North Carolina is the latest in a series of states to introduce a commercial financing disclosure bill.
The “Small Business Truth in Financing Act” introduced on May 11th, would cover business loans, factoring, and merchant cash advances.
The language was copy and pasted from bills elsewhere, like the recent one in Connecticut. The “double dipping” term is noticeably absent from this one, however.
The North Carolina bill was introduced by Rep James D. Gailliard (D). If it succeeds in moving forward, it’s written to go into effect on May 1, 2022.
The lawsuit filed by the FTC against Yellowstone Capital et al has resulted in a settlement. The defendants agreed to pay $9,837,000 for the matter to be resolved.
As part of it, the defendants did not admit or deny the allegations of the complaint. They also agreed to have the FTC monitor their compliance with the agreement for varying but long periods of time.
Aside from the cost, the FTC made its point in two areas, the requirement that the defendants comply with a specific system of customer disclosure and that they not debit or cause withdrawals to be made from any customer’s bank account without the customer’s express informed consent. On the former, they must (roughly speaking) disclose clearly and conspicuously the amount and timing of any fees, the specific amount a customer will receive at the time of funding, and the total amount customers will repay.
The announcement coincides with the Supreme Court decision that revoked the agency’s presumed authority to obtain restitution or disgorgement under Section 13(b), the basis that the FTC brought against Yellowstone Capital in August 2020.
The FTC signed and filed the agreement less than 24 hours before the SCOTUS decision.
One of cornerstone objectives is to outlaw confessions of judgment from being used in business loan transactions nationwide.
“With this bill, we are taking another step toward protecting America’s small businesses—the foundation of our economy—by preserving the right of a business to be heard in a court of law before a potential credit default,” Rubio said. “I remain committed to protecting our small businesses from predatory, out-of-state lenders, and I urge my colleagues to join me in this effort.”
“When we let financial predators harm hardworking Americans through scams like confessions of judgment, we undermine the dignity of work,” Brown said. “This bipartisan bill would protect consumers and small business owners from predatory lenders that use legal tricks to strip away their hard earned money.”
This is not the first swipe at COJs. In 2019, New York passed a law that made it illegal to file a confession of judgment against a non-New York debtor in the New York state court system. However, this does not prevent a party from using another state’s COJ and filing the COJ in that respective state.
The federal bill was previously introduced in 2018 and 2019 and failed to advance both times. The text of the bill can be found here.
Nearly three years after California became the first state to pass a business loan and merchant cash advance disclosure law (SB 1235), the actual disclosure rules themselves are finally nearing completion. The public has until April 26th to submit any comments on the amended portions of the proposed rules.
The 52-page document is the result of years of negotiations between various parties that all have a stake in its implementation. Among the finer details are the characteristics of the fonts permitted in the disclosures, what column a certain disclosure can be placed in, and the aspect ratio of the columns themselves.
But that’s the easy part. Here’s the hard part, according to a brief published in Manatt’s newsletter yesterday.
“The modified regulations continue to require use of the annual percentage rate (APR) metric, rather than annualized cost of capital (ACC), to disclose the total cost of financing as an annualized rate. This appears to be a final decision, which will make it difficult if not impossible for many commercial finance companies to comply given the significant challenges of calculating APR on products with substantial variance in the amounts and timing of payments or remittances.”
Manatt highlights other issues, including that all the necessary disclosures be provided “whenever a payment amount, rate, or price is quoted based on information provided by the proposed recipient of financing…”
This requirement, the firm says, is not even required under Federal Regulation Z for consumer loans.
“Many companies will not be able to comply with this requirement absent radical changes to their California application and underwriting procedures, as it is common today for companies to have preliminary discussions with applicants about potentially available financing terms before full underwriting has been completed.”
Any interested person may submit written comments regarding SB 1235’s modifications by written communication addressed as follows:
Commissioner of Financial Protection and Innovation
Attn: Sandra Sandoval, Regulations Coordinator
300 South Spring Street, 15th Floor
Los Angeles, CA 90013
The last day to submit comments is April 26, 2021
The implementation of New York’s commercial financing disclosure law has been pushed back. Originally scheduled to go into effect in June of 2021, an amending bill changed the date to January 1, 2022.
The only other material change of note is that the exemption from the law for transactions greater than $500,000 has been increased to $2.5 million.
A New York Supreme Court judge that was presiding over a breach of contract claim (653596/2018) in a merchant cash advance agreement, said he was bound to follow the decision issued in Champion Auto Sales, the landmark appellate ruling in 2018.
In Principis Capital LLC v Team Van Eyk, Inc. et al, Principis sued the defendants over a breach of contract. Defendants “did not deny the facts underlying the motion or the the amount due,” the judge said, “but asserted instead that the Agreement is not an agreement for the purchase of future receivables; but is instead, a criminally usurious loan, and is therefore void as a matter of public policy.”
This defense actually led to victory for the plaintiff.
The Appellate Division, First Department, in Champion Auto Sales, LLC v Pearl Beta Funding, LLC (159 AD3d 507, 507 [1st Dept], lv denied 31 NY3d 910 ) has considered this issue, involving a merchant agreement substantially similar to the agreement in this matter, and has held that the type of agreement involved in this case is a factoring agreement rather than a usurious loan. This court is bound to follow Champion and, therefore finds that the Agreement is a factoring agreement and not, as defendants assert, a usurious loan. There are, therefore, no genuine triable issues of fact, and plaintiff is entitled to summary judgment on its complaint.
“In a lot of these places, a lot of the bills are well intended, believe it or not,” Steve Denis, executive director of the Small Business Finance Association, said. “Legislators just don’t understand enough about our industry to understand the nuances. We’ve worked really hard educating policymakers in Maryland, and frankly, they now understand our industry better.”
Denis was referring to the nearly unanimous canning of Maryland’s MCA “Prohibition” bill last week. The bill failed to get enough support to leave the committee, blocked by a 19 to 3 vote against bringing the law out to the House floor. Denis, a proponent of the MCA and alt financing industry for years, said it was due to legislators understanding the need for capital “out there during the pandemic” and how harmful an APR cap could be for both business owners and the broker industry.
The law was originally proposed last year before covid shutdowns, but that also failed to make it to the floor. It now appears to be an annual event.
“Our goal as an organization is to make sure that small businesses have access to all different types of financial products and that we believe that small businesses are in the best position to make good decisions for their businesses,” Denis said. “The bill in Maryland narrowly targeted MCA products, and as you know and a lot of folks in the industry know, that sometimes MCA is in the best interest of the business, there’s a lot of benefits to an MCA.”
Denis punctuated his statement with the mantra- we were not out of the woods yet. An APR disclosure bill was just introduced in the Connecticut State Senate last month, modeled off the New York APR bill set to go into effect this year. Denis was hopeful the legislators could learn from speaking to industry interests and change their course like in Maryland.
“We are engaged, I think we’re in a good spot. With any of these bills, Maryland, Connecticut, I caution you know we’re not out of the woods yet,” Denis said. “We still want to work really closely with policymakers. We’re for meaningful disclosure, we think there needs to be some guardrails on our industry, but I think that the most important thing we can do is continue to educate folks in states.”
Despite the rapid advancement of the newest merchant cash advance prohibition bill in the Maryland state legislature, the bill failed to jump over the final hurdle in a House Committee hearing on Thursday. Delegate Seth Howard (R), who introduced the bill, vigorously advocated for it to move forward so that it could proceed to the Floor, going so far as to say he was willing to make some concessions to at least get “the regulatory structure” of the bill into law.
“I don’t want to snatch defeat from the jaws of victory,” he maintained.
There were several amendments up for consideration, including the inclusion or removal of a 24% APR rate cap on MCA transactions. The subject of APR dominated the light Q&A that took place, but one delegate voiced concern that creating restrictions on capital providers to businesses that might not be able to obtain funding elsewhere would probably be counterproductive. And when a roll call of votes was taken to determine if the Bill should advance to the Floor, he voted no, as did nineteen of his colleagues. Only three voted yes, so the bill did not advance, ending its prospects for the 2021 legislative session. However, it could be reintroduced again in 2022.
Committee Vice-Chair Kathleen Dumais (D) said that she thought the bill “was not ready” despite Delegate Howard “having worked hard on it.” This was Howard’s second try in two years to move it forward. His first attempt, introduced on February 7, 2020, was called the Merchant Cash Advance Prohibition Bill. The more recent one dropped the “prohibition” label but used language that would have effectively prohibited them in the state of Maryland.