Commercial Finance Coalition Emerges – An All Inclusive MCA Industry Trade Group
March 16, 2016
A new trade association hopes to bring together every type of company in the alternative-finance industry to form a united front capable of managing state and federal regulation.
The fledgling Commercial Finance Coalition (CFC) welcomes potential members that include funders, brokers, payments processors, data providers and collection agencies, said Matt Patterson, CEO of Sioux Falls, SD-based Expansion Capital Group LLC and a board member and organizer of the new trade group.
Patterson began thinking about forming an association early last year when he learned that the established Small Business Finance Association (SBFA), formerly the North American Merchant Advance Association, wasn’t communicating with legislators and regulators on behalf of the industry. “When I talked to them six or nine months ago, they had no road map for affecting legislation or regulation,” he said.
Since then, the SBFA has hired an executive director with legislative and association experience to tell the industry’s story on Capitol Hill. (See here.) So, two industry groups now plan to begin contacting government officials to educate them on the cause of small-business alternative finance.
The decision to create the CFC came at a dinner meeting convened Dec. 3 in New York. That gathering came together after several months of conference calls and videoconferences, Patterson said.
The CFC is working with two well-established lobbying groups, Patterson noted. Both organizations advised the CFC during its formation, he said.
Law firm WilmerHale was selected to represent the CFC. The combination of Polaris and WilmerHale will give the association an immediate Washington presence, he noted.
The group intends to write best practices for its members but doesn’t contemplate starting a trade show, trade publication or merchant watch list, Patterson said.
The CFC is beginning its journey with nearly 20 member companies, according to Patterson. Recruitment of additional members is scheduled to intensify after the association has been operating for a while.
Inviting members from all facets of the industry indicates a philosophy that differs from that of the SBFA, which includes only funders on its roster, Patterson said. “We want to be inclusive,” he said. “We’re interested in building a broad base of constituents that all have an incentive to see that the industry survives and thrives.”
The coalition’s trusted service providers include:
- Arena Strategies
- Catalyst Group
- Polaris Consulting
- Wilmer Cutler Pickering Hale and Dorr
Chicago Resumes Call for Protection of Small Business Owners Against Predatory Lenders
February 12, 2016
Chicago City Treasurer Kurt Summers has picked up where Rahm Emanuel left off a year ago. During a January 25th Illinois Senate Financial Institutions Committee hearing named, Small Businesses, lack of access to capital, and predatory lending practices, Summers called for new legislation to protect small business owners from misleading and dishonest predatory lenders.
OnDeck we mean you
Spencer M. Cowan, Senior Vice President for Research, Woodstock Institute, also testified during the hearing and referenced OnDeck specifically. “The terms do not, without calculations that few people can make, let the borrower know that the loan will take a full year to repay with an effective interest rate of just under 70 percent,” he said. Cowan’s position was that banks need to lend more so that small businesses don’t need such alternatives. “If businesses do not have access to loans from banks, then they are probably going to resort to the same types of strategies as consumers who can’t get small loans from banks,” he said.
Cowan cited a report he prepared 18 months ago that examined the relationship between banks and the racial makeup of the small business owners they lend to. The sources he cited about alternative lending were blog posts written by industry critic Ami Kassar.
Treasurer Summers meanwhile recommended the following measures be included in draft legislation to protect small business owners:
- Require loan terms to be clear and unequivocal. Loan terms should be clearly stated using straightforward language and the interest rate should be clearly disclosed as an annualized interest rate or an annual percentage rate (APR).
- Loans should be free from traps. Borrowers should not be hit with new fees on existing principal if they refinance or modify a loan. Borrowers should not be charged interest or periodic costs for the remaining period of the loan if they pay it off early.
- Lenders should be required to display information about the results of their previous loans. This information could be anonymous and in the aggregate, but would give borrowers important data points as they determine whether or not to use a particular lender. If borrowers are able to see that a lender has a pattern of providing loans that are not paid back or have caused businesses to fail, they will be more likely to choose a more reputable lender.
- Conflicts of interest should be disclosed to borrowers. Borrowers should know what types of incentives are driving the lender and whether the broker will receive higher fees for using certain lenders or types of loans.
- Because many of these loans are made online, lenders must take substantial steps to protect the data privacy of loan applicants. Borrower data should not be allowed to be sent to third parties without the written consent of the borrower and lenders should be required to take steps to ensure that the data is encrypted and protected from breaches.
Unsurprisingly, the Illinois Bankers Association (IBA), who was not even invited to the hearing, felt compelled to issue a public statement. In a letter addressed to Chairperson Jacqueline Collins, the IBA was rather protective of their own interests. “We share the Committee’s concern with the proliferation of these under-regulated lenders, sometimes known as ‘fintech’ companies,” they stated. “This relatively new ‘shadow banking’ industry — unlike traditional financial institutions — is in many respects unregulated. Consequently, some bad actors are engaging in predatory lending practices with repayment terms that too often are forcing small business customers into cycles of debt.”
However they tapered down the rhetoric and made a technology-forward plea. “We do think it is important for lawmakers to preserve the benefits of lending innovations, and to ensure that mainstream financial institutions are not prevented from adopting technologies that result in better customer service,” they said. “For example, mobile lending interfaces and faster loan approvals, with appropriate safeguards, provide many potential benefits and match changing customer needs and expectations. We should seek to preserve these innovative solutions that benefit entrepreneurs and small businesses, while at the same time curbing abusive lending practices.”
A public digital transcript of the hearing is not currently available.
California Finance Lenders Push Legislative Agenda in Response to Growth of Alternative Small Business Finance Industry
December 8, 2015On October 10, 2015, California Governor Jerry Brown signed into law SB 197, a bill that allows licensed California finance lenders to pay commissions to unlicensed persons that refer prospective commercial loan borrowers to licensees that offer certain types of lower cost loans. The bill was co-sponsored by Opportunity Fund and the California Association for Micro Enterprise Opportunity. The stated purpose of the bill was to “remove a competitive disadvantage that applies to C[alifornia Finance Lender Law (“CFLL”)] licensees making commercial loans.” As the bill’s legislative background explains,
Existing CFLL regulations prohibit CFLL licensees from paying any compensation to any person or company that is unlicensed, in exchange for the referral of business. This places CFLL licensees who make commercial loans at a competitive disadvantage relative to their direct competitors, who are not required to hold CFLL licenses and are thus not subject to this restriction. Two types of direct competitors that are not required to hold CFLL licenses include merchant advance companies (not required to be licensed under the CFLL, because they are advancing, rather than lending money) and companies that partner with banks (not required to be licensed under the CFLL, because the loans are made under the banks’ charters).
Prior to the passage of SB 197, a CFLL licensee was prohibited from paying a commission to an unlicensed person that referred a potential commercial loan borrower to the licensee. The California Code of Regulation states that “no finance company shall pay any compensation to an unlicensed person or company for soliciting or accepting applications for loans…” 10 CCR § 1451.
The new legislation overrides the regulatory restriction and permits licensees to pay compensation to unlicensed persons if certain conditions are met. A CFLL licensee may pay a commission to an unlicensed person if:
- The loan made to the borrower does not charge an annual interest rate in excess of 36%.
- The lender conducts an underwriting and obtains sufficient documentation to ensure that the borrower has the ability to repay the loan.
- The lender maintains records of all compensation paid to unlicensed persons for at least 4 years.
- The lender submits annual reports to the California Commissioner of Business Oversight.
While the bill permits an unlicensed person to refer potential borrowers to commercial lenders in exchange for compensation, it limits the activities in which the unlicensed person can engage. Under the new legislation, unlicensed persons that refer borrowers for compensation may not:
- Participate in any loan negotiation.
- Counsel a borrower about a loan.
- Prepare any loan documents, including credit applications.
- Contact the lender on the borrower’s behalf, other than to refer the borrower.
- Gather documentation of the borrower or obtain the borrower’s signature.
- Participate in the development of any sales or marketing materials.
To be clear, the purpose of SB 197 was not to prohibit licensees from paying compensation to unlicensed persons in exchange for borrower referrals (licensees have been prohibited from paying commissions to unlicensed persons since the CFLL was enacted). Instead, the bill allows certain lenders that charge annual rates under 36% to do something that they were previously prohibited from doing, i.e. pay commissions to unlicensed persons for commercial loan referrals.
Reactions to the Treasury RFI: Business Lenders and Merchant Cash Advance Companies Share Their Thoughts
August 13, 2015
The Treasury Department could get an earful from the alternative funding industry during a 45-day public comment period on online marketplace lending that began July 17.
Treasury emphasizes that it isn’t a regulator and its Request for Information, or RFI, isn’t a regulatory action. The department just wants to hear success stories and opinions on potential public policy issues, a Treasury spokesman said.
“There isn’t a lot of data available on this industry,” the spokesman noted. “The RFI allows us to gather information from the public.”
One portion of the public – alternative funding executives – may have a lot to say on the subject. At least some of the industry’s top players favor regulation or legislation that could clean up the industry and clarify conflicting directives.
“Personally, I’d be glad to see it on the federal level,” Stephen Sheinbaum, president and CEO of Merchant Cash and Capital, said of regulation. “We won’t have to deal with 50 individual states, which is more unruly.”
Others would prefer to see the industry regulate itself instead of having federal agencies issue dictates or having Congress pass laws.
“I would like to put in my two cents,” said Asaf Mengelgrein, owner and president of Fusion Capital, indicating he intended to respond to the RFI. “I see a need for better practices, but regulation should come internally.”
Whoever makes the rules, restrictions seem inevitable because of alternative funding’s prodigious growth, executives agreed. “Regulatory attention is a sign of an emerging industry,” said Marc Glazer, president and CEO of Business Financial Services.
Regulation should curb the practice of stacking loans or advances, which can burden merchants with more financial obligations than they can meet, Sheinbaum said. Stacking has proliferated even though ethical members of the industry avoid it, he said.
At the same time, disclosure statements should become more transparent so that merchants can easily identify how much they’re paying in fees and expenses, Sheinbaum maintained. Merchants should also be able to see how much they’re paying the different entities involved in the deal, he said.
“I’m not suggesting someone should make more or less, but transparency is a healthy thing and this industry could use a little more of it,” Sheinbaum said.
The alternative-funding industry could follow the example of the mortgage business, where more-standardized forms help consumers compare competing offers, Sheinbaum said. “That’s not the case in this industry, so that might help,” he maintained.
The industry should not emulate the credit card processing business, which uses complicated and dissimilar contracts to keep customers uniformed, Sheinbaum said. “It’s not so easy for a merchant to understand the effective cost of a transaction – and that’s by design,” he said.
Reviewing those issues could confuse among regulators who don’t understand the industry, Mengelgrein warned. Someone “on the outside looking in” might consider the industry’s fees and factor rates outrageously high, but that’s because they fail to understand the financial risk involved with lending to small businesses, he said.
Before imposing rules, regulators should also bear in mind that many small businesses could not survive without alternative funding, Mengelgrein continued. In recent years banks have failed to step up and help merchants in need of cash, and the alternative lending community has filled the gap.
Sheinbaum agreed. “I hope the regulators and legislators will make an earnest effort to understand all the good that folks in the alternative finance space provide for people,” he maintained. “It’s a critical role we play in keeping small businesses going, and small business is important to this country.”
The Small Business Finance Association could play a critical role in helping government understand the industry, Sheinbaum suggested. He noted that the trade group changed its name from the North American Merchant Advance Association because the industry is adding loans to its initial offering of merchant cash advances.
Whatever shape regulation takes, the industry should keep up with the new rules, Glazer cautioned. “As this industry evolves, we will work closely with our partners and our customers to ensure that everyone is informed about any new regulations and the potential impact that they may have on our business,” he said.
Meanwhile, Treasury’s efforts to comprehend the business are continuing. Its RFI contains 14 detailed questions that respondents could address.
The department held a forum on Aug. 5 called “Expanding Access to Credit through Online Marketplace Lenders.” The event included two panel discussions and roundtable discussions with Treasury staff.
Attendees numbered about 80 and included consumer advocates, representatives of nonprofit public policy organizations and members of the financial services industry, the department said.
Legal Complexities in the Revenue-Based Financing Industry: An Analysis of Recent Court Cases
January 6, 2025Jeffrey S. Paige is the General Counsel of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com
Navigating the intricate legal landscape of the revenue-based financing industry has become increasingly complex, with recent court cases providing profound insights into the sector’s regulatory dynamics. Amidst legislative shifts, litigation between funders and merchants, and public enforcement actions, three prominent court cases have recently emerged, each offering further guidance into the nuanced legal dynamics governing this innovative sector.
SBFA vs. DFPI: Constitutional Challenges to California’s Regulatory Framework
In the Small Business Finance Association (SBFA) vs. California Department of Financial Protection and Innovation (DFPI), 9th Cir., Case No. 24-50, SBFA challenged the constitutional validity and federal preemption of California’s Commercial Financing Disclosure Law. Central to SBFA’s stance is the contention that the state’s regulatory framework infringes upon the First Amendment rights of its members. SBFA asserts that the regulations compel its members to disseminate inaccurate disclosures to customers, while simultaneously prohibiting any communication that could rectify or clarify purportedly misleading information. Furthermore, SBFA contends that California’s customized interpretation of the Annual Percentage Rate (APR) conflicts with the federal Truth in Lending Act (TILA), potentially causing confusion among merchants. The DFPI moved for summary judgment to dismiss the complaint.
Updates and Nuances: Recent Ruling on SBFA vs. DFPI
On December 4, 2023, the trial level judge ruled in favor of the DFPI, granting their motion for summary judgment and dismissing the case.
First Amendment Argument: The judge disagreed with SBFA, concluding that the disclosures would help small businesses understand the costs and were neither misleading nor unduly burdensome.
Federal Preemption Argument: The judge deferred to the Consumer Financial Protection Bureau (CFPB)‘s authority to resolve preemption issues. In March 2023, the CFPB ruled that the Commercial Financing Disclosure Law (CFDL) does not conflict with TILA.
The SFBA has filed an appeal of the lower court’s grant of summary judgment with the United States Court of Appeals for the Ninth Circuit. On May 28, 2024, SBFA filed their appellate brief setting forth the facts on the record on summary judgment and their specific legal arguments, emphasizing the reversible errors made by the district court, particularly regarding the false and misleading nature of the compelled disclosures, the controversy surrounding the use of APR metrics on products (like receivables-based funding transactions) that APR was not designed to properly describe, and the lack of justification for the regulations. The preemption argument is not being raised on appeal. Following this, on June 6, 2024, the Appellee DFPI’s unopposed motion for an extension of time to file the answering brief was granted. The answering brief of the DFPI is now due on August 30, 2024.
Given these developments, SBFA’s challenge continues to underscore significant constitutional, substantive, and procedural issues within California’s regulatory framework.
The People v. Richmond Capital Group: Uncovering Predatory Practices
In the case of The People v. Richmond Capital Group, 195 N.Y.S.3d 637 (N.Y. Sup. Ct. 2023, unpublished slip copy), allegations of predatory practices have uncovered crucial legal considerations for revenue-based financing providers. Initially filed by the People in 2020, the court ultimately found for the People, holding that the Defendants in that case were “predatory lenders” making thinly disguised loans with usurious interest. The keys to this decision were the reconciliation duty (which was allegedly never performed by the Defendants despite the mandatory contract provisions and requirement that merchants submit bank statements to Defendants on a monthly basis), the fact that the transactions were explicitly based upon fixed repayment amounts with fixed repayment timeframes (as opposed to revenue based funding products, where remittance of the purchased receivables may vary in amount and duration along with the merchant’s revenue stream), contract provisions such as making a few missed payments or declaration of bankruptcy events of default (shifting the risk of loss off of the funder), and the fact that Defendants always referred to their products as loans, and not a bona fide purchase and sale of future receipts. The reprehensible conduct of certain Defendants who harassed, bullied, and made numerous fraudulent statements to their merchant customers certainly did not help their cause. In September 2023 and February 2024, the court issued further decisions addressing accounting and disgorgement of funds, but the core principles related to reconciliation and data remain the same. It’s unclear if Richmond Capital Group appealed any of these rulings.
U.S. Info Group, LLC v. EBF Holdings: Implications for ISO Behavior and Funder Accountability
2023 WL 6198803 (S.D.N.Y., 2003), a case out of the Southern District of New York involving New York law, involves allegations by a Plaintiff against a receivables-based funder similar to those in Richmond Capital, but with a very different set of facts, and a different outcome. U.S. Info Group attempted a civil Racketeer Influenced and Corrupt Organizations Act (RICO) claim against EBF Holdings, alleging that the receivables-based funding transaction at issue was a disguised usurious loan under New York law.
In September 2023, the court dismissed the case entirely on the funder’s motion to dismiss the third amended complaint. The judge ruled that U.S. Info Group failed to adequately allege facts demonstrating a “RICO enterprise” or widespread fraud scheme involving EBF Holdings and their affiliates. In addition, the Court re-iterated the major hallmarks of a true purchase and sale receivables-based funding transaction: (i) that the contract contained a reconciliation provision (and that the funder actually preforms reconciliations where warranted such that the provision is not illusory); (ii) that the risk of non-performance due to bankruptcy or declined revenue of the merchant always rests with the funder; and (iii) that there is no finite, fixed repayment term, which would be typical of a loan.
Legal Recommendations for Funders
Funders should consult with knowledgeable and capable attorneys in this area of law to establish and effectuate clear provisions in their contracts along with steadfast adherence to their contract terms and best practices.
As for the DFPI and California’s disclosure requirements, they remain the law of the land unless the final, unappealable decision of a court states otherwise. Thus, funders should consult with their attorneys to ensure strict compliance with California’s disclosure law and regulations.
In conclusion, the recent legal battles involving the revenue-based financing industry underscore the need for continuous vigilance, genuine commitment to proper contract terms and best practices in servicing those contracts, and adaptation to emerging regulatory paradigms, in order to ensure sustainable growth and legal compliance within this dynamic sector.
See You in Las Vegas
September 18, 2024
We’ll be in Las Vegas for the inaugural B2B Finance Expo (a AltFinanceDaily / SBFA collaboration). Tickets are just about sold out so if you haven’t bought one already, check the site to see if registration is still active. It will turn off automatically.
Here’s what you need to know:
Sept 22, Wynn, Las Vegas, 7-10pm: B2B Finance Expo Poker Tournament
- Anyone can attend to watch and network FREE. Cash bar on site.
- Seats to play are limited. Must be done in advance on the registration page. Seats almost sold out. Game is not for cash. $100 entry fee. All entry fees donated to GreenLedger, a new non-profit.
- Winner of the tournament gets a genuine gold B2B engraved championship bracelet.
Sept 23-24, Wynn, Las Vegas: B2B Finance Expo
- See agenda
- LOWER CONVENTION PROMENADE
- Tickets required for entry
Please be sure to stop by the Small Business Finance Association’s booth (SBFA) to learn more about the non-profit organization.
Other trade associations with representatives in attendance include the National Private Lenders Association (NPLA) and the Innovative Lending Platform Association (ILPA).
Trade media in attendance will include: AltFinanceDaily, Coleman Report, and Equipment Finance News.
Please be sure to check out the booths of Kapitus & Rapid Finance (Diamond Sponsors) and Bitty & Lendini (Platinum Sponsors).
For event related questions email events@debanked.com. Event staff will not be able to answer calls after Thursday, 9/19.
A New Commercial Financing Expo Is Coming to Las Vegas This Fall
March 4, 2024Coming to Las Vegas in 2024, an inaugural commercial financing expo powered by AltFinanceDaily in collaboration with the Small Business Finance Association will be held in the Fall. The conference will bring together the leading lenders, funders, and brokers from across the spectrum of commercial finance, leasing, mortgage, and revenue-based capital products. The event will replace AltFinanceDaily’s annual CONNECT event that has typically taken place in San Diego.
“We’ve had our eye on Las Vegas for a long time and resolved last September that we’d aim to go there next,” said AltFinanceDaily founder Sean Murray. “We’ve built up years of experience through running the annual Broker Fair conference in New York City and this event will have everything from across the commercial finance and small business finance industries.”
“AltFinanceDaily is a powerful industry leader and we look forward to working with them to produce a high level event where the commercial finance industry can learn and network together,” said SBFA Executive Director Steve Denis.
The AltFinanceDaily team has produced nearly two dozen events since 2017. Additional information will be made available soon. For inquiries, email events@debanked.com or call 917-722-0808.
SBFA Appeals Decision in Disclosure Law Lawsuit
January 2, 2024The Small Business Finance Association will appeal the decision issued in its case against the California DFPI over the legality of its disclosure laws.
The SBFA filed its suit in December 2022, alleging that the disclosure laws in California violated the First Amendment and that they were pre-empted by a federal law (TILA) that governs APR calculations. After the Court initially allowed the case to proceed in March 2023, it reversed course and dismissed the SBFA’s lawsuit in December.
On December 29, the SBFA filed its notice of appeal to the United States Court of Appeals for the Ninth Circuit.
