:07:35.840 guarantee from the owner. So let me ask you this. What what 01:07:35.840 --> 01:07:39.920 recourse does your company have if someone stops paying? 01:07:41.400 --> 01:07:42.810 Patrick Sigfried: If they legitimately stopped paying 01:07:42.810 --> 01:07:44.460 because of the business failure? None. 01:07:44.490 --> 01:07:47.040 Senator Kramer: Yeah. If they stop paying you, what is the 01:07:47.040 --> 01:07:47.700 recourse? 01:07:47.790 --> 01:07:49.230 Patrick Sigfried: Well, again, Senator, I think you'd 01:07:49.230 --> 01:07:52.080 misunderstand the product, they don't stop paying, they stopped 01:07:52.080 --> 01:07:54.810 processing credit card transactions, and because 01:07:54.810 --> 01:07:57.600 they're not credit processing credit card transactions, that 01:07:57.630 --> 01:08:00.270 means unfortunately, the business is not doing well. And 01:08:00.270 --> 01:08:03.450 what is your recourse? We do not have any recourse? 01:08:04.860 --> 01:08:08.040 Senator Kramer: No. No interest, no recourse with regard to the 01:08:08.040 --> 01:08:12.780 business assets to the business assets, correct? Yes. Okay. So 01:08:12.780 --> 01:08:17.760 now we just hit on something very important that you have 01:08:17.760 --> 01:08:20.850 failed to share with the committee in your testimony, 01:08:21.030 --> 01:08:25.950 because you said sir, and I wrote down verbatim owners walk 01:08:25.950 --> 01:08:30.210 away debt free, the risk is on the lender. These are direct 01:08:30.210 --> 01:08:34.350 quotes from you, sir. But the fact of the matter is, you can 01:08:34.350 --> 01:08:38.250 go in and seize the business bank accounts, sir, you can go 01:08:38.250 --> 01:08:43.020 in and seize their assets, their inventory, their fixtures, their 01:08:43.200 --> 01:08:47.460 equipment, you do in fact, have recourse sir. So when you 01:08:47.460 --> 01:08:52.500 represent it to this committee, walk away dead free. That really 01:08:52.500 --> 01:08:55.320 wasn't quite accurate statement wasn't sir. 01:08:56.010 --> 01:08:58.890 Patrick Sigfried: So Senator, again, the customers are rapid 01:08:58.890 --> 01:09:03.270 finances. excuse for sorry, the pun, but they don't have access 01:09:03.270 --> 01:09:04.980 to banks. They don't they don't have. 01:09:05.850 --> 01:09:10.320 Senator Kramer: My question for you. Is that you explained that 01:09:10.320 --> 01:09:13.860 there is in fact, recourse and you can seize all the assets of 01:09:13.860 --> 01:09:17.670 the business and in fact, sir, last year at the hearing on this 01:09:17.670 --> 01:09:23.610 bill, we saw the 20 pages of lawsuits that you filed against 01:09:23.610 --> 01:09:27.000 small business owners, because you go after their business 01:09:27.000 --> 01:09:35.310 assets. you seize everything that they have. Again, Senator 01:09:37.020 --> 01:09:38.280 so again, thank you. 01:09:39.930 --> 01:09:43.230 Madam Chair: One other witness and we want to hear the last 01:09:43.230 --> 01:09:47.400 witness. So if we could hear now from Katherine Fisher commercial 01:09:47.400 --> 01:09:52.050 finance coalition. Miss Fisher. 01:09:53.040 --> 01:09:54.930 Katherine Fisher: Thank you, Madam Chair and members of the 01:09:54.930 --> 01:09:58.230 committee. This has been a long afternoon. So thanks for bearing 01:09:58.230 --> 01:10:02.010 with me to hear my time. testimony. My name is Kate 01:10:02.010 --> 01:10:05.820 Fisher. I'm a partner with a firm Hudson Cook, based in 01:10:05.820 --> 01:10:09.570 Maryland and I represent the commercial finance Coalition, a 01:10:09.570 --> 01:10:12.480 group of responsible finance companies that provide capital 01:10:12.480 --> 01:10:17.250 to small and medium sized businesses. Proponents of this 01:10:17.250 --> 01:10:20.910 legislation are describing it as allowing small businesses to 01:10:20.910 --> 01:10:24.600 compare apples to apples so they can understand the cost of 01:10:24.600 --> 01:10:28.650 financing across products. And the federal reserve study that 01:10:28.650 --> 01:10:31.890 Mr. Hinton mentioned, and that that you will be receiving a 01:10:31.890 --> 01:10:35.790 copy of apparently, is very good, and it says that small 01:10:35.790 --> 01:10:40.230 businesses need help comparing costs across different types of 01:10:40.230 --> 01:10:44.700 financing. Respectfully, this legislation does not address 01:10:44.700 --> 01:10:49.980 that issue. This legislation singles out only one product 01:10:50.040 --> 01:10:56.700 sales based financing, and this product is not alone. The 01:10:56.700 --> 01:11:00.000 California and New York legislation that has been 01:11:00.000 --> 01:11:03.900 referenced has some important differences that I'd like to 01:11:03.900 --> 01:11:07.770 touch on but both of those states have addressed 01:11:07.920 --> 01:11:12.780 disclosures across commercial financing as a whole. It applies 01:11:12.780 --> 01:11:17.790 to loans lines of credit, invoice factoring, Merchant Cash 01:11:17.790 --> 01:11:24.060 Advance sales based finance. This legislation before you only 01:11:24.060 --> 01:11:27.690 applies to a very narrow slice of commercial finance and 01:11:27.690 --> 01:11:32.880 commercial finance is complicated. As a result, this 01:11:32.880 --> 01:11:37.050 does not provide an opportunity to comparison shop across 01:11:37.050 --> 01:11:40.530 commercial finance. It would only provide it would only 01:11:40.530 --> 01:11:45.930 require one small sliver of the commercial finance world to 01:11:45.930 --> 01:11:51.840 provide these types of disclosures. California passed a 01:11:51.840 --> 01:11:56.940 law that will require a rate disclosure. The law does not 01:11:56.940 --> 01:12:02.520 require an APR disclosure in California. The regulator has 01:12:02.520 --> 01:12:09.060 been working for two years to draft regulations that have 01:12:09.060 --> 01:12:13.200 proposed an APR disclosure. But because this issue is so 01:12:13.200 --> 01:12:18.930 complicated, particularly trying to apply an APR disclosure to 01:12:18.930 --> 01:12:22.830 sales based finance, which is not alone does not have fixed 01:12:22.830 --> 01:12:28.530 required payments or a fixed term. It has proved to be so 01:12:28.530 --> 01:12:31.230 complex that so far the regulations have not been 01:12:31.230 --> 01:12:38.460 finalized. New York has proposed an APR disclosure, again across 01:12:38.850 --> 01:12:42.180 almost all segments of commercial finance, not just one 01:12:42.180 --> 01:12:47.160 narrow product. Although that law has been passed, and it will 01:12:47.160 --> 01:12:52.050 require an APR disclosure, the regulator will have to put out a 01:12:52.050 --> 01:12:55.620 lot of complicated rules in order to require an APR 01:12:55.620 --> 01:12:58.710 disclosure for this type of product. And I just want to show 01:12:58.710 --> 01:13:02.250 you as an example of how complicated it is, this is an 01:13:02.250 --> 01:13:07.860 example of the formula for calculating APR. It is it is 01:13:07.890 --> 01:13:13.140 more complex than simply calculating the payment amount. 01:13:20.280 --> 01:13:24.900 All right, well, one sorry. My apologies. One thing, one last 01:13:24.900 --> 01:13:30.480 comment. Because of the complicated issue. We ask that 01:13:30.510 --> 01:13:35.160 the commissioner of financial regulations working group that 01:13:35.160 --> 01:13:40.470 was formed to discuss this legislation and this issue be 01:13:40.500 --> 01:13:45.150 reauthorized and reformed this the commissioner put together a 01:13:45.150 --> 01:13:49.110 working group as Senator Kramer participated industry was 01:13:49.110 --> 01:13:50.430 invited, to. 01:13:50.610 --> 01:13:53.880 Madam Chair: You're really are going beyond terms. 01:13:53.970 --> 01:13:59.760 Katherine Fisher: Sorry, just my my point is that this is a very 01:13:59.760 --> 01:14:03.570 complicated issue. The commercial finance coalition 01:14:03.570 --> 01:14:07.770 supports disclosure supports licensing supports the ban on 01:14:07.800 --> 01:14:12.270 confessions of judgment does not support the cap or an APR 01:14:12.270 --> 01:14:16.740 disclosure. And And my point is that this is a complicated issue 01:14:16.740 --> 01:14:18.960 that should be considered more. Thank you. 01:14:18.960 --> 01:14:22.800 Madam Chair: Thank you. Are there questions for this one? 01:14:24.810 --> 01:14:26.880 Senator Kramer and Senator Benson. 01:14:27.300 --> 01:14:30.060 Senator Kramer: Thank you in my question, very quick and easy 01:14:30.060 --> 01:14:36.120 Madam Chair. Miss Fisher, you said that the APR APR is highly 01:14:36.120 --> 01:14:41.340 technical and complicated. And you are the committee to see 01:14:41.880 --> 01:14:46.650 Einstein's formula of relativity. Let me ask you this. 01:14:47.100 --> 01:14:55.860 Does your industry not utilize computers? Input Output? Does 01:14:55.860 --> 01:14:59.520 your industry not utilize computers? Are you telling me 01:14:59.520 --> 01:15:02.460 that the four formula that you held up before the committee, 01:15:02.460 --> 01:15:06.750 please share with us is how your industry will have to calculate 01:15:06.750 --> 01:15:11.370 the APR for everyone transactions because they don't 01:15:11.370 --> 01:15:12.810 utilize computers. 01:15:13.200 --> 01:15:15.030 Katherine Fisher: Thank you for asking that. And as you said, 01:15:15.060 --> 01:15:18.510 input, output, I would characterize this as garbage in 01:15:18.510 --> 01:15:23.040 garbage out, because there's no fixed term and no fixed payment 01:15:23.040 --> 01:15:26.820 schedule. And so the information that will be run through that 01:15:26.850 --> 01:15:30.450 calculation will result in a disclosure. That's wrong. 01:15:30.780 --> 01:15:33.900 Senator Kramer: And I appreciate your commentary about garbage. 01:15:33.900 --> 01:15:37.350 But I think what we've heard was garbage in and garbage out. But 01:15:37.350 --> 01:15:39.000 thank you very much, Madam. 01:15:40.770 --> 01:15:45.990 Madam Chair: Alright, I think we have reached that point. And 01:15:45.990 --> 01:15:50.370 we've heard all of the bills for today, and thanks to everybody 01:15:50.370 --> 01:16:00.300 who has participate. Oh, Senator Benson? Yeah. Well, you gotta 01:16:00.300 --> 01:16:04.050 unmute. Unmute. 01:16:06.100 --> 01:16:08.050 Senator Benson: Thank you very much. Miss Fisher, I just want 01:16:08.050 --> 01:16:13.390 to ask a question that was asked before. What procedure? Do you 01:16:13.450 --> 01:16:16.780 what happens with the people who are not able to pay or the 01:16:16.780 --> 01:16:20.290 people who fail to pay? What process do you all follow? 01:16:20.760 --> 01:16:23.340 Katherine Fisher: Yes, ma'am. Thank you for asking that. In a 01:16:23.340 --> 01:16:29.250 space finance transaction, the promise to pay is only a promise 01:16:29.250 --> 01:16:33.060 to pay a percentage of revenue to the extent that revenue is 01:16:33.060 --> 01:16:37.920 created. For example, if I have a pizza restaurant, I am 01:16:37.920 --> 01:16:42.480 promising to pay 10% of the revenue I get for each slice 01:16:43.260 --> 01:16:47.760 that I sell. So if I have a great month, and I saw a lot of 01:16:47.760 --> 01:16:52.320 pizza that I'm wondering, with the pandemic, when restaurants 01:16:52.320 --> 01:16:56.640 had to close, though only to take out, have their capacity 01:16:56.640 --> 01:17:02.340 reduced significantly, those restaurants have a revenue drop 01:17:03.060 --> 01:17:10.050 the payments by contract, also with drop. If the business was 01:17:10.080 --> 01:17:13.890 unable to pay, because revenue dropped, then there is no 01:17:13.890 --> 01:17:20.340 obligation to pay. There is no now, and and I'm not trying to 01:17:20.340 --> 01:17:23.670 be cute here, because the business does promise not to do 01:17:23.670 --> 01:17:28.320 things such as hide money, your open additional bank accounts. 01:17:28.440 --> 01:17:34.590 So there are are if the business takes intentional steps to 01:17:34.620 --> 01:17:39.330 deprive or cheat on what they owe, then there is recourse but, 01:17:39.660 --> 01:17:44.970 but failure to generate enough revenue, never be an event of 01:17:44.970 --> 01:17:47.010 default under one of these contracts. 01:17:48.560 --> 01:17:51.590 Senator Benson: So you all don't go so you all don't go in and 01:17:51.890 --> 01:17:57.710 and retrieve their property and go through the don't go into 01:17:57.710 --> 01:18:00.860 their bank accounts, and you don't do those kinds of things? 01:18:01.890 --> 01:18:05.580 Katherine Fisher: Thank you for asking. If if the business 01:18:05.580 --> 01:18:10.140 revenue drops, then none of those actions would be taken. If 01:18:10.140 --> 01:18:14.820 the business has, let's say, opened up a second bank account, 01:18:15.150 --> 01:18:18.480 and they're they're hiding their revenue into into that second 01:18:18.480 --> 01:18:22.770 bank account so that they are essentially committing fraud, 01:18:23.040 --> 01:18:28.350 then those types of actions such as Uniform Commercial Code 01:18:28.350 --> 01:18:33.450 process to exercise a security interest on perhaps their 01:18:33.480 --> 01:18:35.730 inventory and equipment, that would be an appropriate 01:18:35.730 --> 01:18:36.510 response. 01:18:38.880 --> 01:18:43.080 Madam Chair: Okay, I think that was the last question and we've 01:18:43.080 --> 01:18:45.390 had a very interesting afternoon. We appreciate 01:18:45.390 --> 01:18:48.900 everyone's testimony, and have a good evening.