Regulation

How Should A Merchant Cash Advance Be Structured, What is Syndication, and More?

June 29, 2020
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A 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:

Sorry, You’re Not Eligible For PPP Money

April 8, 2020
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closed for businessThe rush to submit your PPP application may be for naught if you own an ineligible business. The SBA prohibits loan guarantees to “businesses primarily engaged in lending, investments, or to an otherwise eligible business engaged in financing or factoring.” If there’s any confusion as to what that includes, the SBA lists 7 specific ineligible business types under this definition in the statutory code. They include:

  • Banks
  • Life Insurance Companies (but not independent agents);
  • Finance Companies
  • Factoring Companies
  • Investment Companies
  • Bail Bond Companies
  • Other businesses whose stock in trade is money

The PPP’s interim final rule refers to this statute as a rule for ineligibility as it applies to the PPP.

The statute does list a handful of businesses engaged in lending that may traditionally qualify for an exception. They are as follows:

  • A pawn shop that provides financing is eligible if more than 50% of its revenue for the previous year was from the sale of merchandise rather than from interest on loans.
  • A business that provides financing in the regular course of its business (such as a business that finances credit sales) is eligible, provided less than 50% of its revenue is from financing its sales.
  • A mortgage servicing company that disburses loans and sells them within 14 calendar days of loan closing is eligible. Mortgage companies primarily engaged in the business of servicing loans are eligible. Mortgage companies that make loans and hold them in their portfolio are not eligible.
  • A check cashing business is eligible if it receives more than 50% of its revenue from the service of cashing checks.
  • A business engaged in providing the services of a financial advisor on a fee basis is eligible provided they do not use loan proceeds to invest in their own

deBanked is not a law firm. Consult a CPA or an attorney to provide better guidance on your company’s eligibility.

Lists of States Where Non-Essential Businesses Have Been Ordered to Close

March 24, 2020
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Make sure you know about individual state orders that could affect a small business’s ability to operate. Below is a list of states and regions that have ordered some or all non-essential businesses to close. This list may be incomplete and the details of each state’s orders could change and may have changed since this was posted. Do you own due diligence:

Maryland Merchant Cash Advance Prohibition Bill Put on Hold After State Abruptly Ended The Legislative Session

March 19, 2020
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prohibitionThe State of Maryland decided to end their 2020 legislative session late last night rather than on the original April 6th deadline, due to COVID-19 concerns. Legislators managed to pass 650 bills in a “3-day sprint” but did not get to everything. Among the bills that did not even make it to the floor were SB913 and HB1478, the bills that called for an outright prohibition on a narrow definition of merchant cash advances.

But it’s not over. Legislative leaders plan to hold a special legislative session at the end of May which they may use to vote on the numerous bills they were not able to pass in time this week.

Senate President Bill Ferguson told the Baltimore Sun, “We want to give enough time for the public health crisis to move past.”

The bills were not exactly on the fast track as it was, having only gone through 1 committee hearing leading up to the deadline.

If the bills do not pass during the special legislative session in May, they might not be picked up again until the normal session resumes in Mid-January 2021.

With New York in a State of Emergency, Its Legislators Rush to Regulate Disclosures in the Commercial Finance Industry

March 16, 2020
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New York CityOn March 7th, Governor Cuomo declared a disaster emergency for New York State. Four and 6 days later respectively, legislators in the state Assembly and Senate introduced commercial financing disclosure bills that would regulate all business-to-business financing transactions including secured loans, factoring, and merchant cash advances. The bills intend 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 (DFS).

The bills also state that merchant cash advance companies may be required to prepare funding reports on all of their deals for the DFS to inspect so that the superintendent can analyze the difference between the estimated anticipated APR and the actual retrospective APR that resulted after the merchants delivered all of the receivables to the funder on each deal.

The bills are said to have been in the works for some time, but the timing of their introduction is awkward given the sudden economic situation that is unfolding in the state.

The bills are actually quite lengthy so you can read them yourselves in full here:

Assembly Bill A10118 – Introduced by Kenneth Zebrowski

Senate Bill S05470A – Introduced by Kevin Thomas

New Jersey Tries Again With a Small Business Finance Disclosure Bill

January 26, 2020
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New Jersey Capitol Building in TrentonFor the third year in a row, New Jersey has a small business finance disclosure bill on the table. S233 is the latest iteration of S2262 from prior years.

Introduced by State Senator Troy Singleton, the proposed law would impose disclosures on loans, factoring, and merchant cash advances on transactions less than $500,000.

In addition to APR requirements, brokers who arrange such financing would be required to disclose their fee to prospective applicants separately from the financing contract and prior to the consummation of the transaction.

Singleton is a Democrat. The Democrats in New Jersey control the Senate, Assembly, and Governor’s office.

New Jersey Firms Up Its Confession of Judgment Bill

January 13, 2020
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The New Jersey State legislature strengthened its Confession of Judgment (COJ) bill last week by adding language that grants the Attorney General power to enforce monetary penalties against violators.

S3581 would prohibit any provider of business financing from extending financing with a COJ. Business financing is defined as a loan, line of credit, cash advance, factoring, or asset-based transaction for a business purpose.

The bill still needs to pass the Senate and Assembly and be signed off by the Governor in order to become law. The bill’s sponsor, Senator Troy Singleton, is a Democrat, increasing the likelihood that the Democrat-controlled legislature and Democrat Governor Phil Murphy will move it forward.

Dodd-Frank’s Small Business Lending Data Collection Rule Could Still Take Years to Implement

January 12, 2020
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CFPB LogoSmall business lenders: Are you ready to regularly submit loan application data to the Consumer Financial Protection Bureau? No? Good, because almost ten years after Dodd-Frank passed, the provision that requires the CFPB to collect small business lending data still hasn’t been implemented.

And apparently we’re still years away.

Section 1071, as it’s known, modified the Equal Credit Opportunity Act and defined a small business lender as any company that engages in any financial activity. So if you’re wondering if this thing even applies to whatever you do in your corner of small business finance, it probably does.

The rule has taken so long to implement that consumer advocacy groups have actually sued the CFPB over the delay. The CFPB took note followed by initiative and hosted a symposium late last year to discuss how it might go forward. The next steps from here are to convene a panel of small business lenders, have that panel issue a report, propose what the rules on collection will be, collect feedback on the proposal, formulate a final rule, issue a rule, and then set a time for when it will go into effect. That process could mean that the earliest that data collection takes place is in 2023, possibly even longer as the entire financial services industry may need time to develop the infrastructure and human resources to comply.

Beyond that, advocates and critics of Section 1071 do not even entirely agree on what purpose data collection will even serve. Some believe the intent is merely for the government to have access to data it otherwise might not have while others believe that the CFPB could use statistics it deems discriminatory to bring enforcement actions against financial institutions. Sounds like we could use a few more years to get on the same page…

A recording of the 2019 Symposium is below:

Robocalls Targeted by Trump, Cuomo, Michigan Attorney General

January 2, 2020
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TCPA rules on cell phonesIn what turned out to be a tough week for illegal robocalls, both the President and New York’s Governor have been behind bills set to combat the invasive form of marketing.

On Tuesday, President Trump signed the TRACED (Telephone Robocall Abuse Criminal Enforcement & Deterrence) Act, bringing into effect legislation first introduced to in November 2018. Aiming to crack down on the number of robocalls received by Americans, TRACED increases the fine faced by robocallers, setting it now in the range of $1,500 to $10,000 if caught. As well as this, the bill pushes for the rollout of call-authentication technology by telecommunication companies to identify ‘spoofed’ numbers and block them accordingly.

Such technology was authorized for use by an FCC vote last June. However while it has since been employed by the likes of T-Mobile and AT&T, the authorization did not guarantee all Americans access to the service, as in some cases it has been offered as a premium feature of more expensive phone plans.

Another detail of TRACED is that it extends the FCC’s period of time to collect fines from illegal robocallers from one year to four, a development that is seen optimistically as a path to increasing the number of charges made. According to the FCC, between 2015 and March of 2018, $208.4 million in fines was collected from illegal robocallers.

Historically, the onus has been on the individual to shield themselves from robocalls, with companies such as Hiya and YouMail offering apps to block them. But with this legislation, moves are being made to compel service providers to better protect their customers, and Governor Cuomo’s bill seeks to take this one step further.

Announced on January 1st, one day after Trump’s signing, Cuomo’s robocall bill is part of his 2020 agenda, titled State of the State. Sharing similarities with TRACED, one of the primary differences between the two bills is that Cuomo’s would require telecommunications companies to block robocalls, pinning them with a fine upon failing to do this.

And making it a hat-trick for anti-robocall legal action this week is Michigan’s Attorney General, Dana Nessel, who set up a Robocall Crackdown Team dedicated to charging those partaking in the criminal activity. “The message we want to send loud and clear is if you are engaged in this kind of illegal activity, we are going to come after you,” said Nessel at a press conference. “And we are going to prosecute you to the fullest extent of the law.”

New Jersey is Propelling its Own Confession of Judgment Bill

December 12, 2019
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New Jersey Capitol Building in TrentonThe New Jersey legislature has climbed aboard the Confession of Judgment restriction train. On Thursday, the state’s Senate Commerce Committee advanced S3581, a bill that would prohibit the use of COJs in a “business financing” contract with a New Jersey debtor. The bill was introduced in March but had not experienced movement until today.

New Jersey’s COJ bill is similar to the bill advancing through the House of Representatives at the federal level. Meanwhile, New York’s legislature had also proposed a near-identical bill but it did not pass. Instead, New York passed a law that prohibits entering a judgment by confession in New York’s courts against a non-New York debtor.

The New Jersey bill passed through the committee without any debate. The Committee chair said on the record, however, that the New Jersey Credit Union League, an advocacy group for credit unions, was in favor of the bill.

OCC Believes It’s Time To Fix Madden Issue Once And For All

November 18, 2019
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OCC SealIf a bank makes a legal loan to a consumer and then later sells the debt to a third party, the terms of the loan are still legal right?

“Yes” should be the obvious answer, but in 2015 a federal appeals court said “no.” The case was Madden v. Midland Funding LLC, which started as a credit card debt owed by a consumer to Bank of America at 27% interest and ended as an allegedly illegal loan once the debt was sold to Midland Funding.

The ruling, which deBanked has covered extensively, shook the consumer and business loan markets in New York, Connecticut, and Vermont with its jurisdictional reach. Midland Funding appealed the ruling to the United States Supreme Court but the Court declined to hear the case.

Congress attempted to bring clarity to the lawfulness of the practice with a bill called the Protecting Consumers’ Access to Credit Act of 2017 but failed when the approved House bill never even came up for a vote in the Senate.

On Monday, the Office of the Comptroller of the Currency (OCC) proposed a rule to clarify the “Valid When Made” Doctrine that had been pierced in Madden. “This proposal will address confusion about the effect of a transfer on a loan’s valid interest rate, including confusion resulting from a recent decision from the U.S. Court of Appeals for the Second Circuit (Madden v. Midland Funding, LLC),” OCC wrote in a statement.

A 60-day public comment period will be open once the proposal is published in the Federal Register. To find out how to comment on the rule, click here.

“Predatory Lenders” Slammed as Bill to Ban Confessions of Judgment Nationwide Advances

November 14, 2019
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Rep Nydia Velázquez and Michael Bloomberg
Above: Rep Nydia Velázquez and Michael Bloomberg | Brooklyn, 2011
(Bloomberg is majority owner of Bloomberg News parent Bloomberg LP)

Rep. Nydia Velázquez (D) celebrated the advancement of a bill on Thursday that aims to outlaw confessions of judgment (COJs) in commercial finance transactions nationwide. HR 3490, dubbed the Small Business Lending Fairness Act, made its way through the House Financial Services Committee on a vote of 31-23. The next step will be a floor vote.

Velázquez made direct references to a Bloomberg News story series published last year about “predatory lending” and a NY Times article about Taxi medallion loans as her basis for supporting it. Velázquez said that New York had become a breeding ground for “con artists” that relied on COJs to prey on mom-and-pop businesses. The congresswoman singled out New York because of recent taxi medallion loan outrage and the state’s alleged reputation as a “clearing house” for obtaining fast easy judgments against debtors nationwide. New York took a major step to change that practice earlier this year through a new law that only allows COJs to be filed in the state against New York residents. HR 3490 seeks to prevent them from being filed in every state, including New York.

Senator Marco RubioIronically then, the bill is at odds with the new New York law in that Velázquez’s bill, if it became federal law, would go so far as to prevent New York’s own courts from entering a COJ against New York’s own residents, if it resulted from a commercial finance transaction.

While momentum in the House could be perceived as a partisan initiative unlikely to survive the Senate, the bill has in fact garnered a degree of Republican support, recently through Rep. Roger W. Marshall, a co-sponsor of the bill, and originally by Senator Marco Rubio who initially sparked the call to action in the Senate last year.

A co-author of the COJ-centric Bloomberg News stories was quick to take the credit for the advancement of Velázquez’s bill.

COJ Enforcer Gets COJ’d By City of New York And Is Forced to Resign NYC Marshal Position

November 7, 2019
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cojsA New York City marshal at the center of a controversial Bloomberg News story series last year about “predatory lending,” has resigned after a city probe, the City of New York announced.

Marshal Vadim Barbarovich was allegedly a prolific enforcer of New York judgments obtained by confession. After irregularities were discovered by the Department of Investigation with how he served levies, the City of New York formally levied penalties of their own against him that include a return of fees and poundage earned from 92 improperly served levies, his resignation, and a $300,000 fine.

The City agreed to suspend the full amount of the monetary fine provided he complies with an orderly wind-down of his business by March 20th. Barbarovich, in a twisted circumstance of irony, had to guarantee full immediate payment in the instance he did not comply…by signing a Confession of Judgment.

NYC Marshal Vadim Barbarovich Confession of Judgment

The investigation into Barbarovich began in May 2018, 4 months before Bloomberg News published their story, details published by the City reveal.

Earlier this year, New York State passed a law restricting COJs from being entered against non-New York state debtors.

The FTC Wants To Police Small Business Finance

October 22, 2019
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This story appeared in deBanked’s Sept/Oct 2019 magazine issue. To receive copies in print, SUBSCRIBE FREE

FTC PoliceOn May 23, the Federal Trade Commission launched an investigation into unfair or deceptive practices in the small business financing industry, including by merchant cash advance providers.

The agency is looking into, among other things, whether both financial technology companies and merchant cash advance firms are making misrepresentations in their marketing and advertising to small businesses, whether they employ brokers and lead-generators who make false and misleading claims, and whether they engage in legal chicanery and misconduct in structuring contracts and debt-servicing.

Evan Zullow, senior attorney at the FTC’s consumer protection division, told deBanked that the FTC is, moreover, investigating whether fintechs and MCAs employ “problematic,” “egregious” and “abusive” tactics in collecting debts. He cited such bullying actions as “making false threats of the consequences of not paying a debt,” as well as pressuring debtors with warnings that they could face jail time, that authorities would be notified of their “criminal” behavior, contacting third-parties like employers, colleagues, or family members, and even issuing physical threats.

“Broadly,” Zullow said in a telephone interview, “our work and authority reaches the full life cycle of the financing arrangement.” He added: “We’re looking closely at the conduct (of firms) in this industry and, if there’s unlawful conduct, we’ll take law enforcement action.”

“IF THERE’S UNLAWFUL CONDUCT, WE’LL TAKE LAW ENFORCEMENT ACTION”

Zullow declined to identify any targets of the FTC inquiry. “I can’t comment on nonpublic investigative work,” he said.

cojsThe FTC investigation is one of several regulatory, legislative and law enforcement actions facing the merchant cash advance industry, which was triggered by a Bloomberg exposé last winter alleging sharp practices by some MCA firms.

The Bloomberg series told of high-cost financings, of MCA firms’ draining debtors’ bank accounts, and of controversial collections practices in which debtors signed contracts that included “confessions of judgment.”

The FTC long ago outlawed the use of COJs in consumer loan contracts and several states have banned their use in commercial transactions. In September, Governor Andrew Cuomo signed legislation prohibiting the use of COJs in New York State courts for out-of-state residents. And there is a bipartisan bill pending in the U.S. Senate authored by Florida Republican Marco Rubio and Ohio Democrat Sherrod Brown to outlaw COJs nationwide.

Mark Dabertin, a senior attorney at Pepper Hamilton, described the FTC’s investigation of small business financing as a “significant development.” But he also said that the agency’s “expansive reading of the FTC Act arguably presents the bigger news.” Writing in a legal memorandum to clients, Dabertin added: “It opens the door to introducing federal consumer protection laws into all manner of business-to-business conduct.”

“IT OPENS THE DOOR TO INTRODUCING FEDERAL CONSUMER PROTECTION LAWS INTO ALL MANNER OF BUSINESS-TO-BUSINESS CONDUCT”

FTC attorney Zullow told deBanked, “We don’t think it’s new or that we’re in uncharted waters.”

The FTC inquiry into alternative small business financing is not the only investigation into the MCA industry. Citing unnamed sources, The Washington Post reported in June that the Manhattan district attorney is pursuing a criminal investigation of “a group of cash advance executives” and that the New York State attorney general’s office is conducting a separate civil probe.

ftc COMMISSIONER rohit chopra
FTC Commissioner Rohit Chopra

The FTC’s investigation follows hard on the heels of a May 8 forum on small business financing. Labeled “Strictly Business,” the proceedings commenced with a brief address by FTC Commissioner Rohit Chopra, who paid homage to the vital role that small business plays in the U.S. economy. “Hard work and the creativity of entrepreneurs and new small businesses helped us grow,” he said.

But he expressed concern that entrepreneurship and small business formation in the U.S. was in decline. According to census data analyzed by the Kaufmann Foundation and the Brookings Institution, the commissioner noted, the number of new companies as a share of U.S. businesses has declined by 44 percent from 1978 to 2012.

“It’s getting harder and harder for entrepreneurs to launch new businesses,” Chopra declared. “Since the 1980s, new business formation began its long steady decline. A decade ago births of new firms started to be eclipsed by deaths of firms.”

Chopra singled out one-sided, unjust contracts as a particularly concerning phenomenon. “One of the most powerful weapons wielded by firms over new businesses is the take-it-or-leave-it contract,” he said, adding: “Contracts are ways that we put promises on paper. When it comes to commerce, arm’s length dealing codified through contracts is a prerequisite for prosperity. “But when a market structure requires small businesses to be dependent on a small set of dominant firms — or firms that don’t engage in scrupulous business practices — these incumbents can impose contract terms that cement dominance, extract rents, and make it harder for new businesses to emerge and thrive.”

Watch a recording of the FTC panels below

As the panel discussions unfolded, representatives of the financial technology industry (Kabbage, Square Capital and the Electronic Transactions Association) as well as executives in the merchant cash advance industry (Kapitus, Everest Business Financing, and United Capital Source) sought to emphasize the beneficial role that alternative commercial financiers were playing in fostering the growth of small businesses by filling a void left by banks.

The fintechs went first. In general, they stressed the speed and convenience of their loans and lines of credit, and the pioneering innovations in technology that allowed them to do deeper dives into companies seeking credit, and to tailor their products to the borrower’s needs. Panelists cited the “SMART Box” devised by Kabbage and OnDeck as examples of transparency. (Accompanying those companies’ loan offers, the SMART Box is modeled on the uniform terms contained in credit card offerings, which are mandated by the Truth in Lending Act. TILA does not pertain to commercial debt transactions.)

FTC paneSam Taussig, head of global policy at Kabbage, explained that his company typically provides loans to borrowers with five to seven employees — “truly Main Street American small businesses” — that are seeking out “project-based financing” or “working capital.”

“The average small business according to our research only has about 27 days of cash flow on hand,” Taussig told the fintech panel, FTC moderators and audience members. “So if you as a small business owner need to seize an opportunity to expand your revenue or (have) a one-off event — such as the freezer in your ice cream store breaks — it’s very difficult to access that capital quickly to get back to business or grow your business.”

Taussig contrasted the purpose of a commercial loan with consumer loans taken out to consolidate existing debt or purchase a consumer product that’s “a depreciating asset.” Fintechs, which typically supply lightning-quick loans to entrepreneurs to purchase equipment, meet payrolls, or build inventory, should be judged by a different standard.

A florist needs to purchase roses and carnations for Mother’s Day, an ice-cream store must replenish inventory over the summer, an Irish pub has to stock up on beer and add bartenders at St. Patrick’s Day.

The session was a snapshot of not just the fintech industry but of the state of small business. Lewis Goodwin, the head of banking services at Square Capital, noted that small businesses account for 48% of the U.S. workforce. Yet, he said, Square’s surveys show that 70% of them “are not able to get what they want” when they seek financing.

Square, he said, has made 700,000 loans for $4.5 billion in just the past few years, the platform’s average loan is between $6,000 and $7,000, and it never charges borrowers more than 15% of a business’s daily receipts. The No. 1 alternative for small businesses in need of capital is “friends and family,” Goodwin said, “and that’s a tough bank to go back to.”

florist owner waving goodbyePanelist Gwendy Brown, vice-president of research and policy at the Opportunity Fund, a non-profit microfinance organization, provided the fintechs with their most rocky moment when she declared that small businesses turning up at her fund were typically paying an annual percentage rate of 94 percent for fintech loans. And while most small business owners were knowledgeable about their businesses — the florists “know flowers in and out,” for example — they are often bewildered by the “landscape” of financial product offerings.

“Sophistication as a business owner,” Brown said, “does not necessarily equate into sophistication in being able to assess finance options.”

Panelist Claire Kramer Mills, vice-president of the Federal Reserve Bank of New York, reported that the country’s banks have made a dramatic exit from small business lending over the past ten years. A graphic would show that bank loans of more than $1 million have risen dramatically over the past decade but, she said, “When you look at the small loans, they’ve remained relatively flat and are not back to pre-crisis levels.”

Mills also said that 50% of small businesses in the Federal Reserve’s surveys “tell us that they have a funding shortfall of some sort or another. It’s more stark when you look at women-owned business, black or African-American owned businesses, and Latino-owned businesses.”

On the merchant cash advance panel there was less opportunity to dazzle the regulators and audience members with accounts of state-of-the-art technology and the ability to aggregate mountains of data to make online loans in as few as seven minutes, as Kabbage’s Taussig noted the fintech is wont to do.

merchant cash advance panel ftcInstead, industry panelists endeavored to explain to an audience — which included skeptical regulators, journalists, lawyers and critics — the precarious, high-risk nature of an MCA or factoring product, how it differs from a loan, and the upside to a merchant opting for a cash advance. (To their credit, one attendee told deBanked, the audience also included members of the MCA industry interested in compliance with federal law.)

A merchant cash advance is “a purchase of future receipts,” Kate Fisher, an attorney at Hudson Cook in Baltimore, explained. “The business promises to deliver a percentage of its revenue only to the extent as that revenue is created. If sales go down,” she explained, “then the business has a contractual right to pay less. If sales go up, the business may have to pay more.”

As for the major difference between a loan and a merchant cash advance: the borrower promises to repay the lender for the loan, Fisher noted, but for a cash advance “there’s no absolute obligation to repay.”

Scott Crockett, chief executive at Everest Business Funding, related two anecdotes, both involving cash advances to seasonal businesses. In the first instance, a summer resort in Georgia relied on Everest’s cash advances to tide it over during the off-season.

When the resort owner didn’t call back after two seasonal advances, Crockett said, Everest wanted to know the reason. The answer? The resort had been sold to Marriott Corporation. Thanking Everest, Crockett said, the former resort-owners reported that without the MCA, he would likely have sold off a share of his business to a private equity fund or an investor.

By providing a cash advance Everest acted “more like a temporary equity partner,” Crockett remarked.

In the second instance, a restaurant in the Florida Keys that relied on a cash advance from Everest to get through the slow summer season was destroyed by Hurricane Irma. “Thank God no one was hurt,” Crockett said, “but the business owner didn’t owe us anything. We had purchased future revenues that never materialized.”

The outsized risk borne by the MCA industry is not confined entirely to the firm making the advance, asserted Jared Weitz, chief executive at United Capital Service, a consultancy and broker based in Great Neck, N.Y. It also extends to the broker. Weitz reported that a big difference between the MCA industry and other funding sources, such as a bank loan backed by the Small Business Administration, is that ”you are responsible to give that commission back if that merchant does not perform or goes into an actual default up to 90 days in.

“I think that’s important,” Weitz added, “because on (both) the broker side and on the funding side, we really are taking a ride with the merchant to make sure that the business succeeds.”

NO APRFTC’s panel moderators prodded the MCA firms to describe a typical factor rate. Jesse Carlson, senior vice-president and general counsel at Kapitus, asserted that the factor rate can vary, but did not provide a rate.

“Our average financing is approximately $50,000, it’s approximately 11-12 months,” he said. “On a $50,000 funding we would be purchasing $65,000 of future revenue of that business.”

The FTC moderator asked how that financing arrangement compared with a “typical” annual percentage rate for a small business financing loan and whether businesses “understand the difference.”

Carlson replied: “There is no interest rate and there is no APR. There is no set repayment period, so there is no term.” He added: “We provide (the) total cost in a very clear disclosure on the first page of all of our contracts.”

Ami Kassar, founder and chief executive of Multifunding, a loan broker that does 70% of its work with the Small Business Administration, emerged as the panelist most critical of the MCA industry. If a small business owner takes an advance of $50,000, Kassar said, the advance is “often quoted as a factor rate of 20%. The merchant thinks about that as a 20% rate. But on a six-month payback, it’s closer to 60-65%.”

He asserted that small businesses would do better to borrow the same amount of money using an SBA loan, pay 8 1/4 percent and take 10 years to pay back. It would take more effort and the wait might be longer, but “the impact on their cash flow is dramatic” — $600 per month versus $600 a day, he said — “compared to some of these other solutions.”

Kassar warned about “enticing” offers from MCA firms on the Internet, particularly for a business owner in a bind. “If you jump on that train and take a short-term amortization, oftentimes the cash flow pressure that creates forces you into a cycle of short-term renewals. As your situation gets tougher and tougher, you get into situations of stacking and stacking.”

On a final panel on, among other matters, whether there is uniformity in the commercial funding business, panelists described a massive muddle of financial products.

“THEY’RE TELLING US THAT IT’S VERY DIFFICULT TO FIND EVEN SOME BASIC INFORMATION”

Barbara Lipman: project manager in the division of community affairs with the Federal Reserve Board of Governors, said that the central bank rounded up small businesses to do some mystery shopping. The cohort — small businesses that employ fewer than 20 employees and had less than $2 million in revenues — pretended to shop for credit online.

As they sought out information about costs and terms and what the application process was like, she said, “They’re telling us that it’s very difficult to find even some basic information. Some of the lenders are very explicit about costs and fees. Others however require a visitor to go to the website to enter business and personal information before finding even the basics about the products.” That experience, Lipman said, was “problematic.”

She also said that, once they were identified as prospective borrowers on the Internet, the Fed’s shoppers were barraged with a ceaseless spate of online credit offers.

John Arensmeyer, chief executive at Small Business Majority, an advocacy organization, called for greater consistency and transparency in the marketplace. “We hear all the time, ‘Gee, why do we need to worry about this? These are business people,’” he said. “The reality is that unless a business is large enough to have a controller or head of accounting, they are no more sophisticated than the average consumer.

“Even about the question of whether a merchant cash advance is a loan or not,” Arensmeyer added. “To the average small business owner everything is a loan. These legal distinctions are meaningless. It’s pretty much the Wild West.”

ftc office washington dcIn the aftermath of the forum, the question now is: What is the FTC likely to do?

Zullow, the FTC attorney, referred deBanked to several recent cases — including actions against Avant and SoFi — in which the agency sanctioned online lenders that engaged in unfair or deceptive practices, or misrepresented their products to consumers.

These included a $3.85 million settlement in April, 2019, with Avant, an online lending company. The FTC had charged that the fintech had made “unauthorized charges on consumers’ accounts” and “unlawfully required consumers to consent to automatic payments from their bank accounts,” the agency said in a statement.

In the settlement with SoFi, the FTC alleged that the online lender, “made prominent false statements about loan refinancing savings in television, print, and internet advertisements.” Under the final order, “SoFi is prohibited from misrepresenting to consumers how much money consumers will save,” according to an FTC press release.

But these are traditional actions against consumer lenders. A more relevant FTC action, says Pepper Hamilton attorney Dabertin, was the FTC’s “Operation Main Street,” a major enforcement action taken in July, 2018 when the agency joined forces with a dozen law enforcement partners to bring civil and criminal charges against 24 alleged scam artists charged with bilking U.S. small businesses for more than $290 million.

In the multi-pronged campaign, which Zullow also cited, the FTC collaborated with two U.S. attorneys’ offices, the attorneys general of eight states, the U.S. Postal Inspection Service, and the Better Business Bureau. According to the FTC, the strike force took action against six types of fraudulent schemes, including:

  • Unordered merchandise scams in which the defendants charged consumers for toner, light bulbs, cleaner and other office supplies that they never ordered;
  • Imposter scams in which the defendants use deceptive tactics, such as claiming an affiliation with a government or private entity, to trick consumers into paying for corporate materials, filings, registrations, or fees;
  • Scams involving unsolicited faxes or robocalls offering business loans and vacation packages.

“THIS IS A WAKE-UP CALL”

If there remains any question about whether the FTC believes itself constrained from acting on behalf of small businesses as well as consumers, consider the closing remarks at the May forum made by Andrew Smith, director of the agency’s bureau of consumer protection.

“(O)ur organic statute, the FTC Act, allows us to address unfair and deceptive practices even with respect to businesses,” Smith declared, “And I want to make clear that we believe strongly in the importance of small businesses to the economy, the importance of loans and financing to the economy.

Smith asserted that the agency could be casting a wide net. “The FTC Act gives us broad authority to stop deceptive and unfair practices by nonbank lenders, marketers, brokers, ISOs, servicers, lead generators and collectors.”

As fintechs and MCAs, in particular, await forthcoming actions by the commission, their membership should take pains to comport themselves ethically and responsibly, counsels Hudson Cook attorney Fisher. “I don’t think businesses should be nervous,” she says, “but they should be motivated to improve compliance with the law.”

She recommends that companies make certain that they have a robust vendor-management policy in place, and that they review contracts with ISOs. Companies should also ensure that they have the ability to audit ISOs and monitor any complaints. “Take them seriously and respond,” Fisher says.

Companies would also do well to review advertising on their websites to ascertain that claims are not deceptive, and see to it that customer service and collections are “done in a way that is fair and not deceptive,” she says, adding of the FTC investigation: “This is a wake-up call.”

Puff, Puff, Pass the Bill: House Approves Cannabis Banking Bill, Forwards it to Senate

October 10, 2019
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marijuana farmerLast month the House of Representatives passed the SAFE Banking Act, which provides for the lifting of red tape preventing cannabis companies from accessing banks and lenders.

Currently, such businesses are unable to make use of these financial services as regulators have put an outright ban on such dealings given cannabis’s federal Schedule 1 drug classification.

Having been approved 321-103, the House vote appeared bipartisan with almost half of the voting Republicans being in favor of SAFE. However, this is just the first step for the bill, as now it will be passed onto the Republican-held Senate, and then if it is approved there, the president’s office. With Republicans having demonstrated split attitudes towards legalization it is unclear which way the vote will go.

Regardless, the victory in the House has been celebrated by cannabis advocates and lobbyists alike. Talking to NBC, Platinum Vape President George Sadler described the vote as “a blessing.” While Aaron Smith, the Executive Director of the National Cannabis Industry Association, said that “it’s incredibly gratifying to see this strong bipartisan showing of support in today’s House vote … We owe a great debt of gratitude to the bill sponsors, who have been working with us to move this issue forward long before anyone else thought it was worth the effort … This bipartisan legislation is vital to protecting public safety, fostering transparency, and leveling the playing field for small businesses in the growing number of states with successful cannabis programs.”

For now though, no date has been set for the Senate vote on SAFE. With this version having been introduced by Senators Cory Gardner (R-CO) and Jeff Merkley (D-OR), and the Banking Committee Chairman Mike Crapo having recently asserted that cannabis banking legislation is being considered by his chamber, it appears as if this second round of voting may also benefit from bipartisan support.

NYC Taxi Industry Leads Charge to Ban Confessions of Judgment Nationwide

September 30, 2019
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NYC TaxiNew York State may have outlawed entering confessions of judgments (COJs) against out-of-state debtors in their courts, but federal legislators want to see a ban on their use nationwide. On Thursday, the House Financial Services Committee convened for a hearing on predatory debt collection. Notably adding small businesses to the mix with consumers, COJs repeatedly came under attack.

Testimony presented by Bhairavi Desai, executive Director of the 22,000 member New York Taxi Workers Alliance, claimed that predatory lenders are aggressively relying on COJs to “intimidate borrowers into making large sum payments towards outstanding loan balances.” Desai provided one such COJ affidavit to the Committee in which allegedly victimized defendants had confessed to judgment for nearly $600,000. The plaintiff was 160-year-old New York Community Bank, not an alternative finance company.

The NYC taxi business has moved front and center after the New York Times published a bombshell story in May that alleged lenders unfairly trapped Taxi medallion owners into loans they could not repay. The occasional reliance on COJs was vaguely mentioned but struck a nerve with critics already frothing to make them illegal.

Bhairavi Desai taxi industryDesai explained that unusually high suicide rates in the taxi business are rooted in part by predatory lending practices. “The real stories are the tens of thousands of drivers we see today that are really dying a slow death from despair, from stress from the crisis of this debt,” she told the Committee on Thursday. “Confessions of judgment have basically meant that when [the taxi medallion market] started to fall, drivers were told that they had to pay up the total sum of what was owed on that debt, had to produce $350,000, $400,000 overnight.”

FTC Commissioner Rohit Chopra voiced his support for a COJ ban when called upon to testify. “The FTC has unique jurisdiction to attack debt collection and discrimination issues in the small business lending market and we should look to restrict terms like confessions of judgment that the FTC banned in consumer loans ages ago.”

The Bloomberg stories that led to new legislation in New York were only mentioned during the hearing once and only in passing.

A slew of bills have been introduced to pursue the Committee’s initiatives. In addition to the Small Business Fairness Lending Act that would outlaw COJs from small business finance transactions nationwide, the Small Business Fair Debt Collection Protection Act seeks to apply the existing Fair Debt Collections Practices Act to small businesses and effectively put small business lenders under the regulatory purview of the CFPB.

You can watch the hearing below:

Earnin, Say What’s Your Price? Nas-backed Earnin Comes Under Investigation

September 17, 2019
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Question MarksEarnin, the self-proclaimed alternative to payday loans, is part of a new online lending category that is under investigation in eleven states and Puerto Rico for its similarities to payday loans. With such loans being banned in sixteen states, the app-based personal loans company has drawn the attention of various regulators after it was suggested that its lending model potentially shares a similar APR with payday loans.

Backed by rapper Nas (only as of June and on undisclosed terms), the company came under fire after it was reported that in a meeting its founder and CEO, Ram Palaniappan, discussed hiring a private investigator to look into the past of a New York Post journalist that was writing about them.

Operating under a ‘tipping’ system, Earnin profits from the loans it provides by suggesting that customers give a voluntary tip when repaying their loans. The default amount is $9 per $100 taken, but people have paid up to $14 per $100, this being the limit one can tip.

According to the New York Post, these tips can lead to APRs of over 400% for an individual advance. Uncertainty looms over Earnin’s model as the phrasing of ‘tipping’ confuses whether or not this can be classified as a loan fee. Say what’s your price? Borrowers may not be aware that their tip could put the loan’s cost on par with costly payday loans.

Earnin relies on analytics gathered from customers’ phones, with the company knowing how much users are paid per hour as well as knowing how long they were at work via their location, Earnin can accurately predict incoming wages.

In a company statement, Earnin said that its system “is a brand new model, so we expect, and welcome questions from regulators like the New York Department of Financial Services.” Since this announcement, Earnin no longer suggests a tip to users in New York and Nas has yet to comment on the situation.

Up Next On The New York Legislative Agenda: Funder, Lender, and Broker Licensing

September 10, 2019
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Fall AlbanyNew York State Senator James Sanders Jr. has introduced S6688, a commercial financing licensing bill that would require persons or entities engaging in the business of making or soliciting commercial financing products in New York state to obtain a license from the New York Department of Financial Services. The bill covers small business lenders, merchant cash advance companies, factors, and leasing companies for transactions under $500,000.

The bill likely won’t see any activity until the New York legislative session resumes in 2020, at which point it could be amended or killed.

As currently drafted, applicants for a license would be subject to a criminal background search and be required to submit their fingerprints for a review by agencies such as the FBI. In addition to paying an application fee, applicants would be required to maintain liquid assets of $50,000.

Sanders, the bill’s sponsor, is the Chairman of the banking committee. You can read the full text of the bill here.

New York’s COJ Restrictions Have Been Signed Into Law

August 30, 2019
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Albany CapitolGovernor Cuomo has signed S6395, the law that outlaws entering a Confession of Judgment in New York against a non-New York debtor.

Rich Azzopardi, a senior advisor to the governor, said on social media that the law has “closed a loophole that allowed unscrupulous creditors to use NY courts to penalize out-of-state consumers with no ties to the state.” He congratulated Senators Brad Hoylman and Assembly Member Jeffrey Dinowitz for their work on the bill.

Senator Hoylman tweeted in response that “the entire business model of lenders who exploited New York’s court system and laws to prey on out-of-state small businesses through confessions of judgment was immoral.”

The Confession of Judgment ban is very specific, it prohibits the entering of a COJ in New York against a non-New York party. It does not prevent parties from filing lawsuits in New York. It does not prohibit COJs from being filed in other states. This law is significant because approximately 99% of COJs being utilized in the small business finance industry were being filed in New York regardless of where the debtor resided. That is because the New York Court system is the fastest and most efficient when it comes to entering COJs and securing a judgment.

The bill was drafted in response to a controversial story series published by Bloomberg reporters Zeke Faux and Zachary Mider that alleged abuses were taking place in the New York courts via COJs.

New York’s COJ Bill Has Been Delivered To The Governor

August 28, 2019
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COJ TombstoneNew York’s infamous Confession of Judgment bill has finally been delivered to the governor for his signature. Although the legislative process offers flexibility to depart from the statutory timelines (as we have witnessed), the governor now presumably has 10 days or less to sign it. Stay tuned.

The Confession of Judgment ban is very specific, it prohibits the entering of a COJ in New York against a non-New York resident. It does not prevent parties from filing lawsuits in New York. It does not prohibit COJs from being filed in other states. This law is significant because approximately 99% of COJs being utilized in the small business finance industry were being filed in New York regardless of where the debtor resided. That is because the New York Court system is the fastest and most efficient when it comes to entering COJs and securing a judgment.