The controversial commercial finance disclosure bill that passed in New York in July, has still not been signed by Governor Cuomo.
Technically, the governor only had 10 days to sign it while the legislature was in session and only 30 days to sign it when the legislature closed out its session for the year, which it did in July. Both deadlines have passed. But as deBanked learned in the case of the COJ bill, the clock does not actually begin to tick until the legislature has formally “delivered” the bill to the governor.
That puts the disclosure bill and other bills not yet signed in a state of suspended animation that can carry them through until December 31st. Doing this “is done to ensure that legislation is thoroughly vetted, with extra checks to guarantee that bills are not unconstitutional and that they’ll lead to no previously unforeseen consequences.”
It’s that latter part of that, that has created concern. Even dueling small business lending trade associations disagree on what the consequences will be. The Innovative Lending Platform Association (ILPA), for example, say the bill is almost exactly what they wanted, while the Small Business Finance Association (SBFA) suggests that advocates do not even understand the bill, much less the implications.
ILPA’s CEO, Scott Stewart, told deBanked in July that “the implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success.”
SBFA’s Executive Director, Steve Denis, meanwhile, responded very soon after by saying that they don’t realize that it will subject them to massive liability and hefty fines.
“We’re for disclosure, we think there should be standard disclosure,” Denis said. “Our message to the Governor’s office is ‘Let’s take a step back.’ The Department of Financial Services needs to look at our industry, they need to get to know our industry. They are the experts that understand the space, they understand disclosure, and they understand what they need to do to bring responsible lending to New Yorkers. And we would like to work with the NYDFS and a broader industry to put forward a bill that’s led by the Governor and the Governor’s office that brings meaningful disclosure and meaningful safeguards to this industry.”
The SBFA later published the results of a study that supports their arguments.
In qualitative testing of 24 small business owners and executives who have experience taking commercial loans, the study concluded participants did not understand what APR was.
APR disclosure, of course, is the centerpiece of the entire bill.
It is still possible the bill’s language could be amended before the governor signs it. It’s happened before.
In 2017, for example, the state legislature passed a bill that would establish a 7-person task force to analyze online lending activity in the state. The bill, dubbed the Online Lending Task Force bill, called for industry participants to serve on it. The final version signed by the governor, however, was completely rewritten to the point that the online lending task force bill had completely eliminated the task force portion of it and no one was allowed to participate in any analysis except for NYDFS.
“$100,000, we can make that work,” said Ryan Metcalf, head of Public Policy Affairs at Funding Circle. “But we can help a lot more small business if it was $50,000.”
Metcalf was referring to a recent change in the minimum loan amount in the Main Street Lending Program (MSLP.) Just recently, the Federal Reserve lowered the minimum loan amount for the MSLP for a third time, to $100,000. The change was intended to broaden the underused Cares Act aid facility but it might not be enough.
Though changing the program days before, at a press briefing Thursday Fed chair Jerome Powell said SMB aid projects like PPP and the MSLP were up to the gridlocked House and Senate.
“The Fed cannot grant money to particular beneficiaries; we can only create programs or facilities to make loans that will be repaid,” Powell said. “Elected officials have the power to tax and spend, and to make decisions about where we as the society should direct our collective resources.”
Despite Powell’s talk of inaction in the face of an undecided congress, Metcalf said the Fed’s actions have proved that changes can be made to existing programs. Metcalf has been fighting for changes to MSLP for months on behalf of the small business lending community, he says.
In July, Metcalf, in partnership with the Innovative Lending Platform Association and Marketplace Lending Association, wrote a letter to the fed to argue for changes to the MSLP.
The letter argued that the Cares Act made non-depository finech lenders eligible to participate in PPP lending. Though these lenders saved millions of jobs, they were not allowed to lend through the MSLP facility.
Even if they could, the minimum loan size was still too large for “main street” American businesses that needed capital. The letter advocated for a lower minimum of $50,000, allow lenders that were approved for PPP to lend in the MSLP, and create a Special Purpose Vehicle for fintechs.
Metcalf said the Fed has only responded, “that is not under consideration.”
So far, 400 borrowers have taken out $3.7 billion in loans, of the $600 billion allocated. The program offers Fed backed five-year loans with differed principal and interest payments and minimal rates. With the facility’s deadline approaching Dec 31 and no changes in sight, Metcalf said the program’s vultures are circling.
If new aid, revisions, or at least an extension is not passed by when the government is funded Dec 11, Metcalf said the program might be finished.
Back in September, Powell testified before Congress that lowering the minimum any further wouldn’t change the adoption rate.
“We have very little demand below a million, as I told the chair a while back,” Powell said. “We’re not seeing demand for very small loans. And that’s really because the nature of the facility and the things you’ve got to do to qualify, it tends to be larger sized businesses.”
Mnuchin has consistently argued that grant programs like PPP would most benefit smaller firms. Metcalf said this was only the case because the MSLP facility has left out smaller firms and alternative lenders that need the capital.
“My response to that was no, there’s been no uptick in your program because the requirements of the program are not attractive enough to make it workable,” Metcalf said. “Don’t scrap the entire program altogether; look at the proposal that we sent you back in July and work with us on amending the facility.”
As the FTC contemplates how to “wipe out” entire industries, federal courts around the country have recently ruled that the regulator can’t accomplish such a goal under Section 13(b) of the FTC act. That’s the statute the FTC relied on to bring its most recent actions against merchant cash advance companies. It might not have bite.
Under 13(b), the FTC is empowered to bring a lawsuit to obtain an injunction against unlawful activity that is currently occurring or is about to occur. It’s powerful, but very limited. However, for the last several decades, the FTC, with the help of federal courts, has interpreted the statute to mean that it can also force the defendants to “disgorge” with illegally obtained funds.
That’s how the FTC wiped out Scott Tucker and his payday lending empire. In a lawsuit the FTC brought against his companies under 13(b) in 2012, the Court entered a judgment of $1.3 billion against him.
Not so fast, modern legal analysis says. Tucker’s case is being brought before the Supreme Court of the United States to settle once and for all what 13(b) allows for and what it doesn’t.
The momentum does not weigh in the FTC’s favor.
On September 30, the Third Circuit ruled in FTC v AbbVie that the FTC is not entitled to seek disgorgement under 13(b). The Seventh Circuit arrived at a similar conclusion last year in FTC v Credit Bureau Center.
In an interview with NBC, FTC Commissioner Rohit Chopra said in August “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
As the FTC attempts to be more proactive in the area of small business finance, it will be important to monitor what the Supreme Court ultimately decides it can actually accomplish.
Last month, the Colorado Attorney General’s office announced a settlement with Avant and Marlette Funding, setting a precedent for how “true lender” cases will be handled. The fintech lenders and their partners are free to lend in the state, subject to a lot of restrictions, as long as they stick below the 36% APR level.
Some touted the decision as a safeguard for fintech bank partnerships. Still, many, like those represented in the Online Lenders Alliance (OLA)- saw misplaced regulation that harms borrowers more than it helps.
Mary Jackson, CEO of OLA, said that while well-meaning, the 36% rule arbitrarily limits the ability for non-prime credit customers to get a loan at all. The limit draws an arbitrary line in the sand, based on an outdated centuries-old lending system, and doesn’t describe loans that last shorter than a year very well, Jackson said.
“What it did was drive out all the lenders,” Jackson said. “Non-prime consumers have fewer choices. They have to go and be subject to fraud or more unscrupulous lenders, or they have to go back to overdraft as another option.”
Jackson represents a group of lenders that offer online services, which regularly partner with banks to provide loans nationwide at higher APR rates than some states allow. Jackson said these are not fintech “rent-a-bank” cases to skirt state regulations, but natural partnerships that enable larger institutions to gain the tech and talent of leading tech companies to reach a greater customer base.
“Big banks cannot keep up with the technology that fintech providers have developed,” Jackson said. “A key US bank has a lot of data scientists that they employ, but if you’re a regional or smaller bank, you don’t have that capability: it’s nearly impossible to drive an IT team as a banker.”
Jackson said that when her firm Cash America, that offered storefront cash advances, was bought by online lender CashNetUSA, she saw the differences between in-person transactions and the IT teams necessary for online lending. “It’s like two different worlds, two different ways of looking at something.”
“Our lenders are sophisticated like Enova, Elevate, CURO, Access Financial,” Jackson said. “These are companies that employ hundreds of data scientists that compete for jobs with Google in Chicago and a small regional bank can’t keep up.”
Fintech talent is helping to reach the 42% of Americans that have non-prime credit scores- FICO scores below 680, according to the Domestic Policy Caucus.
Jackson said these customers, many of whom can pay for loans, have almost no options. Jackson sees many of her partner companies offering a “pathway to prime” service, empowering customers to rehabilitate their credit.
“Most of these people are non-banking customers, these folks have damaged or thin file credit,” Jackson said. “Most banks don’t service that customer, except for overdraft- a 35$ fee for lack of money in their account- I think bankers want to be able to offer longer-term installment loans.”
Jackson said research backs up her claims, pointing to a 2018 US Treasury report that discussed how banks would have to rely on fintech partnerships to innovate and drive product change. That’s what is finally happening, Jackson said.
She also pointed to a 2017 study into the effects of the 2006 Military Lending Act. The act intended to protect military families from lending products with an APR above 36%. The study out of West Point found that the limit only hurt military members, some of which lost their security clearances when their credit fell too low.
“We find virtually no statistically or economically significant evidence of any adverse effects of payday lending access on credit and labor outcomes. In a few cases, we find suggestive evidence of the positive impacts of access. For example, our second survey suggests that a 1 standard deviation increase in the fraction of time spent in a payday loan access state decreases the probability of being involuntarily separated from the Army by 10%”
Not only was there no harm done, but the paper argues on behalf of payday lending as a healthy way to maintain the credit necessary to keep a military job.
She sees similarities in the legal fight over the creation of interstate credit card laws in the 50s and 60s, saying it used to be the case that consumers had to use a texas-based or California based card. The country had to decide how interstate credit worked then, and with the induction of new technology to loans today, the same question is being asked.
The majority of Jackson’s clients offer products above the 36% limit, in the 100 to 175% APR range. She said that looks high, but consumers are looking at it on a monthly basis, and most of them pay it off early.
“These fintech partnerships allow the bank to offer one rate to everybody across the United States,” Jackson said. “We feel that really adds more democracy to credit, making sure that those who’ve been left out of banking have a shot at it.”
At some point in this century, small business finance companies will be expected to comply with Section 1071 of the Wall Street Reform and Consumer Protection Act that was passed in 2010.
In the wake of the ’08-’09 financial crisis (remember that?!), lawmakers passed the above act that has become colloquially known as Dodd-Frank. Section 1071 gave the Consumer Financial Protection Bureau the authority and the mandate to collect data from small business lenders (and similar companies).
The costs, risks, and challenges with rolling out this law have been discussed on deBanked for 5 years, yet little progress has been made to finally implement it. But it’s starting to move along and the CFPB would now like to know how expensive it will be for businesses to comply.
If you are engaged in small business finance, you should seriously consider submitting a response to their survey. The CFPB is specifically cataloging responses from merchant cash advance companies, fintech lenders, and equipment financiers.
“It’s actually shocking to me how tone deaf those who claim to represent our industry are when it comes to policy,” is how Steve Denis, Executive Director of the Small Business Finance Association, described the Innovative Lending Platform Association’s response to and influence over the drafting of bill A10118A/S5470B. Known as New York’s APR disclosure bill, S5470B has been passed by the state legislature, and if signed by Governor Cuomo, will require small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures.
Speaking to deBanked over the phone, Denis expressed disappointment with both the bill as well as comments made by ILPA’s CEO, Scott Stewart, in a recent article.
“Small businesses in New York are struggling right now,” the Director noted. “They’re waking up every single day wondering if they should even stay open or close permanently, and companies and organizations in our space are using their resources to push a disclosure bill that nobody has asked for. There’s no widespread issue with disclosure. There’s been no outpouring of complaints to regulators. No bad reviews on Trustpilot. This is a really bad solution in search of a problem. We have real problems right now, we should be coming together as an industry to help solve them. We want to make sure that capital is available to small businesses on the other side of this pandemic, and this group of tone deaf companies are spending resources trying to push a meaningless disclosure bill that’s just going to hurt the access to capital for real small businesses who are grinding and trying to figure out how to stay open. It’s unbelievable.”
The SBFA showed deBanked a list of issues and complaints made to the New York legislature regarding S5470B. According to the trade group, these were largely ignored and the bill was pushed through with the issues left in. Among these were problems relating to definitions and terms. No definition for the application process is included, nor is there one for a finance charge. As well as this, one senator was quoted using the term “double dipping” to refer to consumers refinancing debts that have prepayment penalties; which Denis said was “creating a whole new term that’s never been used or defined before, and applying it to commercial finance, something that’s never been done.”
Accompanying these complaints was one regarding how APR is calculated, as S5470B includes two different calculations for this, producing different results while not clearly defining when to use each.
When asked why he believes these issues were allowed to remain in the language of the bill, Denis was baffled.
“I think that the companies and organizations that support this legislation don’t fully understand what’s actually in the bill. […] They have no problem pounding the table and taking credit for its passage, but I guess they don’t realize it will subject them and the rest of the alternative finance industry to massive liability, massive fines—upwards of billions of dollars worth of fines.”
Denis’s fear going forward is that funders in New York will tighten up their channels going forward or cease funding entirely, given the increased riskiness of funding under the terms of S5470B if Cuomo signs it into law. Before that happens though, the Director mentioned that he believes there will be legal challenges to the bill in the future, saying that its wording is just too unclear and poorly drafted. Adding to this, Denis said that he believes many members of New York’s state government are aware that this bill is imperfect and were comfortable with the thought of it being edited once passed. Looking forward, Denis wants the SBFA to be deeply involved in those edits, saying that they’re willing to work with the Governor, the state assembly, and the New York Department of Financial Services.
“We’re for disclosure, we think there should be standard disclosure. … Our message to the Governor’s office is ‘Let’s take a step back.’ The Department of Financial Services needs to look at our industry, they need to get to know our industry. They are the experts that understand the space, they understand disclosure, and they understand what they need to do to bring responsible lending to New Yorkers. And we would like to work with the NYDFS and a broader industry to put forward a bill that’s led by the Governor and the Governor’s office that brings meaningful disclosure and meaningful safeguards to this industry.”
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 Legislature Passes Law That Requires APR Disclosure On Small Business Finance Contracts (Even If They’re Not Loans)July 24, 2020
Factoring companies and merchant cash advance providers may be in for a rude awakening in New York. The legislature there, in a matter of days, has rammed through a new law that requires APRs and other uniform disclosures be presented on commercial finance contracts… even if the agreements are not loans and even if one cannot be mathematically ascertained.
The law also makes New York’s Department of Financial Services (DFS) the overseer and regulatory authority of all such finance agreements. DFS can impose penalties for violations of the law, the language says.
The bill was passed through so quickly that unusual jargon remained in the final version, increasing the likelihood that there will be confusion during the roll-out. One such issue raised is the requirement that a capital provider disclose whether or not there is any “double dipping” going on in the transaction. The term led to a rather interesting debate on the Senate Floor where Senator George Borrello expounded that double dipping might be well understood at a party where potato chips are available but that it did not formally exist in finance and made little sense to have it written into law.
Senator Kevin Thomas, the senate sponsor of the bill, admitted that there was opposition to the “technicalities” of it by some industry groups like the Small Business Finance Association and that PayPal was one such particular company that had opposed it on that basis. Senator Borrello raised the concern that a similar law had already been passed in California and that even with all of their best minds, the state regulatory authorities had been unable to come up with a mutually agreed upon way to calculate APR for products in which there is no absolute time-frame. Thomas, acknowledging that, hoped that DFS would be able to come up with their own math.
APR as defined under Federal “Regulation Z”, which the New York law points to for its definition, does not permit any room for imprecision. The issue calls to mind a consent order that an online consumer lender (LendUp) entered into with the Consumer Financial Protection Bureau in 2016 after the agency accused the lender of understating its APR by only 1/10th of 1%. The penalty to LendUp was $1.8 million.
Providers of small business loans, MCAs, factoring and other types of commercial financing in New York would probably be well advised to consult an attorney for a legal analysis and plan of action for compliance with this law. The governor still needs to sign the bill and New York’s DFS still has to prepare for its new oversight role.
Passage of the law was celebrated by Funding Circle on social media and retweeted by Assemblyman Ken Zebrowski who sponsored the bill. The Responsible Business Lending Coalition simultaneously published a statement.