NY Action Against Predatory Lenders – MCA Lenders Beware – Regulation Z

New York State Legislature Passes Law That Requires APR Disclosure On Small Business Finance Contracts (Even If They’re Not Loans)

 

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.

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 Borello 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.

To continue reading click here.

The Jig May Be Up for Predatory Lenders – Tish James, What About the Brokers, the Credit Card Swipes, etc?

PEOPLE OF THE STATE OF NEW YORK, BY LETITIA JAMES V….

Dear Reader:

Please, Please, Please be advised if it looks too easy, it’s because it IS TOO EASY.

Merchant Cash Advance Lenders (most not all) have one thing in mind and that is all… money. They traffic in the vulnerability of borrowers who cannot get traditional bank loans. They make accepting cash easy for anyone cash poor. They make paying it back in full next to impossible. 

Once you are in, you are in, ensnared. They trap the most needy into “stacking” these loans (taking one out to pay another or having multiple loans) in order to keep the borrowers in a cycle of financial shortfalls. All the while, you, the borrower are paying their fees: brokers, lawyers, financial institutions. It is a no-lose for the lender and a no-win for the borrower. 

They obtain a “Confession of Judgement” (“COJ”) which borrowers unwittingly sign for the total amount of the debt + fees + collection fees + court costs + legal fees. A default on the loan allows them to obtain the total value of the COJ even if the lender has paid back part if not almost all of the debt. And, Governor Cuomo in New York still has not signed the legislation de-legalizing the use of a COJ. 

Up until now, this was all quite legal. This type of lending represents a loophole in the banking system. It is unregulated as a bank. It is an industry unregulated by the rules governing any form of traditional Lenders. And, up until now, these type of lenders were not governed by usury laws.

Why Merchant Cash Accounts are WRONG For Your Business, We are Urging our Readers to AVOID! – Part II

THE PART OF THE MERCHANT CASH ACCOUNT (MCA) BUSINESS YOU DID NOT KNOW….

1. Did you know that the MCA loan draws down on your account DAILY (rarely WEEKLY) whether you have funds in your account or not?

2. Did you know that, at least on the East Coast of the United States, many MCA lenders are friends, family members, investors all tied to one another in the form of investment; or they use the same attorneys, the same collection agencies, the same brokers? What that means is they monitor your loans like turkey vultures just waiting for you to be unable to render payment so they can pounce.

3. Did you know that most MCA lenders require you to sign a Confession of Judgement, an unscrupulous document that is an admission of default, signed on the full face amount + interest + fees + penalties + collection fees? This means that you owe a sum total before you even get the money in the bank and even as you pay down the loan that Confession of Judgement remains on the face amount of the original loan + interest + fees + penalties + collection fees. In some states there is legislation being drafted to de-legitimize the Confession of Judgement.

4. Did you know that most MCA loans require you to personally guarantee your loan (on the full face amount mentioned above). In the event of a default you risk everything – your home, your car, your life savings, the future of your children, the future of your estate, your business, everything?

5. Did you know that many MCA lenders are completely unregistered with any oversight agency and are not restricted by any form of finance/banking laws intended to protect the Borrowers? They are not bank loans. They skirt all legal loopholes including those regarding confidentiality, usury, fees.

6. Did you know that while the “Interest Rate” (i.e. the rate of interest charged for the loan) may be within legal limits (generally advertised as low-interest), there are associated fees, pre-payment penalties, lending fees, draw-down fees, collection fees, documentation fees, registration fees, that can ultimately add up to nearly 50%-80%, which while not called “interest” are effectively the same thing? They INCREASE THE COST OF BORROWING THE MONEY.

7. Did you know that very few MCA lenders will be willing to re-negotiate the terms on an MCA loan in the event that something goes dramatically wrong and you cannot make payment? More to the point, as soon as you run into problems you usually have ten more offering you better terms, which actually bury you deeper into debt?

WE URGE OUR READERS TO AVOID MCA LOANS, TO CONTACT ATTORNEYS TO REVIEW ALL LOAN DOCUMENTS OF ANY KIND, TO FIND ANOTHER WAY. IF YOU TAKE AN MCA LOAN YOU MIGHT AS WELL BUY A SHOVEL TO DIG YOUR OWN HOLE IN THE GROUND, THEY ARE RARELY A STEP IN THE RIGHT DIRECTION.

The following is an article written for business.com, espousing the benefits of MCA loans. We will not post the entire article but will highlight some of the finer points the writer tried to use to portray the MCA as a benefit to business. He admits that while the loans are advertised at low-interest, they can be “quite high”. He acknowledges in the last paragraph that in some cases, the rate (i.e. effective interest rate) can range in the TRIPLE DIGITS! This means that it can be more than 100%!

We have seen these loans bury far too many people and businesses in debt and wreckage. We want to prevent that from happening. AVOID MCA LOANS!

 

Why Businesses Should Consider a Merchant Cash Advance

Like the name suggests, a merchant cash advance (MCA) is an advance provided as a lump sum to a business in exchange for future credit card sales. Therefore, it cannot be considered a loan, because it does not have the technical details of a bank account such as collateral and a fixed repayment term. It is more akin to factoring, where a lender gives an advance of cash against an invoice. In fact, the companies that offer financing are very careful not to be referred to as lenders but simply as providers. This allows them a lot of leeway in providing financing to small businesses.

In a factoring business, the one providing funding is buying a portion of a company’s future receivables. In an MCA agreement, the business’s receivables are in the form of credit and debit card sales. This is a riskier approach for the lender because an invoice does not exist. Thus, the interest rates are higher because of the higher risk profile of these cash advances. Despite the costs, there are still circumstances that necessitate taking an advance. To help you navigate the industry and make more informed decisions, this guide will teach you everything you need to know about MCAs.

…..

2. Factor fee

In a cash advance, the factoring fee replaces the interest rate, although it is essentially the same thing. The average rate is between 1.14 and 1.18 and, when multiplied with the advance amount, shows you what you owe in total. When this factor fee is converted to an annual percentage rate (APR), it becomes equivalent to 15% or more. [Want to know more about factoring? Check out our reviews.]

3. Holdback

Every day, a percentage of the daily credit card sales that is deducted from your bank account and sent to the MCA provider. The percentage can be between 10% and 20% and will be charged until the debt is repaid.

To facilitate the daily payments to the lender, an MCA deal is made with the collaboration of a credit card processing company. One way they allocate monies is by deducting the total sales of the day and sending those to the lender, while the rest are processed to your business bank account. The other way is by allowing the MCA provider to access your credit card sales, and they make their deductions before sending the remaining funds to your account. Alternatively, your bank can handle the account, and the provider’s portion is sent to the MCA provider by ACH.

……

What is the disadvantage of a merchant cash advance?

The most glaring and obvious problem with MCAs is their high cost. At first, the factor rate makes it seem that the debt would be low, but in actuality, the interest rate is quite high. In some cases, the rate can reach triple digits, which is much higher than a bank loan. Also, considering the daily holdback, your business’s cash flow can be negatively affected.

To read the article in its entirety click here.

Merchant Cash Advance – The Shuttering of City Bakery, a NY Institution’s Financial Demise

The City Bakery on West 18th Street unexpectedly closed after nearly 30 years in business. Photo: Ben Fractenberg/THE CITY

How Manhattan’s City Bakery Crumbled Under Weight of Debts

 

Walking into City Bakery on West 18th Street in Manhattan, it was hard to imagine the popular eatery with the best hot chocolate in New York and a famous pretzel croissant could ever crumble.

The roomy, bustling café brimmed with locals and tourists any day of the week. Things got even busier during the Hot Chocolate Festival in February.

But the Union Square bakery abruptly shut its doors over the weekend after nearly 30 years in business, citing “too much debt … which is like quicksand” in a good-bye Instagram post.

…….

Debt for New Yorkers Only

Until this summer, New York was a national magnet for a booming “merchant cash advance” business, thanks to state law that allowed firms to file confessions of judgment in New York courts.

When Kalamata merged last year with another merchant-cash-advance company, Kings Cash Group, the new entity said it provided $300 million in capital to more than 5,000 small businesses.

Bloomberg News analyzed data last year on more than 350 lenders and found cash-advance companies have obtained more than 25,000 judgments since 2012 totaling about $1.5 billion — all in New York.

The biggest player was Jersey City–based Yellowstone Capital, responsible for a quarter of those judgments, Bloomberg found. The New York attorney general subsequently launched an investigation of the industry and subpoenaed Yellowstone.

Fed up with county courthouses being inundated with cases seeking to enforce the judgments, New York State Chief Judge Janet DiFiore prevailed on the Legislature to pass a law that forbids confessions signed with out-of-state businesses from being enforced in New York courts. Governor Andrew Cuomo signed the bill August 30.

To read the article in its entirety click here.

The Merchant Cash Advance Scheme – Predatory Lenders – PART I.

The Merchant Cash Advance (MCA) How it all Works and the DANGER SCENARIO:

 

DANGER! DANGER! DANGER!

MCA Loans are in large part Predatory Lending Strategies! They are sometimes referred to as “Payday Loans.” They can be very, very dangerous.

Let us begin by stating that these types of loans are from quasi-financial institutions that are largely unregulated. They do not following general banking regulations and they do not run afoul of typical usury laws because their “interest” structure is actually fees piled upon fees, coupled with additional fees all baked into the principal amount of the loan. So they can legally say they are “low interest.” Most, are not.

Most, with very few exceptions, are highly predatory.

Most of the loan companies are not set up as investment funds so they have no investment filings or FINRA/SEC requirements and as LLC’s it is very difficult to track the owners. Many are personal investors who themselves have their hands in multiple pockets. They are generally a tight knit group of people who use the same brokers, the same collections attorneys, the same funding groups, etc. 

Most, with very few exceptions, are predatory.

In the interest of full disclosure, there are a small number of these loan companies that are honest and upfront and you know what you are getting. They are few and far between and the desperate Borrower has no way to differentiate.

DO NOT GO WITH A MERCHANT CASH ADVANCE WITHOUT ADVICE OF COUNSEL AND AN ANALYSIS OF THE COMPANY. MOST ARE PREDATORY LENDERS!

HYPOTEHTICAL:

You are a business owner with generally high receivables ($5,000,000/month or $60,000,000/year). You find yourself in a situation where two of your biggest clients are not paying on time and you have payroll to make for your employees for the first pay period in March (You pay on the 1st and 14th) . The payroll requires $300,000, not a big deal since you have $3,000,000 outstanding in invoices (the two unpaid bills). You need cash in 4 days or you will miss payroll (sense of desperation sets in).

A Merchant Cash Advance (MCA) company “A” comes to you through a broker/intermediary or salesman and says we can offer you an immediate infusion of cash of $300,000 for a year. You will repay us on daily draws. We don’t need any major credit checks, just a list of your invoices. 

AND! You will have your money in the account in 3 days, just in time to pay your employees. 

BUT! We will have the rights to collect on those invoices (your receivables) if you cannot make the payments. We will want access to your bank account so that the money comes out immediately. We want your vendor lists. You just have to sign a bunch of papers.

BECAUSE: We are low interest at 6.5%/year or $19,500.00, you don’t have much time to decide. You just need to sign the papers.

OH YEAH… YOU ALSO NEED TO…  personally guarantee the loans AND sign a “Confession of Judgement.” 

A Confession of Judgement is a shady and dangerous legal document, lender-friendly,  borrower-unfriendly. It is akin to an absolutely inarguable Judgement against you if you triggered by a “default.” Depending upon the loan documents (which they convince you not to read carefully) the TRIGGER can be anything from missing a payment to needing additional cash. The Confession of Judgement allows the Lender to demand repayment of loans (from your vendors) without need of going to court to try a case. It will not matter why you could not make payments. It will not matter if the company “jumps the gun” and does not wait for you to actually default by missing a payment. The rules are drafted into the fine print on the loan documents. The action that the MCA company will need to take is a Declaratory Judgement action to simply give them the rights to start collections directly from the vendors who owe money.

UCC FINANCING, LIENS… Most MCA companies also take at UCC financings on the business and on the personal guarantees. Most MCA companies have judges who are “friendly” to these types of transactions and will “fast-track” the stamp on the Confession for collections purposes.

AND THE KICKER: The Confession of Judgement calculates the entire value of the loan at payment time of the entire loan + Fees for “litigation” for “Collections Actions” for other various fees. Usually a Confession of Judgement on an initial offer of $300,000 is listed as a judgement for somewhere between $425,000 and $500,000 or thereabouts, based upon experience reviewing documents.

THE FINE PRINT! The fine print on these loans can be any of the following, each of which can be used to trigger the Confesssion of Judgement.  1. you are precluded from incurring additional debt without advising them; 2. you advise them in the event of hardship; 3. you not place additional liens on the same assets, etc. etc. 

NEVERTHELESS: You think to yourself, this is okay. I am borrowing $319,500.00. On 100 days/year, that’s $3,195.00/day to be drawn from your account, you can do that.

AND: The broker/customer relations person/salesperson convinces you that you can prepay without penalty. He does not tell you that prepayment is prepayment of the face value on the Confession of Judgement, not what you owe on the date of payment. 

SO IN YOUR DESPERATION: You need the cash. It will all be easy because the outstanding invoices cover that no problem. There is no prepayment penalty (or so you are told). As soon as you get the money, you should be able to pay it off. You did not consider your usual use-of-funds and how you stepped into this trap in the first place, short on cash.

SO YOU TAKE THE BAIT!

IF ONLY:  that were the only money you would be paying…. It isn’t. You think to yourself, I can pull this off. 

BUT: MCA A then says that they take 4.5% immediately ($13,500.00) at the time of the loan as a service fee. The loan guy tells you not to worry because it is added to the principal balance so it is not a big deal. So, actually, you are taking out a loan of $313,500.00. The 6.5% interest is on the total

IF ONLY:  it were the only money you are paying it would total $20,377.50. Now the daily draw will actually be $3,338.78/day. 

BUT: The company then says that there is a one-time account setup fee of $2,500.00. No big deal because that is added to the principal balance also. It is baked into the loan. So, your $300,000.00 loan is actually $316,000.00. Your interest is now $20,540.00 (because it is on the total and fees). 

BUT: The company forgot to tell you that there is a daily transaction service fee of $74.71 for every withdrawal. 

NOW: Your daily withdrawal has gone from $3,195.00/day to $3,440.11 (rough numbers). That’s an additional $245.11 on the daily draw or approximate 7%. So your actual interest rate is about 11.5% on the loan.

AND: that’s not where it ends. The fee structure continues. Each fee is added to the initial loan amount, thereby increasing the principal balance of the initial loan. If you stopped there, the total payment to the company would be $344,111.00 at the end of the year. 

BUT: The Confession of Judgement includes all kinds of other fees and no one tells you that no matter what day you pay, you are paying on what is listed on that Confession of Judgement, whatever amount MCA A has added, and all of the associated fees. 

ALSO: If you fail to make the loans after 6 months of payments, even assuming you had a year, the MCA company will go to the court with the amount listed on the original confession of judgement form, not accounting for reductions. 

TWO WEEKS LATER: after making daily payments, you realize that you did not account for your usual use of funds. You need to buy supplies. You need to carry out the ordinary course of business. And you cannot because you are paying nearly $3,500.00/day of draws.

So, in walks MCA Company B.

ANOTHER LOAN: MCA company B offers you an immediate influx of $50,000.00 to keep things running, also under the same terms and conditions as MCA A. He lists MCA A as a creditor so the interest rate is a bit higher because you are now  a greater risk. 

WHAT YOU DON’T KNOW: MCA A and MCA B are largely the same investor pool. They are in cohoots. MCA A now knows that you are having cash-flow problems and need a second loan. If you call MCA A to try and renegotiate, they advise MCA B and both companies decide who is going to be the first to file on the Confession of Judgement. You have effectively warned both companies that you are having a problem with cash-flow and are in danger of default.

What do they do? They send in their friend from MCA C…

 

FOR ADDITIONAL READING:

https://loans.usnews.com/what-is-a-merchant-cash-advance

https://www.pymnts.com/news/b2b-payments/2019/open-banking-merchant-cash-advance-mo-technologies/

https://www.post-gazette.com/business/money/2019/09/15/Small-businesses-high-interest-lenders-merchant-cash-advances-bank-loans-refinance/stories/201909150025