Do Not Borrow from Predatory Lenders – No Matter How Cash Strapped You Are – It is a Lose-Lose

Hard Money (a/k/a Predatory) Lenders are More Likely to Sink you Than Save You! Avoid!

Dear Reader:

We could warn you off hard money lenders until the moon turns blue; and some of you will be convinced, nonetheless, to take out a hard money loan. These are also referred to as predatory Lenders who offer Predatory Loans. In times like Covid-19 when people are in financial dire straits, it may seem like the best possible option. It is not. This cannot be emphasized enough – these loans are not worth it. They are expensive and will most likely cost you your current business and a chance at a future. Inevitably these hard money loans end in a loss, regardless of best efforts, and often that reality takes months to set in, when finances have already been largely dissipated and the agony prolonged. And, when you are at your darkest, another offer will come into your “Inbox” providing the euphoric feeling that you have found an option. You have not.

The following is a warning and is intended to serve you well. “Dealstruck”

We have a spreadsheet of names of companies that offer hard-money loans, their top tier officials, their investors in some cases, their attorneys and collection agents and how many of these companies are interconnected. Many of these companies are represented by a cadre of collaborative attorneys who communicate with one another, so where someone has defaulted on one loan, there is another waiting in the wings.

That spreadsheet is available upon request.

Hard money loans are generally provided absent credit review, making them attractive to desperate borrowers with lousy credit. Depending upon the amount requested, the review is one that requires submission of bank account statements and receivables, nothing else. It seems too good to be true because it is too good to be true.

As an illustrative example using very simple numbers, you are short $20,000 and need it quickly. You take out a hard-money loan because they guarantee you an interest rate of 1.5% and immediate cash. Right at the outset, you get stuck with a fee usually referred to as a processing fee, an implementation fee, a finder’s fee or some other name making it feel acceptable. The lender promises this fee will be taken and capitalized from the top of the loan so you will not even notice.

In other words, the fee can be $2,000, $4,000 – any number but it feels palatable because there are no “closing costs.” Let’s assume for illustration that the fee is $2,000 or 10% of the total loan. You now owe $22,000.00 but have access to $20,000.00 of that money. You have already paid 10% on the loan before even getting started. Now for the sake of ease, the payback term is 10 months (these are generally short-term loans) and also for the sake of ease, lets pretend that this is a 0% interest loan – to make the numbers easier. Remember, you have already paid 10% capitalized on the top or 1%/month over 10 months. In essence that is 12% per year.

Now, lets assume that your monthly draw is $2,200/month (ease of numbers). This means that they withdraw $2,200.00 from your account each month. But, they tell you that for each draw, they are going to take another $110.00 for servicing fees. That means they are actually taking $2,310.00/month. That’s actually 1.55% each month. This adds up to $3,100.00 over 10 months or 15.5% over that same 10 months and that is without including what we said was the 1.5% interest fee that you agreed to. Consider how much this would be if we had calculated in the 1.5% interest rate you were offered as a “low interest loan”. You are being taken for a financial waterboarding and not even realizing it.

To add insult to injury, most of these companies require you sign a personal guarantee and a Confession of Judgement. This COJ means, if you fail to make a payment – or default on the loan – the Lender can submit the confession of judgement and you can be held to account for the entire debt even if you have completed 1 payment or 9 payments, it does not matter. In the simple example above, you are responsible for $23,100.00 without even considering the interest rate. To put it bluntly, you are generally on the hook for the entire amount of the debt until it is fully paid off.

Last year the State of New York implemented a law that precludes the use of COJ’s as a remedy. It has not stopped many of these Lenders because a COJ is legal in other states even if it is not legal in New York. So, many of these companies get around that by changing the forum and jurisdiction of both the agreements you sign and the place of adjudication. The combination is toxic.

For today we are going to warn you against the following company: “Dealstruck.” We have chosen this company because they are impossible to avoid once they get your email and/or telephone numbers. The emails hit your inbox daily, if not more than that, and it may seem like a worthwhile idea to look at the company and see what they have to offer. It is not. After multiple emails and telephone requests, they have not removed at least one person’s information from their registers.

The following is a text of their email. This company has been reported to the authorities for their harassing tactics. We offer a warning against using this company and companies like it, which are all some form of predatory lenders offering hard money loans.

In the interest of protecting a modicum of Dan’s privacy, we have removed his cell phone. The rest of the email is the actual text of what you might see coming into your email box. It is entitled “As you wish” or “More As you Wish” in its most recent iteration as follows :

Hi,   I wanted to introduce myself and go over a few available funding options we have for you. Our rates start at 3% and we just started offering monthly payments. It would help if you could answer the following quick questions:   How much are you looking for? Are you seeking short or long term funding options? Do you have any open balances? How soon were you looking to get funded? Do you have any current competing offers you would like us to beat?   Looking forward to your response. Alternatively, feel free to reach out to me on my cell to discuss open options.     Best Regards, Dan Rubin   Dan Rubin VP Of Sales Email: Dan@dealstruck.com Cell: REDACTED Office: REDACTED

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 Toxicity of Predatory Lenders and Nursing Home Lobbies and the Politicians They Buy- Ohio House Speaker

Dear Reader:

We have done countless stories on predatory lenders and nursing home owners, lobbyists, their attorneys and the tactics they employ to buy favorable treatment from politicians and lawmakers. There is little difference between the below and what goes on in other areas of the country.

New York is prime territory for the morally and ethically challenged, their lobbyists and high powered, publicly connected attorneys. Cleveland, Pennsylvania, Florida, Arizona, these places are most certainly not immune. Politicians looking for another political victory are more than willing to sell their souls for 25K, 50K whatever it takes. The below article sets that in full view.

The victims in the predatory lending schemes are the borrowers, already vulnerable to inducement and sent into an abyss of cash strapped quicksand only to drown in debt and despair. The victims in the power of the nursing home schemes are the patients and their families who often don’t realize they’ve been victimized until the patient is dead.

The federal authorities should get involved. Ohio is not the exception, it’s now swiftly becoming the rule in two industries that are fraught with lacking oversight, vulnerability, financial incestuousness and money that is almost coined.

Read on:

Feds: Householder pay-to-play scheme extended beyond House Bill 6

Ohio House Speaker Larry Householder’s alleged pay-to-play scheme to pass legislation for special interests extended beyond House Bill 6 and its $1 billion ratepayer bailout of a pair of ailing nuclear power plants.

Householder and charged co-conspirator Neil Clark, a lobbyist, are portrayed in a federal affidavit as engaging in an active effort to solicit big, secretive checks in exchange for favorable consideration of bills.

The Perry County Republican talked of adding money from the payday-loan, nursing home and other industries to the $60 million funneled by FirstEnergy to Generation Now, the “dark money” nonprofit Householder allegedly controlled to defend House Bill 6 from a repeal attempt.

An affidavit from an FBI agent detailing the federal racketeering charges against Householder and his alleged co-conspirators reveals that “other” non-energy interests paid nearly $2.9 million into Generation Now, which was not required to reveal its donors.

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.

Predatory Lenders, MCA Lenders, Only One Person Wins, the Lender…. The AG is Catching On

ATTORNEY GENERAL LETITIA JAMES IS SUING A GROUP OF MERCHANT CASH ADVANCE COMPANIES FOR CHARGING ILLEGALLY HIGH INTEREST

Dear Reader:

We have written about predatory lenders many times. They are one of several pet peeves of ours. Most are merciless, without any compassion and a mantra: “it’s all about money not mizvas [good deeds].” We hope to see the entire business get tanked. In our opinion, the merchant cash advance business is nothing more than vultures eating the carcasses of poor and unsuspecting victims, sometimes threatening their families and often destroying their lives and others. It is a scheme of epic proportions, with intertwined credit card swiping businesses, investment businesses, brokers, lawyers and collection agents.

There is nothing worse than the financial havoc they wreak, all under the guise of quick and easy loans. They destroy small businesses but make a huge fortune in the process.

And, behind the scenes, the investors in many of the MCA loan companies are interrelated groups of people who hire the same attorneys, use the same brokers, have access to the same personal information of the Borrowers, have a network of go-to persons and politicians, judges and jurists, it is big business. The entire structure is not for the financially faint of heart.

Let’s start by taking you back on a walk down memory lane, our explanation of how the whole scam works.

First, the merchant banks convince a company (Company A) to use their credit card swiping system (thereby giving the merchant bank access to Company A’s receipts and invoices). Then, they share your information with potential “funding groups” all hidden under the same umbrella. Next, Company A has a bad month or two, Covid-19 strikes, who knows? Those behind the scenes at the merchant cash advance company notice that Company A is getting charge backs or business has slowed. In other words, the merchant cash advance company sees that their credit card swiping client is becoming vulnerable to liquidity problems. 

So, the merchant cash advance company sends a broker in to offer assistance, not effectively a loan but a purchase of invoices. In other words, the broker suggests that Company A borrow money against the receipts, selling it as quick and easy cash. It is characterized not as a loan, but as a purchase of receipts, thereby avoiding any and all usury laws, banking laws, regulators and the list goes one. Company A is desperate.

Cash-poor Company A needs the money and a conventional bank loan will not work. The merchant cash advance company offers “low interest” rates (not actually low interest but Merchant A is too cash-strapped to chart the numbers). The merchant cash advance company promises quick money, no credit reports, a few days from application to cash, all fees get tagged to the Loan (increasing the principal amount) but the draw of few out-of-pocket fees are weighed against desperation. So, Company A takes the bait.

What poor Company A does not know is that the fees tagged (or capitalized) to the principal amount increase the loan by about 20% (another 20% for interest purposes). There is a daily or even a weekly draw and there are fees each time a draw is made, directly from the merchant company, increasing payments.

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