Regulation
Senator Elizabeth Warren Questions Federal Agencies About Discrimination in Fintech Lending
June 12, 2019
Senator Elizabeth Warren and colleague Senator Doug Jones (D-AL) addressed a letter to multiple federal agencies this week to inquire about their individual roles in overseeing fintech, particularly as it pertains to potential discriminatory underwriting.
The senators cited a UC Berkeley study that examined discrimination in the era of algorithmic underwriting. “With algorithmic credit scoring,” the researchers write, “the nature of discrimination changes from being primarily concerned with human biases – racism and in-group/out-group bias – to being primarily concerned with illegitimate applications of statistical discrimination. Even if agents performing statistical discrimination have no animus against minority groups, they can induce disparate impact by their use of Big Data variables.”
The letter tasked the Federal Reserve Chairman, OCC Comptroller, CFPB Director, and FDIC Chairman with responding to 5 questions by June 24th. They are:
1. What is your agency doing to identify and combat lending discrimination by lenders who use algorithms for underwriting?
2. What is the responsibility of your agency with regards to overseeing and enforcing fair lending laws? To what extent do these responsibilities extend to the fintech industry or the use of fintech algorithms by traditional lenders?
3. Has your agency conducted any analyses of the impact of fintech companies or use of fintech algorithms on minority borrowers, including differences in credit availability and pricing? If so, what have these analyses concluded? If not, does your agency plan to conduct these analyses in the future?
4. Has your agency identified any unique challenges to oversight and enforcement of fair lending laws posed by the fintech industry? If so, how are you addressing these challenges?
5. Has your agency identified increased cases of lending discrimination in financial institutions that participate in the fintech industry? Are there additional statutory authorities that would help your agency enforce fair lending laws or protect minority borrowers from discrimination in their interactions with the fintech industry?
One New York COJ Bill Moves Forward
June 5, 2019A bill that would prevent companies from using Confessions of Judgment against out-of-state debtors is progressing through the New York Assembly. A07500 cleared the judiciary committee on Tuesday despite some Republican opposition. The milestone comes as no surprise as the judiciary committee chair, Assemblymember Jeffrey Dinowitz, is also the bill’s sponsor.
Assemblymembers Niou, DenDekker, Wright, Wallace, and Schimminger are bill co-sponsors.
A07500 now heads to the Codes committee.
Lawyers: Earn CLE Credits While Learning About Alternative Finance
May 23, 2019
| June 13 Sessions | June 14 Sessions |
| Case Law Updates | Regulatory Download: The Complete Picture |
| TCPA: Defining ATDS, Exploring the TCPA and How Emails are Covered | Legislation, Business and Lobbying: How does it work and Does it work at all? |
| Bankruptcy Updates | Future Invoice Factoring and Traditional Factoring: Can’t We All Just Get Along? |
| Securities: A Lesson from Bitcoin and Recent Industry Case Law | Clean Contracts: Merchant Agreements, Inter-Creditor Agreements and ISO Agreements: What you MUST know to keep up with the times |
| Inside the UCC with Bob Zadek | |
| Collections in a Post Bloomberg World | |
| Ethics: Conflicts of Interest | |
| *Evening Social event at Lucky Strike in Manhattan Food, drinks and bowling! 7:00pm – 9:00pm* | *Rooftop Cocktail Reception, Castell Rooftop Lounge 3:00pm – 5:00pm* |
Admission Price List:
Admission for Members: $75
2-Day Ticket Includes:
- Day One: breakfast and lunch during the full day of panels. Evening at Lucky Strike with food and drinks.
- Day Two : Three panel discussions, lunch and cocktail hour immediately to follow.
Non-Member Attorneys $250.00 for the 2 day ticket
Non-Member Attorneys $150.00 for a 1 day ticket
(may only attend one of the two days.)
Corporate Guests (Day Two only) $150.00
Featuring the Following Speakers:
- Christopher Murray, Esq.
- Patrick Siegfried, Esq.
- William Molinski, Esq.
- Natalie Nahabet, Esq.
- David Fuad, Esq.
- Kate Fisher, Esq.
- Jamie Polon, Esq.
- Thomas Telesca, Esq.
- Richard J. Zack, Esq.
- Robert Zadek, Esq.
- Richard Simon, Esq.
- Anthony Giuliano, Esq.
- Mark Dabertin, Esq.
- Gregory Nowak, Esq.
Email Lindsey Rohan: lindsey@lrohanlaw.com
FTC Forum on Small Business Financing & Merchant Cash Advances
May 7, 2019At the FTC Forum on Small Business Financing & Merchant Cash Advances this morning, FTC regulators asked questions of a panel of industry representatives about controversial topics, including the use of COJs. Below are some closely paraphrased responses.
On Confessions of Judgment (COJs)
Scott Crocket, Founder & CEO, Everest Business Funding
The role of COJs is a conversation worth having. What’s the right balance?
We choose only to use them for deals of $100,000 or more. And COJs apply for only 3% of our business. So if there was a ban on COJs, it wouldn’t really affect us. It might just limit the amount we would fund.
The Bloomberg stories are not representative of what we do. We don’t file a COJ when a business is slowing down, but only when we suspect fraud.
Jared Weitz, CEO, United Capital Source
90% to 95% of our deals do not include COJs. And for those where we do use COJs, we give merchants a document that has a description of what it is so that they’re comfortable with it. We tell them that they have to be comfortable with it before they take it.
Jesse Carlson, Senior Vice President & General Counsel, Kapitus
After we saw the extent of the use of confessions of judgement by certain individuals/companies, as a trade association, we at the Small Business Finance Association (SBFA) decided to include in our code of conduct a ban on the use of confessions of judgement if you’re a member of the SBFA.
Part of the reason why we do include COJs is because we’re very careful with our underwriting.
On True-ups
Jesse Carlson
We have 5 to 10 employees who speak with merchants when they are having unforeseen financial challenges and we’ll adjust their ACH repayment. Some companies treat the percentage of the company’s sales as an absolute. We’ll offer them modifications.
Scott Crocket
We remind merchants that the true-up is available.
Ami Kassar, Founder & CEO, Multifunding LLC
Many funders are not as forgiving as these funders say they are.
Kate Fisher, Partner, Hudson Cook
Some MCA funders reached out to merchants affected by the hurricane in Texas and the forest fires in California to adjust their payments.
Jared Weitz
Other funders stopped requesting payments altogether from merchants who were affected by these natural disasters.
Brokers / Aggressive Marketing
Jared Weitz
A broker of an MCA deal has to give the commission back if the merchant fails within 90 days.
Jesse Carlson
We work with about 100 brokers/ISOs at a given time and we do background checks on them.
Scott Crocket
We do background checks on brokers and we monitor their behavior. We don’t hesitate to cut off a relationship with an ISO. We do spot checks, but we don’t monitor every ISO every day.
The Federal Trade Commission hosted a forum on small business financing including loans and merchant cash advances to examine trends and consumer protection issues in this marketplace.
The forum began at 8:30am and concluded at 1pm. Among some familiar names that spoke are:
- Jared Weitz, CEO, United Capital Source
- Scott Crockett, Founder & CEO, Everest Business Funding
- Christian Spradley, Head of Policy & Senior General Associate Counsel, OnDeck
- Kate Fisher, Partner, Hudson Cook
- Ami Kassar, Founder & CEO, Multifunding LLC
- Jesse Carlson, Senior Vice President & General Counsel, Kapitus
- Sam Taussig, Head of Global Policy, Kabbage
- Lewis Goodwin, Banking Lead, Square Capital
SEC Finding Said that Prosper Misled Investors
April 22, 2019
From approximately July 2015 until May 2017, Prosper excluded certain non-performing loans from its calculation of annualized net returns that it reported to its investors, according to an SEC order released last Friday. The order found that Prosper reported overstated annualized net returns to more than 30,000 investors on individual account pages on Prosper’s website and in emails soliciting additional investments from investors.
As a result of the inflated numbered, which the SEC order says Prosper management was aware of, many investors decided to make additional investments based on the overstated annualized net returns. The SEC order said that Prosper failed to identify and correct the error that overstated its annualized net returns “despite Prosper’s knowledge that it no longer understood how annualized net returns were calculated and despite investor complaints about the calculation.”
“For almost two years, Prosper told tens of thousands of investors that their returns were higher than they actually were despite warning signs that should have alerted Prosper that it was miscalculating those returns,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
Prosper neither admitted nor denied the findings. The company did not refute the SEC order’s findings, including that it violated the antifraud provision contained in Section 17(a)(2) of the Securities Act of 1933. Prosper will pay a $3 million penalty for miscalculating and overstating annualized net returns to retail and other investors.
According to a 2017 Financial Times story, one Prosper investor wrote on the Lend Academy forum in 2017 that their returns were restated from about 14 percent to 7 percent.
“Shame on me for just assuming that I was getting a higher rate,” the investor wrote, “but shame on Prosper x 1000 for misleading investors.”
In a written statement to deBanked today, a Prosper representative characterized the miscalculation as an error only, not a scheme. She conveyed that when Prosper discovered the error in 2017, they notified investors who were impacted and changed the numbers so that they accurately reflected the investors’ returns.
“We’re pleased to have the SEC inquiry resolved and appreciate the SEC’s recognition of our cooperation as the agency looked into this matter,” read a statement provided by Prosper. “Since discovering and fixing this issue two years ago, we have put additional controls in place designed to detect and prevent similar errors in the future, and we are committed to providing transparent information on returns to our retail investors.”
Prosper’s CEO, David Kimball, was awarded “Executive of the Year” at this year’s LendIt Fintech conference earlier this month.
In 2018, the company originated $2.8 billion in loans, remaining flat compared to 2017. Prosper’s net revenue last year was $104 million, a decrease compared to $116 million in 2017. Founded in 2005 and headquartered in San Francisco, Prosper provides personal loans up to $40,000 and was one of the first peer to peer lenders.
Lots of Tech Buzzwords, Scary Problems
April 16, 2019
A federal regulator cut through the shield of fintech buzzwords on Monday when it announced that a darling of online lending valued at $2 billion, failed to properly handle rudimentary loan practices. The lender is Chicago-based Avant, who reportedly settled with the FTC for $3.85 million.
According to the FTC, Avant struggled to accurately determine borrower loan balances and repeatedly mismanaged payments. FTC Bureau of Consumer Protection Director Andrew Smith said that Avant’s issues were systemic. “Online lenders need to understand that loan servicing is just as important to consumers as loan marketing and origination, and we will not hesitate to hold lenders liable for unfair or deceptive servicing practices,” he said in a press release.
The FTC alleged:
“When consumers got an email or verbal confirmation from Avant that their loan was paid off, the company came back for more – sometimes months later – claiming the payoff quote was erroneous. The FTC says Avant dinged consumers for extra fees and interest and even reported to credit bureaus that loans were delinquent after consumers paid the quoted payoff amount.”
The FTC further stated:
“The lawsuit also alleges that Avant charged consumers’ credit cards or took payments from their bank accounts without permission or in amounts larger than authorized. Sometimes Avant charged duplicate payments. One unfortunate consumer’s monthly payment was debited from his account eleven times in a single day. Another person called Avant’s customer service number trying to reduce his monthly payment only to be charged his entire balance. In other instances, Avant took consumers’ payoff balance twice. One consumer was stuck with overdraft fees and angry creditors when Avant withdrew his monthly payment three times in one day.”
In a subtle dig, the FTC said that online lending could be beneficial “if 21st century financial platforms abandon misleading 20th century practices.”
Under the settlement order, Avant, LLC will be prohibited from taking unauthorized payments and from collecting payment by means of remotely created check (RCC). The company also is prohibited from misrepresenting: the methods of payment accepted for monthly payments, partial payments, payoffs, or any other purpose; the amount of payment that will be sufficient to pay off in its entirety the balance of an account; when payments will be applied or credited; or any material fact regarding payments, fees, or charges.
New Jersey Bill Seeks to Eliminate Quick Easy Access to Small Business Loans
March 21, 2019
The speed at which a small business owner can access capital to grow and create jobs in New Jersey is too dangerous and must be stopped. This is the takeaway from a bill (S3617) proposed by New Jersey State Senator Nellie Pou that calls for a minimum 3-day waiting period between when contract terms are disclosed to an applicant and when they can actually go through with getting a business loan or merchant cash advance. If the transaction does not fund within 10 days of the terms being disclosed, it implies that the waiting process must start over if the applicant wishes to still go forward.
The motivation behind the bill is to presumably force small business owners to think about the terms for awhile. It would apply where the payment frequency is greater than bi-weekly or the maturity is less than two years. There’s other little caveats too. If it passed, funding small businesses same-day or next-day would effectively become illegal.
In addition, the bill calls for detailed contract disclosures, proof that the funds will be used to economically benefit the small business applicant, lenders to set up their own complaint departments, licensing, bonding requirements for brokers & lenders, a minimum net worth for a broker of $100,000, background checks, written examinations, and ethics classes as part of continuing required education.
Pou’s bill, which at this point has not had the opportunity to get traction yet, is separate from another bill, S2262, which in addition to disclosures, calls for merchant cash advances to be defined as loans in the state. S2262 passed the Senate in February and is now under consideration in the Assembly.
New York Legislators Introduce Small Business Usury Bill
February 20, 2019Two members of the New York State legislature have introduced a bill to apply consumer usury protections to small businesses. Bill A03638, introduced by New York Assemblymembers Yuh-Line Niou and Crystal Peoples-Stokes define a small business as “one which is resident in this state, independently owned and operated, not dominant in its field and employs one hundred or less persons.”
The bill is separate from the one introduced to outlaw Confessions of Judgment in financial contracts.
