Double Dipped: What’s Next For New York’s Small Business ‘Truth in Lending’ Act
January 11, 2021
Last year, when the Small Business ‘Truth in the Lending’ bill came through the New York State Senate Banking Committee, Senator George M. Borrello said he and other members went to work. Their job: to write a version everyone would like, which fell apart when the bill passed in July and it was signed into law just before Christmas.
“I’m a small business owner myself, but I also come from local government, and in local government, the committee is where the work gets done,” Borrello said. “We had the opportunity to fix this in committee. By the time it got to the floor, the governor basically reversed all the things I presented that were flaws, and he signed it.”
That’s the story of how S5470B came to be in Albany. Instead of ironing out the kinks in committee, Borrello said he watched as the bill with all its problems passed over the summer. There was a process to clean it up afterwards to make it suitable for Governor Andrew Cuomo’s signature, since it’s said that even he himself had expressed reservations about the language. But then he signed the original version and all the edits were discarded.
Politics are suspected to have played a role in that.
“When the governor finds something is flawed, he usually vetoes and sends it back,” Borrello said. “It concerns me that there is an underlying political angle that has nothing to do with the Truth in Lending.”
Steve Denis, the executive director of the Small Business Finance Association, said that he doesn’t think that the signed bill that is up on the state senate website will be the final version.
“It is so poorly drafted that even companies that support the bill have liability and will be the first to get sued,” Denis said. “The SBFA will be a lot more aggressive; the legislature has a lot to work on in the next session. It has been a wake-up call, unifying the industry. We will be more aggressive to create a more favorable version.”
Denis has attested to the harm the bill will do to the SMB finance industry in New York, costing billions of dollars in fines and litigation. He pointed out that major companies like PayPal have fought against the bill, and the proponents “recognized it was not a good bill, but passed it to fix it.”
Borrello said that it is common in Albany to encounter legislation written by lawmakers who don’t understand small business owners who deal with regulation every day. Borrello and his wife worked in the hospitality business for years before going into public service. Borello said he feels business owners’ pain during the pandemic, especially in the restaurant and hotel industry.
He said the end result of this new bill when it comes into effect this July: funding and lending companies will stop providing services in New York State, directly harming the small businesses the bill claims to help.
“One of my frustrations, being on the banking committee, is that we do things that ultimately make it more difficult for people to access credit and financing in New York State,” Borrello said. “You’re talking about small businesses that are already hurting, having financial difficulties accessing lines of credit. This disclosure law passing during this pandemic is one more nail in the coffin for small business.”
The Legislature, the Governor, and the Department of Financial Services (DFS) all reportedly had issues with the bill: yet it passed. Borrello said a problem with “nonsense lawmaking” comes from competition with other states. New York compares itself with California to “prove we’re the most progressive.” Borrello also pointed out that California passed its version of a lending disclosure bill more than two years ago, and their version of the DFS still cannot find a way to calculate an APR metric for factoring or MCA.
As the bill was argued on the legislative floor, Borrello brought up the controversial “double-dipping” term that had been inserted in the language. Borrello came to the same conclusion as Denis, that there is no double-dipping term: It was just conjured up for the bill to sound scary, negative, and damaging.
“Other than talking about potato chips, I’m not sure what you’re talking about,” Borrello said. “When you haven’t defined it, in the legislature, it comes down to a political talking point and dog whistle. You enshrine a rather vague piece of jargon in the legislation, and it shows how deeply flawed it is.”
Borrello now plans to work with the Governor, DFS, and legislature to amend and change the bill. He is also fighting for a Republican banking overhaul to provide further credit access to small businesses.
“The next step now is to go back and see what needs to be fixed,” Borrello said. “Hopefully, my role now as the ranking member of the banking committee, we can have a common-sense conversation about how to actually fix it.”
Greenbox Capital Comments on Landmark Florida Legal Victory
January 7, 2021
Greenbox Capital was the victor of a major lawsuit argued before Florida’s Third District Court of Appeal that conclusively established the legality of merchant cash advances in the state.
When asked for comment, Greenbox Capital® CEO Jordan Fein said:
“It’s been a long, arduous, and expensive battle over the last few years proving in a court of law that a Merchant Cash Advance is not a loan. Today, we celebrate a win for all Merchant Cash Advance companies in Florida and the entire United States who are dedicated to funding small businesses through ethical practices. Our hard work and commitment to helping small businesses grow was validated and we are thrilled with the final decision of the District Court of Appeal.”
The decision in Florida echoes a similiar opinion reached in New York in 2018.
It’s Official, Merchant Cash Advances Not Usurious in Florida
January 6, 2021
Big news in the State of Florida. The Third District Court of Appeal entered its order on January 6th to decide the fate of Craton Entertainment, LLC, et al., v Merchant Capital Group, LLC, et al..
Merchant Capital Group, LLC dba Greenbox Capital sued Craton in December 2016 over a default in a Purchase and Sale of Future Receivables transaction. In turn, Craton responded with various defenses and counterclaims that asserted the underlying transaction was really an unenforceable usurious loan.
The Circuit Court for Miami-Dade County sided with Greenbox in August 2019. The defendants appealed.
The District Court of Appeal decided the matter conclusively on January 6, holding that the original ruling was affirmed on the basis that:
- The transaction is not indicative of a loan where repayment obligation is not absolute but rather contingent or dependent upon the success of the underlying venture
- that the transactions in which a portion of the investment is at speculative risk are excluded from the usury statutes
- when the principal sum lent or any part of it is placed in hazard, the lender may lawfully require, in return for the risk, as large a sum as may be reasonable, provided it is done in good faith.
The decision can be viewed here.
The lawyers representing Appellee Greenbox Capital were Henderson, Franklin, Starnes & Holt, P.A., William Boltrek III, Shannon M. Puopolo and Douglas B. Szabo.
You should contact an attorney to discuss the implications of this ruling. Merchant Cash Advance contracts are not all the same.
This ruling is similar to a ruling in New York that was made in 2018.
Failing Main Street NY
December 21, 2020
During the election, we heard candidates on both sides to toss around the phrase “small businesses are the backbone of the American economy.” A staple of exhausted political rhetoric, made trite despite its truth because for many politicians it’s a talking point, not a platform. We must move from rhetoric to action. To do so, America’s political leaders need a real understanding of what small businesses need—and what they don’t.
The struggle between understanding and posturing is on display right now in Albany. While small business owners struggle to open their doors, the legislature passed a so-called “truth in lending for small business” bill that claims to provide more disclosure to business owners seeking financing. Led by Senator Kevin Thomas and Assemblyman Ken Zebrowski the bill is currently pending before Governor Cuomo. The legislators recently authored an op-ed that further demonstrates their failure to recognize that the innocuously named bill is rife with faults and lacks a competent grasp of small business issues. The critical blind spots in the bill’s design threatens billions of dollars in capital leaving New York—a failing small businesses owners can scarcely afford at such a difficult time.
Yet, rather than incentivizing finance providers to stay in New York, the legislature is focused on complex disclosures that lack real meaning or understanding to small business owners. Senator Thomas opined on the Senate floor “… the reason I introduced this bill is because people don’t use standard terminology.” Interestingly, this bill creates several new terms and metrics that would be required to be disclosed that have never been used before in finance. Terms like “double-dipping” and new confusing metrics that even the CFPB under President Obama labeled as “confusing and misleading” to consumers. This bill’s fatal flaw is that it has confused information volume with transparency, somethings a recent study proved would harm small business owners.
Even Senator Thomas acknowledged the legislation’s myriad of problems while still encouraging its passage. In his colloquy with Senator George Borrello on the Senate floor, right before he called New York small business owners “unsophisticated,” he mentioned how his bill had “many issues” that he “hoped” would be worked out before implementation. Hope is not a strategy and it won’t help small business owners obtain the financing they need to stay in businesses. Advancing legislation that would limit options for entrepreneurs working to stay in businesses during a pandemic that has crippled the New York economy represents a reprehensible failure of leadership.
Minority-owned businesses have faced a disproportionate economic impact from the pandemic. According to the Fed, Black-owned businesses have declined by 41% since February, compared to only 17% of white owned businesses. Further, the Paycheck Protection Program (PPP), the federal government’s signature relief program for small businesses, has left significant coverage gaps: these loans reached only 20% of eligible firms in states with the highest densities of minority-owned firms, and in counties with the densest minority-owned business activity, coverage rates were typically lower than 20%. Specific to New York, only 7% of firms in the Bronx and 11% in Queens received PPP loans. Moreover, less than 10% of minority-owned businesses have a traditional banking relationship—something that was initially required to have access to the PPP.
The lack of cogency and lazy approach to this legislation is a disservice to the hard-working entrepreneurs who continue to open their businesses while facing daily economic uncertainty. Governor Cuomo has worked tirelessly to continue to provide economic relief to both businesses and consumers—removing billions in financing for small businesses will only hinder this effort. New York can do better.
Steve Denis
Executive Director
Small Business Finance Association
Par Funding, Receiver Continue to Spar Over Its MCA Business
December 18, 2020
“From inception through 2019, [Par Funding] incurred a cash loss from operations of $136.2 million.”
That’s the conclusion reached by Bradley D. Sharp, CEO of Development Specialists Inc (DSI), the financial advisor to the Receiver appointed in the Par SEC case.
Par has scoffed at the Receiver’s analysis of its business. “We do not necessarily begrudge attorneys, whose skill sets are often in other areas, a potential inability to understand the math that often makes for a strong and profitable financial model,” Par’s lawyers wrote in an October court filing. “There is a reason that smart, mathematically inclined people are typically hired by banks, hedge funds and financial services firms. But the Receiver and his counsel’s inability to understand Par’s business has led to all manner of baseless accusations that are easily answered in the very documents they possess but do not understand…”
Par says it was profitable and walks the Court throught its mathematical process. Sharp says Par’s assessment “is misleading and does not reflect actual operations at the company.”
Sharp alludes to Ponzi-like characteristics but refrains from using that term. “From inception through 2019, [Par] paid $231 million to investors, consisting of principal repayments totaling $135.6 million and interest payments totaling $95.4 million. [Par] could not have made these principal and interest payments to the investors without additional funds from the investors.”
Par explained that the key to its business is in the compounding:
“The merchant funding model is profitable because merchant funding returns are reinvested, either in a new or different merchant, or in an existing merchant with adequate receivables as a consolidation, or as a refinance of a merchant which may already have MCA funding from another provider. And the reinvestment begins on the merchant funding returns which commence immediately and occur daily. In very simple form, the math works as follows. Assuming $10,000 is funded to a merchant pursuant to a funding agreement providing for a funding return of $13,000 over the course of 100 daily ACH withdrawals, the agreement would provide for repayment to begin immediately with daily payments of $130. As those monies are returned, portions are used to pay operating expenses, but most of the monies are re-invested to fund other merchants. Mathematically, this means that the original $10,000 is being used to fund more than one merchant. Over the life of a single $10,000 funding, that same $10,000 can be used to fund multiple merchants, all of whom are paying funding fees in excess of the principal amount received. Thus, the original $10,000, at a 1.30 factor rate, generates $13,000 on the first merchant cash advance (MCA). Those funds are reinvested and generate $16,900 on the second MCA, and $21,970 by the third MCA – an increase of $11,970 over and above the initial $10,000. And that can happen within a year. This is the powerful compounding effect of the financial model.
That is the simplest version of the model. In practice, the model is far more sophisticated than that because the leveraging to new merchants of the MCA returns begins as soon as the MCA payments come in.”
Par additionally said:
“At the conference on October 8, 2020, the Receiver’s counsel told this Court, and many investors, that out of $1.5 million received per day from merchants prior to July 28, 2020, $1.2 million was used for new MCA funding. Thus, according to the Receiver’s counsel, only $300,000 constituted net collections, about 20%. The Receiver’s counsel appears to be suggesting that the company is not holding on to receivables but, instead, is refunding the same merchants 80% of receipts. This proposition is wrong and its assertion shows that the Receiver and his counsel do not understand the MCA business.”
One could assess that a large element of this case consists of the Receiver being like, ha! well look at this! and Par responding, well, yes, that is actually how our business works.
In fact, that is precisely the angle Par took in defending its use of funding new deals with money collected from deals previously funded.
“First, the numbers show that collections are used to fund new MCA deals,” Par’s attorneys wrote. “This may come as a total surprise to the Receiver and his counsel, but funding merchants is the business of Par. That is like criticizing Ford Motor Corp. for using its car sales income to build and sell more cars.”
Both sides agree that Par advanced over $1 billion to small businesses but Sharp says that “reloads” distorted the numbers.
“Use of reloads escalates the obligations of the merchant as each reload adds an additional ‘factor’ along with any new funds advanced,” Sharp wrote. “In [one example the reloaded funds are] subject to the factor twice; once when the funds were originally sent and again when they are included in the reload advance. The use of reloads also significantly distorts the calculation of loss rates as the advances are simply refinanced without becoming a loss.”
Sharp concludes that the true end result for Par is a much higher default rate than it lets on to.
And then there’s this
Sharp has repeatedly brought attention to a list of merchants with unusual payment and funding activity. Par countered by saying there are good explanations for each.
Amongst all of this is that company insiders are alleged to have received tens of millions in payments from Par and the Receiver is confident, in part due to DSI’s report, that Par was majorly unprofitable.
“Based on our review to date, it is apparent that [Par] would not have been able to continue to provide payments to investors, or to continue to operate, without additional funds from investors,” Sharp wrote in a December 13th report.
This case is not the first rodeo for Sharp and DSI in the merchant cash advance business. They were also assigned to manage the 1 Global Capital case.
The case is ongoing. The Court recently approved a motion to expand the Receivership estate.
CFPB Initially Proposed to Exclude MCAs, Factoring, and Equipment Leasing From Section 1071
December 17, 2020
After ten years of debate over when and how to roll out the CFPB’s mandate to collect data from small business lenders, the Bureau has initially proposed to exclude merchant cash advance providers, factors, and equipment leasing companies from the requirement, according to a recently published report.
The decision is not final. A panel of Small Entity Representatives (SERS) that consulted with the CFPB on the proposed rollout recommended that the “Bureau continue to explore the extent to which covering MCAs or other products, such as factoring, would further the statutory purposes of Section 1071, along with the benefits and costs of covering such products.”
The SERS included individuals from:
- AP Equipment Financing
- Artisans’ Bank
- Bippus State Bank
- CDC Small Business Finance
- City First Bank
- Floorplan Xpress LLC
- Fundation Group LLC
- Funding Circle
- Greenbox Capital
- Hope Credit Union
- InRoads Credit Union
- Kore Capital Corporation
- Lakota Funds
- MariSol Federal Credit Union
- Opportunity Fund
- Reading Co-Operative bank
- River City Federal Credit Union
- Security First Bank of North Dakota
- UT Federal Credit Union
- Virginia Community Capital
The panel discussed many issues including how elements of Section 1071 could inadvertently embarrass or deter borrowers from applying for business loans. That would run counter to the spirit of the law which aims to measure if there are disparities in the small business loan market for both women-owned and minority-owned businesses.
One potential snag that could complicate this endeavor is that the concept of gender has evolved since Dodd-Frank was passed in 2010. “One SER stated that the Bureau should consider revisiting the use of male and female as categories for sex because gender is not binary,” the CFPB report says.
But in any case, there was broad support for the applicants to self-report their own sex, race, and ethnicity, rather than to force loan underwriters to try and make those determinations on their own. The ironic twist, however, according to one SER, is that when applicants are asked to self-report this information on a business loan application, a high percentage refuse to answer the questions at all.
The CFPB will eventually roll the law out in some final fashion regardless. The full report can be viewed here.
New York Trial Court Rules MCA Funder’s Reconciliation Provision is Likely Illusory and Usurious
December 17, 2020
It may all depend on the definition of may.
Another New York Supreme Court judge has expressed his dislike of the word “may” in a reconciliation provision of a merchant cash advance agreement, as in “buyer [of the receivables] may adjust the weekly amount on a going-forward basis to more closely reflect the Seller’s actual Future Receipts times the Specified Percentage.”
In American Resources Corporation et al v C6 Capital, LLC et al, Supreme Court Judge Leon Ruchelsman held that such a provision is illusory because the language reserved C6 the right to reject a reconciliation request.
Ruchelsman cited a similar decision involving a similarly named company that found that “whether [the funder] was willing to reconcile is not relevant, however; the language of the agreement is controlling, and the agreement does not require [the funder] to agree to reconcile.” (italics added for emphasis). That defendant is appealing the decision.
The difference matters, the judge says, so much so that this interpretation creates likelihood that the plaintiffs will succeed on the merits that the underlying MCA agreement may be void because it is usurious.
The contract is distinguishable from Champion Auto Sales v Pearl Beta Funding LLC, a landmark decision in the Appellate Division that created a strong legal footing for MCA funding in New York State. Notably, the judge said the Pearl contract in that case was worded better because it did not give Pearl discretion to decide whether or not to grant a reconciliation if the merchant met the specified conditions.
Here, in American Resources Corporation, the outcome is that the plaintiffs successfully secured a preliminary injunction restraining enforcement of the judgment entered against them. The defendants simultaneously lost on their motion to dismiss the complaint.
The case will now move to the discovery phase. The case # is 518051/2020 in the New York Supreme Court. The decision can be viewed here.
Immigrating From Cuba With “Nothing in my pockets,” to a CEO Funding $12 Million a Month
December 15, 2020
“Work hard, don’t ask questions, and good things will happen to you,” Frank Ebanks described his keys to success in the MCA world. “Being Positive, working hard, and keeping my eyes open: If I hadn’t been looking for opportunities at 2 am in the morning on Craigslist, I would have never known about this industry, but it’s huge, it’s such a big industry.”
Ebanks started what would become Spartan Capital shortly after seeing an ad calling for startup investors in an industry Ebanks had never heard of, called Merchant Cash Advance.
It was around 2016. Ebanks was up late in the NYU university library, putting himself through an MBA while working as a reactor operator at the Indian Point nuclear power plant in Westchester.
Despite the job security Ebanks enjoyed, he said he wasn’t happy with his career, wasn’t getting the satisfaction he wanted. He had already made it a long way— starting before the millennium as a Cuban immigrant, immigrating to the Dominican Republic in 1998 and then Florida in 2002 with empty pockets. Shortly after arriving, Ebanks enlisted.
“I spent some time in the army; I wanted to put in some time,” Ebanks said. “I said: ‘I’m a new immigrant, what’s the best thing that I could do to reward these opportunities?’ To serve in the army, give the country a couple years, and payback in advance for this opportunity that I knew I was going to have.”
Ebanks said he learned early on to take every opportunity seriously. He served for two years and then became an engineer and contractor for the army, working on the Patriot Missile defense system. He went through college at NJIT, graduating in 2009, and following in his father’s footsteps to become an electrical engineer.
After working with South Jerseys PSE&G, Ebanks took the opportunity to work full time shifts at the the nuclear power plant, and by 2016 he was pursuing an MBA and looking for ways to grow what he called “my empire.” Used to investing in small businesses already, discovering MCA fit right within his world.
“I’ve always been active, throughout my professional career I had businesses in real estate, I owned several businesses such as laundromats, a lot of retail cell phone stores and things like that,” Ebanks said. “So at one or two am in the morning, I’m working on how to build my empire. I was on Craigslist looking for opportunities, seeing what’s out there, and somebody wanted an investment, to partner up and start a company in a new industry.”
He took a meeting and learned a ton. Although he did not end up going into business with that person, he was hooked on the concept.
“I looked at that ad, and $10,000 later, we had a company,” Ebanks said.
He learned what he needed and ended up opening his own MCA business shortly after in New Jersey, finding he loved setting up syndicated MCA deals.
“I did some research, opened an office in New Jersey, secured a manager to run the operation, and we started brokering deals and learning about syndication.”
He worked with SFS Capital, now called Kapitus. He fell in love with the immediate gratification feedback of making deals, seeing returns on account receivables, and watching renewals come in. The business grew, but things were not always a straight climb to success.
“There was a point where things were not going well and I had to start a new company, find new parters and investors with a funding direct-only focus, and moved into my basement- my wife was unhappy with that. I started hiring people, processors, underwriters, and ISO managers in my basement,” Ebanks said. “At one point, she said, ‘Okay, this is enough. Ten strangers are coming into my house every day, you’ve got to get an office,’ so we secured an office in New York. And that’s when things took off in 2017.”
At that point, Ebanks had shifted his business model from securing deals to funding them all his own, using capital he raised. Ebanks said that being a broker partnered with Kapitus was great, but he wanted to grow and run his business entirely. The best way to do that was through ISO management, Ebanks said. Ebanks let the direct sales team phase out and he hired ISO managers, learning the ISO business as he went.
“So fast forward now: We have over five ISO managers, and we’re funding about $12 million a month,” Ebanks said. “It’s been a phenomenal journey and the most rewarding thing I’ve ever done in my life; I’m not shy to share how exciting every day is to me, and how other than my family and my kids and God, this is the most important thing my life.”
For brokers looking to get started in the industry, Ebanks has this advice to share: Don’t settle.
“Don’t settle, look for growth, and invest your money,” Ebanks said. “I always invested everything I could, 95%, every penny on the business. It matters especially at the beginning, the more you invest, don’t let it sit.”
That investment should go toward your business, your staff, and hiring. Ebanks said the more you invest, the bigger the bag, the more your firm would grow, and your employees will grow with you. Helping employees will mean they will eventually leave, but in Ebanks’ experience treating employees right creates partners.
“Some of them now are partners, and the employee-employer relationship is always more partnership,” Ebanks said. “Some of them own their own companies now, and we help each other out. If they have a big deal, they say: ‘Frank do you want to take $50,000 out of this deal?’ I say yea I trust you. I’ve known you for years.”
Now that he’s on track to grow with recurring customers, seeing some merchants come back to renew twenty times since 2016, Ebanks sees a possible bright future for Spartan Capital: becoming a chartered online bank.
“It is an alternative lending space but to offer the best products to people,” Ebanks said. “I think at the end of the day, and we need all the resources we can get, the next chapter is to apply and secure an online bank charter, it’s the future of the fintech industry.
“Why do people like doing business with us versus a bank? Some of them can do business with banks, but they choose to use us because they have direct access to us after 6 pm, they could call us Saturday, they can call us on a Sunday,” Ebanks said. “A great relationship that they can never get from a bank. I want to bring what we do in MCA to the banking industry to serve people that want banking products, but I want to give them that MCA experience.”
