Regulation

FTC Commissioner Rohit Chopra on Merchant Cash Advances

August 3, 2020
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United States Federal Trade Commission

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
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Albany CapitolFactoring 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.

The bill, originally introduced in May 2019, resurfaced in March of this year just as the Governor was issuing shut-down orders throughout the state. It, along with many other bills, then went into hibernation. It was brought back to life on July 10th and hurried through the committee process to be made available just in time for a floor vote this week before the legislative session closed for the rest of the year. It passed. All that is required now is the Governor’s signature.

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.

WATCH: NY State Senate Banking Committee Debates The Commercial Finance Disclosure Bill

July 22, 2020
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The New York State Commercial Finance Disclosure Bill passed through the senate banking committee yesterday, but not until some debate over the merits of it took place. You can watch the full discussion by the Senate Banking Committee below:

New York State Legislators Resume Push of Commercial Finance Disclosure Bill

July 17, 2020
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A bill (A10118A / S5470B) intended to create uniform disclosures for comparison purposes while also placing control of the commercial finance industry under the purview of the superintendent of the New York Department of Financial Services, is moving forward.

The March 2020 initiative was picked back up this week by members of the Assembly where it passed the banking committee and codes committee on a unanimous and bipartisan basis.

“When enacted, this bill will become the strongest commercial lending disclosure law in the country that covers all commercial financing products,” wrote Ryan Metcalf, Head of US Regulatory Affairs and Social Impact at Funding Circle, on LinkedIn. “It includes strong provisions that ensures enforcement and eliminates loopholes that will prevent gaming & abuse, & requires APR to be disclosed for all products.”

Metcalf further wrote that they and the Responsible Business Lending Coalition (RBLC) have been working diligently with NY state legislators for the last year or so to craft this bill. Among RBLC’s membership is Fundera, Nav, Lendistry, LendingClub and about 4 dozen other companies.

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

June 29, 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.