Regulation
“A Bad Solution in Search of a Problem”: SBFA’s Response to the New York Disclosure Bill
August 6, 2020
“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.”
FTC Commissioner Rohit Chopra on Merchant Cash Advances
August 3, 2020
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.
WATCH: NY State Senate Banking Committee Debates The Commercial Finance Disclosure Bill
July 22, 2020The 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
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, 2020A 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
The 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, 2020Make 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:
- Alabama – Jefferson County
- California
- Colorado – Must reduce workforce by 50%
- Connecticut
- Delaware
- Florida – multiple counties
- Georgia – bars and restaurants
- Hawaii – Maui and Honolulu
- Idaho – Blaine County
- Illinois
- Indiana
- Kansas – multiple counties
- Kentucky
- Louisiana
- Maine – Bars and restaurants
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi – Certain cities
- Missouri – Certain areas in and around Kansas City
- Montana
- Nevada
- New Jersey
- New Mexico
- New York
- North Carolina
- Ohio
- Oregon
- Pennsylvania
- Rhode Island
- Tennessee – Multiple cities and counties
- Texas – Multiple cities and counties
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming – Multiple counties
