Legal Briefs
FTC Commissioner Rohit Chopra on Merchant Cash Advances
August 3, 2020
Following recent lawsuits filed by the FTC, Commissioner Rohit Chopra made the following statements earlier today in an announcement about merchant cash advances:
As the Commission proceeds into litigation in these matters and further studies this market, I hope that we will uncover additional information about business practices in this opaque industry. In particular, we should closely scrutinize the marketing claim that these payday-style products are “flexible,” with payments contingent on the credit card receivables of a small business. In reality, this structure may be a sham, since many of these products require fixed daily payments, and lenders can file “confessions of judgment” upon any slowdown in payments, with no notice or due process for borrowers.
This raises serious questions as to whether these “merchant cash advance” products are actually closed-end installment loans, subject to federal and state protections including anti-discrimination laws, such as the Equal Credit Opportunity Act, and usury caps. The stakes are high for millions of small businesses.
New York State Legislators Resume Push of Commercial Finance Disclosure Bill
July 17, 2020
A bill (A10118A / S5470B) intended to create uniform disclosures for comparison purposes while also placing control of the commercial finance industry under the purview of the superintendent of the New York Department of Financial Services, is moving forward.
The March 2020 initiative was picked back up this week by members of the Assembly where it passed the banking committee and codes committee on a unanimous and bipartisan basis.
“When enacted, this bill will become the strongest commercial lending disclosure law in the country that covers all commercial financing products,” wrote Ryan Metcalf, Head of US Regulatory Affairs and Social Impact at Funding Circle, on LinkedIn. “It includes strong provisions that ensures enforcement and eliminates loopholes that will prevent gaming & abuse, & requires APR to be disclosed for all products.”
Metcalf further wrote that they and the Responsible Business Lending Coalition (RBLC) have been working diligently with NY state legislators for the last year or so to craft this bill. Among RBLC’s membership is Fundera, Nav, Lendistry, LendingClub and about 4 dozen other companies.
How Should A Merchant Cash Advance Be Structured, What is Syndication, and More?
June 29, 2020A recent roundtable hosted by Pepper Hamilton partner Gregory J. Nowak examined some broad questions about merchant cash advances including:
- What is a merchant cash advance?
- How should a merchant cash advance transaction be structured?
- What are the key features for enforceability?
- Could a merchant cash advance transaction be a security?
- What is participation? is it a security? If yes, what does that mean?
- What is syndication?
- What’s the role of FINRA?
They published the presentation on jdsupra.com and it can be viewed here:
Business Loan Broker “The Tyrant” Pleads Guilty
June 29, 2020
The owner of a Long Island business loan brokerage accused of orchestrating an advance fee loan scheme, pled guilty this month. Demetrios Boudourakis, known in his brief MMA fighting career as The Tyrant, pled guilty to the top charge of grand larceny in the 2nd degree.
Boudourakis was arrested last year after joint law enforcement efforts by the Suffolk and Nassau police and sheriff’s departments, New York State Police, the FBI and the Drug Enforcement Administration, had been monitoring his company’s business for months. According to the Suffolk County District Attorney, the investigation revealed evidence that Boudourakis offered loans to his targets in exchange for advance fees, and then collected the fees without providing the loans. Once he and his employees had received the advance fees, they would cease contact with the victims. The scheme was determined to have generated stolen proceeds in excess of $2 million.
His sentencing date is on September 4th, where he is expected to serve between 5 and 10 years in prison.
Separately, pending federal drug charges against him were recently dropped.
If You Do MCA, You’re Not a Lender (Part Two)
June 16, 2020
A three-year-old deBanked blog post turned out to be a bit prophetic.
Titled If You Don’t Make Loans, You’re Not a Lender (And definitely not a ‘direct lender’) and posted on January 19, 2017, I hypothesized that the misuse of financial language on the phone or in an e-mail, particularly if one conflated merchant cash advances with lending, could one day result in a subpoena for a deposition to explain it.
In the People of the State of New York, by Office of the New York State Attorney General v. Richmond Capital Group LLC et al, that very scenario played out. Several people were subpoenaed last year and were required to give testimony to lawyers for the New York State Attorney General to explain why internal company communications allegedly referred to MCAs as loans or why a purported MCA company website made use of lending terminology.
The answers, which are public record, were not great. At least two individuals answered that line of questioning by pleading the fifth to potentially avoid self-incrimination.
While there are a lot of colorful details to consider in this case, the AG’s lawsuit dives into the various ways in which the defendants allegedly conflated financial products, including that a defendant company allegedly advertised itself as a “lender” when it actually was not.
While the allegations in the AG’s complaint are probably somewhat unique, there are claims and arguments within them that may be worth further legal review and analysis. Contact an industry-knowledgeable attorney if you have questions.
Deloitte Sued Over Audits of Failed DLI Fund
May 7, 2020Those affected by the failure of Direct Lending Investments (DLI) have added a new target to blame, Deloitte & Touche LLP and related entities.
A lawsuit filed last week in the Superior Court of California says that Deloitte was engaged by DLI to audit the Funds’ financial statements and accompanying footnotes in accordance with GAAP for the years ending 2016 – 2018 and issued clean unqualified audit reports that “negligently ratified and confirmed the false valuations contained in the financial statements and footnotes disseminated to the Plaintiffs.”
New York Supreme Court Grinds to a Halt
March 24, 2020Amid the Coronavirus pandemic, the New York Unified Court System has modified its protocols. Among the limitations, the Supreme Court will only be handling “essential applications as the court may allow.” Examples offered were Mental Hygiene Law Applications, civil commitments, and guardianships. All other matters and conferences are being adjourned to future dates.
These temporary rules went into effect on March 17th and will continue until further notice.
Thanks to the Virus Craze: It May Now Be Unlawful For Telemarketers Doing Business in New York To Call Large Swaths Of The Country
March 10, 2020Are you a telemarketer that does business in New York? A large and growing percentage of the country may now be off-limits to contact, thanks to a recently enacted New York State law that prohibits unsolicited telemarketing sales calls to any person in a county, city, town or village under a declared state of emergency or disaster emergency.
New York General Business Law 399-z (5-a)
It shall be unlawful for any telemarketer doing business in this state to knowingly make an unsolicited telemarketing sales call to any person in a county, city, town or village under a declared state of emergency or disaster emergency as described in sections twenty-four or twenty-eight of the executive law.
The statute, which seemingly doesn’t limit its reach to New York individuals, but rather to any place in which a state of emergency has been declared, may mean that anyone doing business in New York may need to be monitoring active states of emergency around the country. At the time of this writing, those places include the states of:
- New York
- New Jersey
- California
- Florida
- Maryland
- Washington
- Oregon
- Utah
- Kentucky
- North Carolina
As this law amends Section 399-z, it is a good idea to read the entirety of the section.
deBanked is not a law firm. For legal advice related to this law, consult with a suitable attorney.
