Regulation
With Clock Ticking, Members of the Commercial Finance Coalition Journeyed to the New York State Capitol
March 5, 2017
With less than a month to go until New York State’s budget deadline, members of the Commercial Finance Coalition (CFC) traveled to Albany, NY last week to address a vague and confusing licensure proposal put forth by Governor Cuomo. According to the CFC, nobody from the New York Department of Financial Services, the governor’s office or the state legislature had contacted any of their members prior to putting the language in the budget that they suspect could lead to catastrophic consequences. So on very short notice, they packed their bags and went up to Albany to tell their story to as many legislators as they could.
“It could destroy the industry if the worst comes to fruition,” declared Robert Cook, a partner at Hudson Cook LLP, who was speaking in reference to the proposal. The industry not only employs thousands of people in New York State but also provides much-needed capital to small businesses there. The CFC says that their members injected more than $50 million into New York businesses just last year alone.
Several law firms who have written about the proposal have used words like could, may and likely to explain what will happen, in part because it seems as though no one’s really sure. CFC members worry that the proper research hasn’t been done, especially when there hasn’t been any engagement with them. “They should allow all the stakeholders to have their voices heard,” said Dan Gans, CFC’s executive director.
As the clock ticked down, the CFC’s two-day effort in the capitol building played out like a scene from a movie.
Are you aware of Part EE of the TED Bill?
This is what we do…
No, nobody from the Department of Financial Services has even talked to us
No, we’re not kidding
And on it went…
Gans says the CFC is looking for additional companies in the small business financing industry to support their efforts. He’ll be at the LendIt Conference. “I would be happy to meet with anyone interested in joining the CFC and helping us fight this misguided policy that is also attending,” he said. He can be contacted at dgans@polariswdc.com.
The budget deadline in New York State is March 31st.
As NY Lending License Proposal Looms, Industry Trade Groups Mobilize
February 13, 2017
The alternative small-business finance community plans to lobby hard against a far-reaching proposed expansion of the New York state lending license. The proposal calls for any person or company that solicits, arranges or facilitates business and consumer loans – or other types of financing – to obtain a license. That could include MCA companies, business loan brokers and ISOs.
Critics claim the expansion, which Governor Andrew M. Cuomo included in his proposed state budget, could trigger a series of ominous and possibly unintended events in the courts and on Wall Street. “It could destroy the industry if the worst comes to fruition,” declared Robert Cook, a partner at Hudson Cook LLP.
Some opponents also contend that the public hasn’t had a reasonable opportunity to respond. “Sneaking a provision with significant impact like this into the budget and not going through regular order is really disturbing,” said Dan Gans, a Washington lobbyist who also serves as executive director of the the Commercial Finance Coalition. “They should allow all the stakeholders to have their voices heard.”
The industry’s trade groups have been quick to react. The Small Business Finance Association has been in contact with New York state legislators to help them understand the ramifications of the proposal, according to Stephen Denis, the trade group’s executive director. Meanwhile, Gans is recommending that the CFC’s board hire an Albany lobbying firm to help advance the industry’s interests.
New York’s current consumer licensing law is written broadly enough to cover any loan to an individual for less than $25,000, even if it’s made for commercial purposes, said Cook. That means the current law could cover loans to sole proprietorships but would not affect loans to corporations, limited liability companies, partnerships or limited liability partnerships, he noted.
Under the proposal in Governor Cuomo’s budget, any type of commercial loan of up to $50,000 would require a license, Cook said. Today, the state requires a license only if a loan carries a simple interest rate of more than 16 percent. Under the budget proposal, all lending would require a license, even if the interest rate is less than 16 percent. Loans made by alternative funders typically carry interest rates of 36 percent to 100 percent, he said.
New York already has a criminal usury rate of 25 percent, but lenders have two methods of avoiding that cap, according to Cook. Under one method, the parties to the loan can use a provision called the “choice of law clause” and thus agree that the contract is subject to the laws of a state that does not limit commercial usury rates, he said. Or, using the second method, the small-business finance company can solicit the loan and refer it to a bank in a state without a cap. The bank makes the loan but then sells the loan back to the small-business finance company or an affiliate, he noted.
But adopting the changes proposed in the New York budget could possibly stymie both methods of circumventing the state’s usury laws. Consider the choice of law clause, Cook suggested. The courts could interpret the proposed expansion as an effort by the state to gain more control of commercial lending. That could prompt the courts to refuse to enforce choice of law clauses involving New York state because doing so would violate a significant policy in New York, he maintained. The proposal could also gut the second way around the usury law – the bank model – by requiring employees of out-of-state banks to have a license in order to originate loans or by prohibiting rates in excess of New York’s cap, he said. Both outcomes are speculative but constitute distinct possibilities, he added.
Expanding the license would also grant additional regulatory authority to the New York State Department of Financial Services, Cook maintained. Besides requiring the license, the DFS would have the ability to regulate, supervise and examine commercial lenders, he said. In the past the department has imposed some significant regulations on licensees, including fair lending requirements and cyber security requirements, he said. “They’re a very active regulator,” he contended. “They could require commercial lenders to jump through a lot of hoops that aren’t there today.”
What’s more, time would pass while a company negotiates the initial hoops simply to obtain a license. Qualifying for the current New York license, for example, can take up to nine months, Cook said. “It’s a fairly intensive licensing process that requires a lot of information about the company, the officers and directors of the company,” he noted. “The licensing process is tough in New York.”
The expansion could also limit the industry’s access to capital, Cook warned. Some alternative funders raise money by selling loans or interests in loans on the secondary market. Requiring a license to buy those products could prompt Wall Street to look elsewhere for less-burdensome investment opportunities, he said.
The laundry list of potential bad effects has many in the industry wondering about the state’s intentions toward the industry. “It’s not clear whether the people up in Albany understand the potential effect this has,” Cook said.
To help bring about that understanding, the CFC intends to call upon its members and merchants who have benefitted from alternative finance to visit officials in the state capital, Gans said.
Gans finds reason for optimism as the associations coalesce around the issue. The state Senate in Albany tends to be pro-business, and I am confident we will find allies that will stand up to this, he said.
Denis also seems upbeat about the industry’s efforts to make itself heard in Albany. In Illinois, some legislators failed to differentiate between consumer loans and commercial loans when considering legislation last year, he noted. That might be the case in New York, too, and the SBFA might help them make the distinction, he said. As an example of the differences, he pointed out that business loans often carry high interest rates because of high risk. “We have talked to some folks in Albany, and everyone is receptive to the industry,” he said. Small business is a powerful constituency, he maintains.
Gans, Denis and Cook all said they’re not opposed to legislation or regulation that addresses problems caused by bad actors in the industry, but all three oppose government action that they believe unnecessarily limits members of the industry who are operating in good faith.
The proposed license in New York differs in at least one significant way from the California lending license that many alternative funders have obtained, Cook noted. The California license doesn’t impose a cap on interest rates, he said. If the New York proposal imposed licensing requirements but did not limit interest rates, the industry probably would reluctantly accept it, he suggested.
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Dan Gans at the CFC can be contacted at dgans@polariswdc.com
Stephen Denis at the SBFA can be contacted at sdenis@sbfassociation.org
Robert Cook at Hudson Cook can be contacted at rcook@hudco.com
‘Debt Collection Terrorist’ Wants FCC to Get Rid of Implied Consent in TCPA
February 9, 2017
Craig Cunningham, the serial TCPA plaintiff who once aspired to author a book titled, Tales Of A Debt Collection Terrorist: How I Beat the Credit Industry At Its Own Game and Made Big Money From the Beat Down, now wants to make it easier to sue for TCPA violations.
Cunningham appeared in a deBanked story about telemarketing last year after it was discovered that he had sued alternative business finance companies for alleged violations. Declining to speak with me at the time, there was plenty to glean from his trail of forum posts where he uses the alias Codename47. One post stands out. “TCPA enforcement for fun and for profit up to 3k per call,” is the title of one thread he started in 2014 on the FatWallet forum.
And if his motives are fun and profit, then a petition filed by Cunningham with the FCC to limit the scope of “prior express consent” might concern you because it would create more opportunities for him and others to initiate lawsuits. This week, the FCC actually asked the public to comment on his petition.
With this Public Notice, we seek comment on a petition for rulemaking and declaratory ruling filed by Craig Moskowitz and Craig Cunningham (Petitioners).1 Petitioners request that the Commission initiate a rulemaking “to overturn the Commission’s improper interpretation that ‘prior express consent’ includes implied consent resulting from a party’s providing a telephone number to the caller.”2 Specifically, Petitioners request that the Commission issue a rule requiring that for all calls made to wireless and residential lines subject to the Telephone Consumer Protection Act (TCPA) restrictions in 47 U.S.C. § 227(b)(1)(A)(iii) and 47 U.S.C. § 227(b)(1)(B),3 “prior express consent” must be express consent specifically to receive autodialed and/or artificial voice/prerecorded telephone calls at a specified number, and such consent must be in writing.4 In addition, Petitioners seek a declaratory ruling to remove uncertainty regarding the meaning of “prior express consent” resulting from previous Commission orders.5
In the original description of Cunningham’s never-written book, his co-author Brian O’Connell, a famous writer, wrote this of Cunningham’s baiting strategy:
“The key was baiting the collections agent on the other end of the line and waiting for the agent to say something incriminating that crossed the line into what the law considered abuse. He began taping calls and soon had his first lawsuit against a security alarm company looking for $450 from an early termination fee.”
He has long since moved on from just debt collectors and files a lot of suits over allegedly unwanted calls.
Comments on Cunningham’s FCC proposal to make suing even easier, can be submitted online or by mail.
Trump’s Two-For-One Regulation Deal
January 31, 2017Trump’s newest order is that for every new regulation proposed, two must be identified for repeal. If a new regulation goes into effect, the costs must be offset by the repealed regulations. The idea behind it is to strip away costs on small businesses and unburden the system. “There will be regulation, there will be control, but it will be normalized control where you can open your business and expand your business very easily,” Trump said prior to signing the executive order. Watch that below:
Trump later said that “Dodd-Frank is a disaster” and that “We’re going to be doing a big number on Dodd-Frank.”
When he does that “big number,” he should pay close attention to Section 1071 of the law, which many believe the CFPB will try to use to police commercial finance and business-to-business transactions.
Ironically, as Trump works to slash federal rules, states will likely be doing just the opposite. Already in New York, Governor Cuomo’s 309-page budget proposal includes edits to an existing law that would impose strict regulations on all non-bank business finance.
New York’s Proposed Budget Slips In Sweeping Regulation of Non-bank Business Lending and Finance
January 28, 2017In New York, Governor Cuomo’s 309-page budget proposal includes a handful of sentences tucked in towards the end (Part EE) that would revise Section 340 of the state’s banking law. And the implications are broad, given that it calls for any person or entity involved in the soliciting, arranging or facilitation of business and consumer loans or other forms of financing to be licensed in order to engage in such activity. It appears that MCA companies as well as business loan brokers and ISOs would be directly impacted.
If it passes, the regulator tasked with overseeing that would be the New York Department of Financial Services. It would be effective January, 2018.
For consumer loans, it applies to loans $25,000 and under. For business financing, $50,000 and under.
New FCC Chairman Ajit Pai Has Been Critical of Serial TCPA Plaintiffs, Record Shows
January 24, 2017
FCC Commissioner Ajit Pai is the commission’s new chairman, thanks to President Trump. A republican who believes free markets are better for American consumers than highly regulated ones, Pai is likely to offer a sympathetic ear to companies besieged by serial TCPA plaintiffs, a problem that has reached epidemic proportions in the small business finance industry.
In 2015, when the FCC announced a broader definition of an autodialer under the TCPA, Pai strongly dissented.
Instead, the Order takes the opposite tack. Rather than focus on the illegal telemarketing calls that consumers really care about, the Order twists the law’s words even further to target useful communications between legitimate businesses and their customers. This Order will make abuse of the TCPA much, much easier. And the primary beneficiaries will be trial lawyers, not the American public.”
– Ajit Pai, 2015
If you’ve been threatened or sued by someone for violating the TCPA, you’re not alone. When we researched Smile, Dial and Trial, we reviewed dozens of lawsuits filed against small business finance companies and have since even discovered new ones filed since then.
With Trump and Co. Now in Control, Has The CFPB Made a Costly Mistake?
November 11, 2016
For years, the CFPB has rejected all calls by republicans (and even some democrats) to reconfigure its one-director leadership to a multi-member commission. At present, Director Richard Cordray has full authority to create the rules and enforce the rules and reports to no one, not even the President of the United States. As the only executive agency with significant authority to operate in this manner, critics have become increasingly worried the CFPB might abuse its power. And just last month, the agency was accused to have actually done so.
In PHH Corp. v. CFPB, the CFPB was alleged to have made legal errors in their enforcement action against a mortgage lender, but more to the point, that the CFPB itself was unconstitutional. The United States Court of Appeals for the District of Columbia Circuit agreed in part, ruling the agency’s structure unconstitutional. The agency was ordered to cure the defect either by conceding its directorship to a multi-member commission or making its leader report directly to the President of the United States.
But the CFPB has refused to comply, arguing shortly thereafter in another case that the “decision was wrongly decided and is not likely to withstand further review,” amplifying fears that the agency had gone rogue and potentially become drunk with power.
Cordray, who has tried to assure critics that his agenda is merely meat and potatoes, now faces a new challenge, a Republican president and a Republican-controlled Congress, who may see this as their only opportunity to rein him in.
According to Bloomberg, sources contend that the CFPB’s and Democrats’ previous unwillingness to concede anything at all, now puts the entire agency itself in jeopardy. Cordray himself is at great risk of losing his job, the Huffington Post asserts.
Already there is chatter of firing Cordray on Trump’s first day in office either for cause as Dodd-Frank allows for, or simply at his own discretion, as the Appeals Court ruled would be acceptable.
Has the CFPB erred all this time?
Coming Soon: The OCC’s Fintech Innovation Office
October 27, 2016Coming soon: An innovation office to work with fintech upstarts poised to disrupt to the industry.
The Office of Comptroller of the Currency that regulates and supervises banks plans to set up a dedicated “fintech innovation office” early next year with branches in New York, San Francisco and Washington.
In an attempt to “identify, understand and respond” to the changing banking landscape, the OCC said that the unit will establish an outreach and technical assistance program for banks and nonbanks, conduct research and promote inter-agency collaboration and act as a point of contact for information and requests.
“By establishing an Office of Innovation, we are ensuring that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision that supports it,” said OCC chief Thomas Curry.
Last month, Curry said that his office was evaluating the “unique risks” fintech companies might pose to the banking system under a less favorable credit cycle. The OCC also plans to release a paper in the next two months raising issues with a limited-purpose charter for nonbanks similar to credit card banks and non-deposit taking entities.
