Delegate Webert: In favor say aye? Aye. Aye, all those
against? All right, the substitute is before Delegate
Tran, please explain this bill, because this is a fascinating
subject matter.
Delegate Tran: Thank you. This bill came to me for soft by a
lawyer in Northern Virginia who is working with a couple of
small business owners that got caught up in Merchant Cash
Advance agreement. And he reached out to me because those
business owners were Vietnamese American, he wanted to know if I
had heard about this practice more broadly in the community.
So I want to take some time to explain what a merchant cash
advances. Because quite frankly, when I initially spoke to the
FCC and the Attorney General's office, they both had to google
it before our meeting so that we could be on the same page. And
then I want to talk about why they're predatory or can be
predatory in nature. And what I'm proposing to do as an
initial step to get our arms around this issue. So first of
all, we know that the pandemic has created unprecedented
economic challenges for some of our small businesses. And we've
worked really hard to make sure that we're shoring them up
providing grants for to help with their recovery. But
unregulated companies are offering different lending
schemes called merchant cash advances, to make sure that
small businesses have quick, easy money in order to make
payroll and pay rent. Merchant Cash Advances is a practice that
gives money upfront to a business in exchange for either
an estimated credit or debit card sales, a percentage of
their estimated credit, or debit card sales, or a fixed sum of
money based on an estimate of sales. It is not alone. It is
kind of falls under a contract of hazard, but not as neatly.
And it's not regulated by any regulations or law in Virginia
code. And it's not regulated by the Federal Trade Commission
either. So in Virginia, we actually don't know who these
companies are, who these companies are. They don't have
to register with the SEC as a business. We've done some
research to identify merchant cash advances, we think we've
identified about 12 Different companies that offer these types
of lending opportunities in Virginia, but they're not the
companies are not necessarily domiciled in Virginia. And these
seem to some not all seem to engage in predatory practices.
And so after the conversation with the lawyer who reached out
to me, I spoke with a leader in the Vietnamese business
community. He's an accountant. He works with hundreds of
immigrant owned businesses in Northern Virginia. When we
brought up MCA, as he said, I've definitely heard about him.
Small business owners are reaching out to him because they
are getting ads on Facebook and YouTube being targeted to them.
And his advice is just stay away. Because if you can't pay
up on their time, you ended up getting caught in a really deep
hole and your business might have to go under. So he flagged
one example company that might be an MCA, it's a little bit
shady. So we called them my staff did and they answered in
Vietnamese, and as soon as my staff has, do you speak English,
can we talk about what you offer, they hung up.
The agreements also often include a confession of
judgment, which removes a business owners right to defend
themselves in court. And even if they can't defend themselves.
Often what's built in is that you have to go to the place
where the business is Dominus, where the lender is domiciled,
instead of where the Virginia business is domiciled. So it's
requiring some of these already cash strapped businesses to have
to cover travel, and then defend themselves in an arbitration
process that is also very costly. Some MCA companies were
basing advances in payback on pre pandemic numbers. So
they're, they're estimating what you might be able to afford to
pay based on your cash receipts pre pandemic, right, which were
many types for restaurants and other mainstream businesses much
higher than in the pandemic. So they're in this cycle where the
idea is that well, you shouldn't be able to pay this. But there
in reality, the cash receipts are getting in on a daily basis
is much lower than we want to just highlight the interest
rates and CA's have interest rates as high as 350%. Compared
to other small business loans, which might be less than 10%,
traditional bank loans, and even business credit cards but
really, really high. Right now we don't regulate so MCA is
don't have to disclose the total cost and fees. There's no way
for a small business owner to actually make an intelligent
comparison between the MCA and some other traditional
financing. The Federal Trade Commission has found that MCA is
across the country have harassed small business owners that
aren't able to meet them equally obligation, they found that
they've been engaging in misleading marketing practices.
And sometimes, you know, getting owners to sign these contracts
under different understandings. What we've proposed in Virginia,
quite frankly, would put us at the cutting edge of trying to
get a handle on MC A's. I want you to note, I'm not proposing
to ban them, I recognize that there are small businesses that
that don't have the the necessary situation to access
traditional financing through our banks and credit unions. But
so for them, this might be a way to go. We just want to make sure
that there's some transparency in this process for the small
business owner, particularly small business owners that might
not have the wherewithal to understand the nitty gritty Enos
of, you know, these types of contracts, we want to require
that MCA lenders register with the SEC, that they provide the
terms of agreement in plain language, how much you're going
to owe, at the end of the day, what the fees are, what the
percentages so that you have, the small business owner has a
clearer picture of the total cost. And that if there's any
arbitration or court actions, that those would take place in
the locality where the small business is domiciled, so that
our Virginia and businesses don't have to travel to New York
or another state. And it would allow the Office of the Attorney
General to investigate and prosecute instances of
violations of the bill. We I think this is a small but
significant step to starting to understand the situation of MCs.
In Virginia, we have not, I have not kind of at that point to
give investigative authority to the SEC, I think I'd like to
gather some information and data, and then figure out the
amount of regulation that we actually need are small
businesses, especially these main street shop, mom and pop
shops are at risk and need our support. And so I hope that
you'll be able to support this bill, and I look forward to our
conversation today.
Delegate Webert: Thank you delegate Tran, questions from
the committee Delegate Weber.
Speaker 3: Thank you Mr. chairman, I think my questions
are probably for the Bureau of financial institutions. I see
the commissioners here. And I had a couple of questions
related to regulation of financial institutions, perhaps
of this nature, if he could.
Speaker 5: Mr. Chairman, Joe, face Commissioner financial
institutions, they'll be aware.
Speaker 3: Commissioner, a couple of questions occur to me.
One is Are you familiar with these types of outfits? And do
they have a an affinity with other types of lending
institutions that we already regulate in some fashion?
Speaker 4: Well, first, if I may, Mr. Chairman, Delegate
where Madam Chair, my apologies for not being here earlier
today? To answer your question, so just want to say that
delegate where this is something that is new to us. I was not
personally aware of this type of lending. I can tell you after 42
years of being a bank examiner, Nothing surprises me anymore.
And I learned something new every day. The way money is
transmitted these days, the way it's led, it changes every day.
There's something new every week. This is something we were
not aware of. It is not captured in any any statutes under 6.2.
Banking, lending, so forth. So it is an unregulated business at
this point.
Speaker 3: Mr. Chairman, another question.
Speaker 4: In Virginia, I should say, dog where
Speaker 3: In testimony what from the patron was that this
these are things discovered on Facebook or other social media
and they're domiciled in, at least in some cases in other
places. Excuse me, do you have regulatory authority that would
reach to such places?
Speaker 4: No, sir, we would not. Miss Chairman Sir Delegate
Weber. Typically when a new industry comes under regulation,
and most recently that would have been student loan servicers
as you recall and debt settlement providers. We do not
have the mechanisms to go out and beat the bushes, if you
will. It's up to the entities to know what the law is in Virginia
into obtain a license or be registered on their own. But we
typically can get tips from consumers filing complaints
about unlicensed entities and when we find that we We do check
it out. We do go after.
Speaker 3: Thank you. Delegate McNamara.
Delegate McNamara: Thank you, Mr. Chairman, I had a number of
questions if I could to the patron. So I think I heard you
say you said these are not loans. But what describe the
transaction. So I get something in my Facebook feed, or
actually, I think I didn't, I confess, when we talked this
week, I did not know, I had not heard of this terminology as
well. But I may have gotten solicitations because I get them
fairly often, as a business owner, you know, we have
business cash for you. And if I just throw them in the bank,
because because my rich uncle gives me money. So the the,
describe the transaction, I opened up the letter, it says we
have cash for you. I tell them what my sales are. They then
give me money based on now to return to that money, but a
certain percentage of my revenues going forward.
Delegate Tran: Yes, that's my understanding. And then you give
them I think, in some cases, you actually give them direct access
to your your bank account to withdrawal. And so we do, I
believe, have somebody online, who is a small business owner, a
restaurant owner here in Richmond, who is is here to
share her experience. And with one of these, and so she can
probably speak specifically to how that, you know, the actual
mechanism of how that happened. But that's what we that's our
understanding and talking with the leaders in the music
community and in reading online as well.
Speaker 3: Thank you, Mr. Chairman. Delegate Sullivan.
Delegate Sullivan: Thank you, Mr. Chairman, this may be a
question for counsel. Since we don't have the substitute
available. We're striking paragraph just paragraph a
beginning on line 137, or the entire section.
Delegate Tran: Delegate Sullivan, I would say it's just
paragraph A. And I think the commissioner could speak a
little bit to that. I think the SEC had some concerns. You know,
how to what is the threshold when they would refer over to
the AGs. Office and such and so we wanted to respect that
because we're not quite at the point of the investigator
vesting, get to investigate for them to investigate yet. And so
we wanted to kind of take this baby step to gather the data
first, but also just allow if they're really egregious cases,
through consumer complaints in such that the AG is office would
be able to take action.
Delegate Sullivan: Further question Mr Chairman.
Speaker 3: Delegate Sullivan.
Delegate Sullivan: Thank you. This is not the Courts
Speaker 1: I'm sorry, I think councils raising the town
Committee. So I don't want to necessarily edit this online.
And we could probably talk edit this during the committee, we
could probably talk about it. But what I don't understand is
paragraphs B, C, and D continued to talk about actions by the
attorney general, including bringing lawsuits and such. So
concerned that just striking a may not solve the problem that
counsel just described. One question for,for.
council,
Mr. Hernandez: Mr. Mr. Chair, Delegate seven delegate trend.
Did you want to leave in subsection A the insurance
Attorney General is authorized to seek to enjion, violations of
this chapter?
Speaker 1: That would probably make sense. Thank you.
Speaker 3: Could counsel repeat that.
Mr. Hernandez: Yes, sir. So previously, I had described it
as striking lines 137 through 141, I think really should be
striking. If the commission through with or without such
referral. So it will take out the part where the commission
refers violations to the Ag but it will still say the Attorney
General is authorized to seek to enjoin violations of this
chapter, circuit court having jurist stiction may join such
violations, notwithstanding the existence of an adequate remedy
at law. All right, thank you.
Delegate Sullivan: Thank you, Mr. Chairman. And one final
question relating to wordsmithing. Delegate Train in
your comments, you talked about how the Ag was going to have
authority to investigate and prosecute. We're not creating a
crime here. There's not going to be any prosecutions under this.
Isn't that right? Or maybe this question is also for counsel.
Mr. Hernandez: Mr. cerdo, Sullivan, sir, it's not. The
bill doesn't create a criminal crime, a criminal violation. It
just says that the attorney general has the authority to
seeks to enjoin Mr. Face may help remind me if there is a gem
rule for criminal violation statute for 6.2. There is not he
says.
Delegate Sullivan: Thank you, Mr. Chair. I will now be quiet.
Speaker 8: So, I guess procedurally, if we want to make
sure we have that sentence, do we need to reject the current
substitute this before us and adopt the new substitute? So
that sentence is in in before us.
Mr. Hernandez: Mr. Chair, I think you can just adopt that
amendment.
Unknown: Okay. I move that amendment. Mr. Chair.
Speaker 8: Is there a second? All those in favor of adopting
the amendment say aye. Aye. Aye. All those against the substance
has been amended, and probably for us. Alright, let's take
testimony. If we can keep it brief. All those in favor of
this piece of legislation, please come forward at or on the
floor. If there isn't anybody, we'll go to virtual. All right.
We do have one person I believe Mr. Hernandez.
Mr. Hernandez: Good afternoon, Mr. Chairman. And thank you
members of the committee. My name is Phil Hernandez with the
Commonwealth Institute. And for the reasons that delegate Tran
put forward we support this legislation, which will help to
bring greater transparency around MCAs and in so doing help
protect small and minority owned businesses across our
Commonwealth. Thank you so much.
Speaker 8: All right. Is there anybody here to speak against
this piece of legislation? Okay, and I don't think there is
anybody virtual delegate train. Would you like the last word?
Sorry. Is that, hold on, Delegate Tran? I believe there's
one other person virtual. And I can't see it but Amy, are you to
speak again?
Speaker 9: Yes, I am here. I'm here to speak in favor.
Delegate Webert: Okay. Please.
Unknown: Thank you. Thank you so much good day leaders. I
represent over 40 small and minority owned restaurants in
the Richmond Chesterfield and Henrico County's Richmond
region. That as you can imagine it as delegate translated have
suffered tremendously. Throughout the pandemic, it's
been reported that much of the emergency funding through
various federal and state grants and loan opportunities just
didn't simply didn't reach many of the minority establishments.
As a result, these predatory companies have, you know, kind
of used this opportunity to enter into bargaining agreements
with harmful terms at a very vulnerable time, we are
requesting that you please support this bill and one of the
delegates had to ask questions about about the process. And
yes, you are borrowing basically from from future receipts. And
so you're kind of predicting if you're going to have enough
money in the future to cover and sometimes it's daily withdrawals
out of your bank account. And so definitely need regulation
definitely want to support this bill, we ask that you. You vote
in favor, thank you so much.
Alright, Delegate Webert?
Delegate Webert: Yes, I was gonna ask the patrons since
since it does have the fiscal impact statement does say will
require one position for the each of the next two years and
although it is described as non general fund money, the
legislation does not provide a funding mechanism to allow the
SEC to recover expenses. Did you have a budget amendment or is
there something or whoever whoever be appropriate.
Unknown: And Delegate Webert I think one of the one of the
pieces in the substitute was an annual fee, registration fee of
$1,000 and a $500 renewal fee every year for the businesses
that engage in this practice. Does that answer your question?
Delegate Webert: It does, if we think that there would be 300 of
these groups out there. Yet, Commissioner.
Mr. Chairman, Delegate Webert that fiscal impact was prepared
on the original language in the bill. Removing the investigative
ability requirements for us significantly reduce that
impact. Your question is correct. We don't know how many
are out there. It's very difficult to for us to gate to
gauge, right. It's like that, again, with any new industry we
bring under regulation, whether it be student loan servicers, we
have no idea what the universe is. We do have a funding
mechanism in here now with a registration fee. Could be next
year. If we find out there a lot more. We'll have to come back to
you with a with a change in that.
Speaker 3: I thank you for that.
Speaker 4: I might if I might just add, we have no position on
the bill will carry out whatever the committee in the General
Assembly require. My general counsel is on virtual if you had
any questions, criminality and so forth, he'd probably be able
to answer those questions.
Delegate Webert: Thank you. Thank you, Mr. Chairman. I think
that answered that speaks to the question I had. No, we'll get
McNamara.
Delegate McNamara: Thank you, Mr. Chairman. I'd like to just
throw out from the discussion standpoint, I think I liked the
concept of the bill. It sounds to me, it's not drastically
different than some of the kind of the the operators that we
outlawed in this General Assembly a couple years ago. I'm
not sure when there's not enforcement capability. And if
we're talking 12, or 14 different businesses, perhaps
even at 500 or $1,000. I don't know. You know, I don't know
that we've we're exactly where we need to be on the bill. And
I, is there some sort of study or commission, that a bill like
this could be referred to to try to put our put our arms around
exactly what's occurring and what makes sense from a
regulation standpoint. And I asked that to your experience on
the committee, Mr. Chair, because I think the idea is very
good. I'm not sure if it's where it needs to be. And if there's
someone that can look at it.
Speaker 8: To be honest, Delegate McNamara, I don't know
if there is a commission or anything that would study this,
but we can certainly look into that real quick. But delegates,
Delegate McNamara: Chairman, if I may speak to the bill, please.
And whatever. I think I'm going to be responding to delegate
McNamara. Delegate train I, I love the bill. This is clearly
something happening under the radar. And we shouldn't study
it. We should we should get on top of it right away. I hope my
earlier comments with respect to the Attorney General section,
having made things confusing, made it worse than it was. There
clearly now is in this bill, the ability of the Attorney General
to enforce this. This provision that we have left in with the
amended substitute the ability of the Attorney General to
enjoin violations of the chapter and to ward them to seek damages
and relief, including restitution. My question simply
went to whether it was wordsmith properly and whether there was
criminality involved with the Attorney General, under the laws
under the statute, as I read it, Delegate McNamara, will clearly
have authority to enforce this, this legislation, and it's
pretty strong enforcement. I hope, I hope, I hope the
committee will report this bill. It's great bill.
Speaker 8: I delegate Tran after we've gone through that, would
you like the last word?
Delegate Tran: I think I would leave you with, you know, we, we
need to get a handle on what the problem is. And that this, this
bill, I think, starts that process by requiring the
registration by starting to gather that data. And I may come
to you next year or the year after once we have a fuller
picture of exactly what role this SEC needs to play and what
other things we need to put in to protect our small businesses.
But I think this is a first step that's incredibly important,
particularly as small businesses are trying to emerge from this
pandemic, that we're protecting them from predatory practices.
Thank you.
Speaker 8: Thank you Delegate Tran. This committee operate,
Delegate Webert?
Delegate Webert: Thank you, Mr. Chairman, I am going to support
this bill. I think it's testimony to the fact however,
that lending entities have amazing ability to transform.
And once we whack this mole, I suspect there may be another
mole pops up. But I do think it at least based on on the patrons
testimony does seem to be a problem. There does at least
provisionally seem to be a way of beginning to identify the
nature and extent of it, and the ability to regulate if as
needed. So I will support the Mayor.
Unknown: Thank you, Delegate Webert this committee operates
by motion,
Speaker 10: Mr. Chair.
Unknown: Delegate Bagby.
I was gonna make the motion, but I feel the need to thank the
patron first because I had constituents call me about about
some of the challenges associated with this sort of
lending. And I asked her to call our friends at poverty law. And
they say the delegate train was already working on that
legislation. So I want to thank them for working hard to make
sure that we get the right piece of legislation before us and and
I think this is going to help a lot of small businesses. Stay in
business.
Speaker 8: Thank you. Mr. Chairman. I'd moved to report.
Alright, there's been a amended. Substitute as amended. Yes.
Okay. There has been a motion to report the substitute as
amended. Is there a second? Okay the Motion to report. The
substitute as amended has been made improperly seconded. All
those in favor, please record your vote on the voting board.
Clerk will open the roll. Clerk will close roll. HB 1027
reports. Nine zero. Congratulations.
Unknown: Thank you very much.
Thank you.