Deal Flow in the Heartland — From Mississippi and Beyond
February 23, 2019
The political, cultural and economic abyss that separates the heartland from the coasts seems to grow deeper and wider with each passing day, and trying to reconcile the disparities can feel nearly hopeless. But differences among geographic locations aren’t nearly so well-defined or as troubling in the alternative small-business funding industry. What’s more, business opportunities can arise when localities differ.
First the lay of the land: Members of the alt finance community agree that funders and brokers are concentrated in just a few geographic locales—Greater New York City, Southern California and South Florida. Those three areas probably generate more than 75 percent of the industry’s volume, according to Jared Weitz, CEO of United Capital Source and one of three co-chairs of the broker council recently formed by the Small Business Finance Association (SBFA).
Sorting out how the industry differs in various regions can prove challenging. The Internet is erasing regional quirks and alleviating the need for physical proximity, says Steve Denis, SBFA executive director. What’s more, every ISO and funder develops a slightly different way of doing business regardless of location, he notes.
However, to a great degree it’s a matter of tweaking a single general outline for navigating the industry no matter where the office or client is based. That’s partially because many members of the industry conduct business in every state or nearly every state.
That said, old-fashioned, small-town ethics can sometimes seem closer to the surface in shops operating far from the coasts. “We’re focused on the values of our organization—like doing what we say we’re going to do, maintains Tim Mages, chief financial officer at Expansion Capital Group, a funder and broker based in Sioux Falls, S.D. “Some of that maybe comes from the Midwest culture or upbringing.”
Outside the major population centers, the industry occasionally seems a little more “laid-back.” In a light-hearted example of a relaxed heartland approach to the alt funding business, Lance Stevens, an attorney who’s a co-founder of Brandon, Miss.-based TransMark Funding, claims he can underwrite a deal while driving his golf cart and listening to Bon Jovi—all while maintaining his under 5 handicap.
Everything can seem a little more slow in the heartland, where people have time to stop and say hello to strangers, says Weitz. “Some folks are like, ‘Hey, my mailbox is three miles from my house, I check my mail once a week. I do not email. I do not fax,’ ” he observes. “It’s a nice change.”
Interactions are often more informal between the coasts. “Being in the Midwest we don’t use a lot of the lingo and terminology from this space, such as ‘stacking,’” says Austin Moss, a managing partner at Strategic Capital in Overland Park, Kan. That lack of jargon may be good or bad, he admits, but instead the staff speaks in a more general, even “holistic,” financial language.
Then there’s the occasional need for the human touch in the heartland. Deals there are sometimes sealed in person, with an office-park conference room substituting for the community bank building on the town square where merchant used to take out loans. “It’s not a widespread trend, but a handful of the ISOs we do business with actually do face-to-face solicitation,” says Mike Ballases, CEO of Houston-based Accord Business Funding.
In line with that mini-trend, an ISO based in Southern California operates a Texas office that specializes in face-to-face encounters, according to Aldo Castro, Accord’s former vice president of sales and marketing. “It’s rather meaningful here,” he says of using the practice in Texas. “You get on the road and shake a hand. They put a face to a name.”
The process can work in reverse, too. A few of the larger local companies seeking funding from Strategic Capital make the journey to the broker-funder’s Overland Park, Kan., offices, Moss says. Bankers who serve as referral partners also like the opportunity to meet in person, he observes.
The personal encounters often strike Moss as “refreshing,” he admits. That’s because the vast majority of the company’s deals occur online and by phone and fax—all without ever seeing the client in person.
Although the desire for personal contact arises from time to time, most heartland deals don’t hinge upon it. “It’s not a big number, but we see it,” Ballases says of face-to-face meetings. “Could it be the wave of the future? Absolutely not.”
Moreover, for some in the industry, the need for face-to-face discussions barely registers. It’s just not about meeting in person, according to Mages. Instead, he cites the importance of other factors. “Speed, convenience and service are the key differentiators, and that’s all driven by data and analytics,” he declares. Partnerships also drive the company’s business, he notes.
Luck outweighs geography, too, in Mages’ view. “It’s more an issue of right place, right time,” he contends. Deals occur primarily when funders manage to attract business owners’ attention at exactly the time when capital’s needed, he contends.
Besides, lots of people tend to think in wide-ranging ways these days instead of in narrow, provincial modes, Mages continues. At Expansion Capital Group, he notes, executives have differing points of view because they come from commercial banking, investment banking, the Small Business Administration lending program and the credit card industry.
At the same time, people tend to take an increasingly cosmopolitan approach to their jobs, according to Mages. He notes that executives at his company maintain contacts across the continent, often forged in earlier chapters of their careers.
Meanwhile, well-trained employees can use a phone call to gather the details they need and establish a consultative relationship without a thought for geography or the need for face-to-face meetings, Mages says.
However, geography can indeed play a role at least once in a while. In a few cases merchants prefer a funder with an address across town or at least in the home state. Sometimes business owners and referral partners choose local brokers or funders simply because their names sound familiar.
Strategic Capital, for example, does more business at home than anywhere else, Moss says. The company’s headquarters is in the portion of greater Kansas City that spills over from Missouri into the state of Kansas, making the location convenient to a major population center.
But despite the massive size of greater Kansas City, Strategic Capital remains the only alternative small-business funding option in the area—there just aren’t any other local providers, Moss says. It’s not like New York, where banks and merchants can choose from among many brokers and funders, he says.
That trend toward being the only game in town or one of just a few can hold true for most companies in the heartland, Moss maintains. A broker or funder based in Denver, for example, would probably have higher volume there than anywhere else, he notes.
Several reasons explain that geographic bias, Moss continues. “The employees live there and have contacts, and we’re part of the local associations and chambers,” he notes. “We work with just about all the banks in the area, and everyone knows who we are.” The company also handles local government bonds and local construction projects, he says.
Mages offers a different perspective. Only a few small-business owners in South Dakota choose Expansion Capital Group because they prefer dealing with a Midwestern company or because they’ve seen local press coverage or heard Expansion’s recruiting ads on the radio, he maintains.
Hometown, home state or regional preferences aside, executives at Accord emphasize the importance of the small-town approach of knowing their customers as well possible. For Ballases—the Accord chairman who started the company with Adam Beebe, who now serves as CEO—that means combining personal and impersonal approaches to underwriting.
Ballases views funders and brokers as falling into three categories. Some choose a personal, hands-on approach and don’t rely upon algorithms. A second category emphasizes automation. A third blends the personal and the automated. His organization falls into the latter, he says
For Accord, the personal comes into play because of what Ballases has learned in his decades in the banking business. He knows margins and growth rates in his applicants’ industries, and those factors aren’t often incorporated into algorithms, he says.
In fact, commercial banks have failed to learn to evaluate small businesses on their true merits, Ballases continues. Banks tend to underwrite small businesses, which he defines as those in need of $100,000 or less, by using a “skinnyed-down” version of how they underwrite big companies, which they base on general financial information. Instead, he counts on discipline, data and his 50 years of experience in commercial banking to evaluate a merchant on an individual basis.
At another company, TransMark Funding, Stevens and his partner draw upon legal and small-business experience to evaluate potential customers’ creditworthiness. “That causes us to focus on an applicant’s business model and their sustainability, which may boil down to personalities,” Stevens says. Transmark combines those factors with “a little bit of credit metrics” to come to decisions on applications.
The company’s mix of objective and subjective reasoning differs starkly from the thought process at most coastal funders, Stevens says. While his company gives most of the weight to the subjective and just a bit to the objective, big-city competitors tend to do the exact opposite, he says.
Of the last five MCA deals that Transmark funded, the merchants averaged 12 checks returned for insufficient funds per month, Stevens says, noting that he can make that statement “with a straight face.” Sometimes it’s been as high as 35 NSF checks per month for successful applicants. “Those people would not even get into the parking lot of a bank and would not get through the door of any MCA funder who’s using any sort of reasonable metrics,” he adds.
An anecdote helps explain the thinking. Suppose a restaurant has been operating for several years in a town of 50,000 and has amassed 2,200 “likes” on its Facebook page, Stevens suggests. “I’m in,” he exclaims, noting that it would take compellingly negative numbers to convince him that the business won’t survive if he helps it obtains capital to improve its positioning in its market.
The vignette illustrates that a business can do well in the community despite the merchant’s financial difficulties, Stevens says. However, the story doesn’t mean Facebook becomes the only determining factor, he continues. Positive factors for success include good location and marketing, he notes.
The principals at many companies funded by TransMark have credit scores in the low 500’s, Stevens continues. “That’s tough,” he says, “because they’re going to have a lot of history of not living up to their financial obligations.” But if someone with that credit score has personally guaranteed a lease on a storefront for the next two years, they may be unlikely to abandon the business. A big bank might look upon that merchant as insufficiently nimble because of the lease, but TransMark takes the opposite view, he says.
Even if a store, restaurant or contractor is “circling the drain” and about to shut down, TransMark may simply believe the owner has the character to make the business work. “Given our minute default rate, we’re right most of the time,” Stevens maintains, adding that banks see applicants as customers, and TransMark sees them as partners.
The business model requires peering into the future to see how the merchants will look after using perhaps $25,000 in capital to make improvements and while dealing with 18 percent holdback for the next six months, Stevens observes. “If they look strong, I need to fund them,” he says of the company’s prognostications.
To find ISOs who appreciate the TransMark model, the company seeks out purveyors of credit card merchant services, Stevens says. They encounter those merchant-services providers at trade shows and through “some general poking around,” he notes.
The merchant-services people often have long-standing relationships with merchants and thus can feed information into the TransMark way of viewing deals. “Tell me what it looks like when you walk into their store at 11 a.m.,” Stevens says to illustrate the kind of conversation he has with ISOs. “How is their signage?”
Besides understanding clients, it also pays to understand markets, and proximity can help with the latter, according to Ballases and Castro in Houston. “We have an affinity for Texas,” Castro says.
Many of the businesses based in Texas are vendors to people—like mechanics who fix cars or restaurants that feed people—not vendors to businesses, Ballases notes. Vendors who cater to people are better candidates for merchant cash advances than business-to-business companies are, he maintains.
“It’s just a huge state,” Castro declares. “We’ve got a thousand new residents moving to Texas every day.” Nearly 10 percent of the nation’s small businesses operate in The Lone Star State, he notes.
“There’s a convergence of the population growth, a low tax rate, low regulations, low cost of running a small business relative to national levels, and a great small-business environment,” Castro says of the Texas scene. “In addition, the healthcare industry is exploding here, and there are the ancillary businesses to healthcare.”
Meanwhile, the state’s Hispanic entrepreneurs remain under-served by alt funding ISOs, which presents a great untapped opportunity, Castro maintains. Funders who cater to those Hispanic merchants will find them loyal, he predicts. In Texas alone, Hispanic consumers spend half a billion dollars annually, he says.
To capitalize on that burgeoning market, Accord has assembled a team that can help Anglo ISOs bridge the cultural and linguistic gap, Castro says. “We do that every day,” he maintains. “We’re jumping on the phone with merchants and helping them get the funding they need to support the growth of their operations.” Those conversations with merchants do not put Accord in competition with ISOs, Castro notes. Accord does not maintain an inside sales staff and does all of its business through ISOs, he says.
Only a few of those ISOs are based in Texas, according to Ballases. Most of Accord’s ISOs operate from offices in the Northeast, with many in the other common geographic spots of South Florida and Southern California, he says. So that makes Accord a national company despite its emphasis on Texas, Ballases says.
Accord’s experience at home, combined with nationwide contacts in the industry, have convinced the company’s leadership that too many brokers remain unaware of the opportunities in Texas.
That’s why Accord is producing ads, videos, infographics, blogs and social media posts to alert those coastal ISOs to opportunities in Texas. The company even offers a tab called “FundTEX” on its website. “We’re getting the word out,” Castro says of the company’s effort to publicize his state.
Besides operating in areas sometimes overlooked on the coasts, heartland brokers and funders sometimes have to reinvent the industry almost from scratch. Brokers can find themselves teaching the business to potential investors outside the Big Three geographic locations, Moss says. In New York, investors already know the industry and use that familiarity to evaluate brokers, he says.
Brokers and funders also have to deal with the heartland’s lack of workers with industry experience. As the lone company in the market, Strategic Capital, for example, can’t find many prospective employees with previous jobs in the business, Moss notes. “There is no OnDeck or Yellowstone or RapidAdvance down the street to provide a talent pool for hiring,” he says.
That’s good and bad, Moss maintains. New hires don’t require re-training to lose habits that don’t fit the Strategic Capital way of working. But it’s difficult to find underwriters, accountants and other prospective employees with the right background. It doesn’t work to put new salespeople on straight commission because the “ramp-up” period takes longer with employees unfamiliar with the industry, he says.
The lack of local experience sometimes prompts brokers in the heartland to tap the Big Three areas for talent. Expansion Capital Group, for example, has a business development director in New York who came from another ISO, Mages says. Besides cultivating relationships in NYC, the business development expert makes frequent trips to Southern California and South Florida.
Meanwhile, members of the industry who tire of the rapid pace on the coasts might want to consider moving inland to fill the vacant jobs, sources suggest. After all, the heartland has its advantages, according to Moss. “Most people here have houses, and the cost of living is lower than in places like New York,” he says. A spacious five-bedroom house in Kansas City might cost less than a cramped apartment in New York, he notes.
To commute to the company’s suburban office, his typical employee jumps into a car in a climate controlled attached garage, cruises for half an hour or so on roads relatively free of traffic and parks in the lot a few steps outside his office building. It’s less stressful than crowding into a subway car, he notes.
The hinterland’s not as culturally barren as some might believe, Moss continues. The public hears “Kansas City” and they think of tornadoes, cows and the Wizard of Oz, he says. But the reality includes a downtown replete with skyscrapers and pro sports, not to mention lots of tech, healthcare and aerospace companies. “It’s like a mini-Chicago,” he notes.
But a retreat from the coasts may not be in the offing. Ballases expects that the majority of ISOs will continue to concentrate on the East Coast and West Coast because that’s where population growth remains strongest and thus provides the most opportunities. “It’s a numbers game,” he observes.
New York Legislators Introduce Small Business Usury Bill
February 20, 2019Two members of the New York State legislature have introduced a bill to apply consumer usury protections to small businesses. Bill A03638, introduced by New York Assemblymembers Yuh-Line Niou and Crystal Peoples-Stokes define a small business as “one which is resident in this state, independently owned and operated, not dominant in its field and employs one hundred or less persons.”
The bill is separate from the one introduced to outlaw Confessions of Judgment in financial contracts.
Fintech Inevitable, But Petrou Says Risks Abound
February 12, 2019
At the end of last week, two large regional banks, BB&T and SunTrust announced that they are merging. The entity will be the sixth largest U.S. bank and the largest bank merger since the 2008 financial crisis. A MarketWatch story yesterday indicated that large bank mergers are part of a somewhat recent trend, citing the mergers of Chemical Bank with TCF Bank, and Key Bank with First Niagara, both in 2016. (The number of bank acquisitions have been static in 2017 and 2018, with 252 and 253 banks, respectively, according to American Banker.)
If large bank mergers are a trend, Managing Director of Federal Financial Analytics Karen Petrou told MarketWatch that this is in part because banks realize that they can combine resources to develop mobile banking capabilities to compete with online banks.
“If banks don’t come up with ways to innovate, they die,” Petrou told MarketWatch yesterday. “Then consumers are left to do their banking with nonbanks.”
Federal Financial Analytics, where Petrou is the managing director, is a Washington, D.C.-based consulting firm and Petrou is a highly regarded voice in the financial regulation space.
While Petrou acknowledges that online banking is the only alternative if traditional banks don’t innovate, she sees serious problems in fintech which she outlined in a paper published earlier this month, according to American Banker.
For instance, she wrote about the danger of a company like Amazon getting into banking and being able to charge individuals different amounts for the same item based on its knowledge of how much money the customer has. Or, the implementation of better banking policies for people who exercise and eat healthier. Petrou says this favors wealthier people with more time for exercise and greater access to more expensive, healthier food.
“I am all for technology,” Petrou said. “But I spent a lot of time when I was a student at MIT studying tech policy, and there is one after another example of seemingly promising technologies with terrible, unintended consequences.”
Get The Affidavit or Waive It? Examining Confessions of Judgment
February 1, 2019
Caton Hanson, the chief legal officer and co-founder of the online credit-reporting and business-to-business matchmaker Nav, says that his Salt Lake City-based company would not associate with a small-business financier that included “confessions of judgment” in its credit contracts.
“If we understood that any of our merchant cash advance partners were using confessions of judgment as a means to enforce contracts,” Hanson told AltFinanceDaily, “we would view that as abusive and distance ourselves from those partners. As a venture-backed company,” Hanson adds, “we have some significant investors, including Goldman Sachs, and I’m sure they would support us.”
Steve Denis, executive director of the Small Business Finance Association, which represents companies in the merchant cash advance (MCA) industry, says that, as an organization, “We’ve taken a strong stance against confessions of judgment.”
He reports that his Washington, D.C.-based trade group is prepared to work with legislators and policy-makers of any political party, regulators, business groups and the news media “to ban that type of practice.
“We’re fighting against the image that we’re payday lenders for business,” Denis says of the merchant cash advance industry. “We’re trying to figure out internally what we can do to stop that from happening and we have been speaking to members of Congress and their staff.”
“Confessions of judgment,” says Cornelius Hurley, a law professor at Boston University and executive director of the Online Lending Policy Institute, “are to the merchant cash advance industry what mandatory arbitration is to banks. Neither enforcement device reflects well on the firms that use them.”
These are just some of the reactions from members of the alternative lending and financial technology community to a blistering series of articles published by Bloomberg News on the use—and alleged misuse—of confessions of judgment (COJs) by merchant cash advance companies. The series charges the MCA industry with gulling unwary small businesses by not only charging high interest rates for quick cash but of using confession-laden contracts to seize their assets without due process.
The Bloomberg articles also reported that it doesn’t matter in which state the small business debtors reside. By bringing legal action in New York State courts, MCA companies have been able to use enforcement powers granted by the confessions to collect an estimated $1.5 billion from some 25,000 businesses since 2012.
“I don’t think anyone can read that series of articles and honestly say what went on were good practices and in the best interest of small business,” says SBFA’s Denis, noting that none of the companies cited in the Bloomberg series belonged to his trade group. “It’s shocking to see some companies in our space doing things we’d classify as predatory,” he adds. “As an industry we’re becoming more sophisticated, but there are still some bad actors out there.”
A confession of judgment is a hand-me-down to U.S. jurisprudence from old English law. The term’s quaint, almost religious phrasing evokes images of drafty buildings, bleak London fog, and dowdy barristers in powdered wigs and solemn black gowns. (And perhaps debtor prisons as well.)
Yet while the legal provision’s wings have been clipped—the Federal Trade Commission banned the use of confessions of judgment in consumer credit transactions in 1985 and many states prohibit their use outright or in such cases as residential real estate contracts—COJs remain alive and well in many U.S. jurisdictions for commercial credit transactions.
Even so, most states where COJs are in use, such as California and Pennsylvania, have adopted safeguards. Here’s how the San Francisco law firm Stimmel, Stimmel and Smith describes a COJ.
“A confession of judgment is a private admission by the defendant to liability for a debt without having a trial. It is essentially a contract—or a clause with such a provision—in which the defendant agrees to let the plaintiff enter a judgment against him or her. The courts have held that such a process constitutes the defendant’s waiving vital constitutional rights, such as the right to due process, thus (the courts) have imposed strict requirements in order to have the confession of judgment enforceable.”
In California, those “strict requirements” include not only that a written statement be “signed and verified by the defendant under oath,” but that it must be accompanied by an independent attorney’s “declaration.” If no independent attorney signs the declaration or—worse still—the plaintiff’s attorney signs the document, the confession is invalid.
But if the confession is “properly executed,” the plaintiff is entitled to use the full panoply of tools for collection of the judgment, including “writs of execution” and “attachment of wages and assets.”
In Pennsylvania, confessions of judgment are nearly as commonplace as Philadelphia Eagles’ and Pittsburgh Steelers’ fans, particularly in commercial real estate transactions. Says attorney Michael G. Louis, a partner at Philadelphia-area law firm Macelree Harvey, “They may go back to old English law, but if you get a business loan or commercial lease in Pennsylvania, a confession of judgment will be in there. It’s illegal in Pennsylvania for a consumer loan or residential real estate. But unless it’s a national tenant with a ton of bargaining power—a big anchor store and the owner of the shopping center really wants them—95% of commercial leasing contracts have them.
“And any commercial bank in Pennsylvania worth its salt includes them in their commercial loan documents,” Louis adds.
Pennsylvania’s laws governing COJs contain a number of additional safeguards. For example, the confession of judgment is part of the note, guaranty or lease agreement—not a separate document—but must be written in capital letters and highlighted. One of the defenses that used to be raised against COJs, Louis says, was that a contractual document was written in fine print “but we haven’t seen fine print for years.”
Other reforms in Pennsylvania have come about, moreover, as a result of a 1994 case known as “Jordan v. Fox Rothschild.” Says Louis: “It used to be lot worse. You used to be able to file a confession of judgment and levy on a defendant’s bank account before he knew what happened. It was brutal. But after the Fox Rothschild case, they changed the law to prevent taking away a defendant’s right of notice and the opportunity to be heard.”
Because of that case, which takes its name from the Fox Rothschild law firm and involved a dispute between a Philadelphia landlord renting commercial space to Jordan, a tenant, the law governing COJs in Pennsylvania requires, among other things, a 30-day notice before a creditor or landlord can execute on the confession. During that period the defendant has the opportunity to stay the execution or re-open the case for trial.
Defenses against the execution of a COJ can entail arguments that creditors failed to comply with the proper language or procedures in drafting the document. But the most successful argument, Louis says, is a “factual defense.” Louis cites the case of a retail clothing store renting space in a shopping center that has a leaky roof. In the 30-day notice period after the landlord invoked the confession of judgment, the tenant was able to demonstrate to the court that he had asked the landlord “ten times” to fix the roof before spending the rent money on roof repairs. In such a case, the courts will grant the defendant a new trial but, Louis says, the parties typically reach a settlement. “Banks generally will waive a jury trial,” he notes, “because they don’t want to take a chance of getting hammered by a jury.”
A number of states, including Florida and Massachusetts ban the use of confessions of judgment. That’s one big reason that Miami attorney Roger Slade, a partner at Haber Law, advises clients that “there’s no place like home.” In other words: commercial contracts should specify that any legal disputes will be adjudicated in Florida. “It’s like having home field advantage in the NFL playoffs,” Slade remarked to AltFinanceDaily. “You don’t want to play on someone else’s turf.”
He has also been warning Floridians for several years against the way that COJs were treated by New York courts. Writing in the blog, “The Florida Litigator,” Slade—a native New Yorker who is certified to practice law there as well as in Florida counseled in 2012: “If you live in New York, a creditor can have your client sign a confession of judgment and, in the event of a default on a loan, can march directly to the courthouse and have a final judgment entered by the clerk. That’s right—no complaint, no summons, no time to answer, no two-page motion to dismiss. The creditor gets to go right for the jugular.”
In addition, because of the “full faith and credit clause of the U.S. Constitution,” Slade notes in an interview, a contract that’s enforced by the New York courts must be honored in Florida. “Courts in Florida have no choice,” Slade says. “It’s a brutal system and it’s unfortunate.”
In December, two U.S. senators from opposing parties—Ohio Democrat Sherrod Brown and Florida Republican Marco Rubio—introduced bipartisan legislation to amend both the Federal Trade Commission Act and Truth in Lending Act to do away with COJs. Their legislative proposal reads:
“(N)o creditor may directly or indirectly take or receive from a borrower an obligation that constitutes or contains a congnovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process theron.”
But with a dysfunctional and divided federal government, warring power factions in Washington, and an influential financial industry, there’s no telling how the legislation will fare. Meantime, the New York State attorney general’s office announced in December that it will investigate the use of COJs following the Bloomberg series. And New York Governor Andrew Cuomo has declared support for legislation that will, among other things, prohibit the use of confessions in judgment for small business credit contracts under $250,000 and restrict judgments by New York courts to in-state parties.
But if New York State or Congressional legislation are adopted it can have “unintended consequences” to merchant cash advance firms in the Empire State—and to their small business customers as well—asserts the general counsel for one MCA firm. “Losing the confession of judgment will be removing what little safety net there is in a risky industry,” the attorney says, noting that the industry has roughly a 15% default rate.
“It is not as powerful a tool as the Bloomberg news stories would have you believe,” this attorney, who spoke on the condition of anonymity, told AltFinanceDaily. “The suggestion seems to be that the MCAs can use the confession of judgment to get back the total amount of money due—and then some—while leaving a trail of dead bodies behind. But that’s not the case.
“What is much more likely to be the case,” he adds, “is that MCA companies try to get the defaulting merchant back on track. And—probably more than we should and only after we’ve tried to reach out to them and failed—do we then reluctantly use the COJ as a last resort. At which point we hope we can recover some part of our exposure. The numbers vary, but the losses are always in the thousands of dollars. These are not micro-transactions.
“What’s going to happen,” he concludes, “is that It will not make sense for us to work with those merchants most in need of working capital. The unfortunate reality is that businesses who don’t have collateral and can’t get a Small Business Administration product will be left out in the cold.”
All of which prompts BU professor Hurley to argue that the “Swiss cheese” system of financial regulation among the 50 states continues to be a root cause of regulatory confusion. Echoing Miami attorney Slade’s concern about New York courts’ dictating to Florida citizens, Hurley likens the situation governing COJs with the disorderly array of state laws governing usury regulations.
In the 1978 “Marquette” decision, the U.S. Supreme Court ruled that a Nebraska bank, First of Omaha, could issue credit cards in Minnesota and charge interest rates that exceeded the usury rate ceiling in the Gopher State. Since then, usury rates enacted by state legislatures have become virtually unenforceable.
“The problem we’re seeing with confessions of judgment is a subset of the usury situation,” Hurley says. “One state’s disharmony becomes a cancer on the whole system. It’s a throwback to Colonial times with 50 states each having their own jurisdictions—and it doesn’t work.”
Hurley’s Online Lending Policy Institute has joined with the Electronic Transactions Association and recruited a phalanx of “academics, non-banks, law firms and other trade associations as members or affiliates” to form the Fintech Harmonization Task Force. It is monitoring the efforts by the 50 states to align their regulatory oversight of the booming financial technology industry which was recently recommended by a U.S. Treasury report.
Tom Ajamie, who practices law in New York and Houston and has won multimillion-dollar, blockbuster judgments against “dozens of financial institutions” including Wall Street investment firms, also argues for greater regulatory oversight. He urges greater funding and expansion of the powers of the Consumer Financial Protection Bureau to rein in “the anticipatory use” of confessions of judgment in commercial transactions.
However, notes Catherine Brennan, a partner at Hudson Cook in Baltimore, the job of protecting small businesses is outside the agency’s mandate. “The CFPB doesn’t have authority over commercial products as a general rule,” she explained in an interview. “Consumers are viewed as a vulnerable population in need of protections since the 1960’s.” As a society “we want protection for households because the consequences are high. A family could become homeless if they lose a house. Or (they) could lose employment if they lose a car and can’t drive. And there is also unequal bargaining power between lenders and consumers.
“Large institutions have lawyers to draft contracts and consumers have to agree on a take it or leave it basis. So there’s not a lot of negotiation and government has decided that consumers need protections, including a (Federal Trade Commission) ban on confessions of judgment.”
But Christopher Odinet, a law professor at the University of Oklahoma and a member of Hurley’s harmonization task force, sees the efforts of the federal government and the states to grapple with confessions of judgment as further recognition that small businesses have more in common with consumers than with big business. The COJ controversy follows on the recent passage of a commercial truth-in-lending bill by the State of California which, for the first time, stipulated that consumer-style disclosures should be included in business loans and financings under $500,000 made by non-bank financial organizations.
He cites the close-to-home example of an accomplished professional who got in over his head in financial dealings. “I recently observed a situation where a family member who is a very successful and affluent medical professional was relying on his own untrained business skills,” Odinet says. “He was about to enter into a sophisticated and complex business partnership relying on his intuition and general sense of confidence in the other party.”
Odinet says that he recommended that his relative hire a lawyer. Which, Odinet says, he did.
Yellowstone Capital LLC Appoints Tangela Griffin as Chief Compliance Officer to Enhance its Compliance and Ethics Practices
January 23, 2019Hiring Evidence of Company’s Commitment to Compliance
New York, N.Y. (January 23, 2019)— Yellowstone Capital LLC (a Fundry Brand), a fintech company offering alternative financing to a wide variety of businesses, has appointed Tangela Griffin to the position of Chief Compliance Officer. Ms. Griffin will be responsible for enhancing and providing oversight of the company’s Compliance and Ethics Program, including regulatory compliance. Ms. Griffin will report directly to the Company’s Chief Executive Officer, and its President.
“Yellowstone recognizes the importance of a strong corporate compliance function and is excited that Tangela has joined our organization to spearhead and continue those efforts,” the company said in a statement.
Ms. Griffin brings extensive industry experience in regulatory compliance and risk management to Yellowstone. She is a former Office of the Comptroller of the Currency (“OCC”) Large Bank Supervision Compliance Examiner and most recently served as the Head of Compliance at a financial services technology company. She previously held the position of Senior Vice President at Citibank and Deputy Compliance Officer/Assistant General Counsel at a foreign banking organization, amongst others.
Ms. Griffin holds a B.A. in History from Old Dominion University, a J.D. from St. John’s University School of Law and is a member of the New York State Bar. She is also a FINRA Dispute Resolution Arbitrator.
Trained at OnDeck, LendingFront Founders Help Banks Lend to Small Businesses
January 9, 2019
Yesterday LendingFront announced that it has raised $4 million to help deliver its white label software designed to help banks and other financial institutions lend to small businesses. The company was founded in 2015 by two former OnDeck employees, Jorge Sun and Dario Vergara.
Sun was the Chief Credit Officer at OnDeck from 2007 to 2012 and said he was the company’s third hire. Vergara joined OnDeck as its Chief Technology Officer in 2008 and was also among the first to join the company, Sun said. They both left before OnDeck went public in 2014 and took other jobs before reconnecting to create LendingFront together. Sun said that it is very difficult to create a technology company inside a large bank, which is what he tried to do in his job at Capital One, following his time at OnDeck. Vergara was working as VP of Technology at Bonobos, an online clothing company.
As Sun began talking with Vergara about going out on their own, he recalled telling Vergara: “There are no platforms in this space directly created to help lenders become more efficient…We’ve built this once [at OnDeck], let’s build it again. But the difference now is it’s strictly a technology company. We take no risk, we don’t lend. All we’re doing is powering other lenders.”
Sun said that LendingFront is “lender agnostic,” in that they license out their proprietary lending platform to any financial institution, including banks, community banks, leasing companies and Community Development Financial Institutions.
Their customers pay them a licensing fee and the customer, say a bank, sets its own parameters with regard to underwriting. The platform simplifies the underwriting process, but completely allows for customization and design of the customer experience, Sun said.
The idea of helping banks become better online lenders is not completely unique. In fact, the founders’ former employer, OnDeck, recently launched a separate entity called ODX, with the mission of making banks better lenders to small businesses.
But Sun said that while ODX and LendingFront both help banks, there is a difference between the two. He said the difference is that ODX is more of a full service shop acting on behalf of a bank.
“With us, a bank is using our platform like using Excel…versus [using] Excel and then giving it to a different company and saying ‘use Excel on our behalf.’”
Sun said that customers have funded $150 million through the LendingFront platform since they started licensing it out in 2016. They previously raised $1.6 million in 2016 and they employ 24 people in an office in New York.
Former Merchant Cash Advance CFO Charged With Fraud by New York Attorney General
January 4, 2019
A former merchant cash advance CFO and executive for a fund that provides capital to merchant cash advance companies, has been charged with fraud by the New York Attorney General. The allegations against Stephen Brown stem from his role as CFO of Cardis Enterprises International, a company that claimed to possess patented and proprietary technology to make low-value credit card transactions less expensive for merchants. Brown is the former CFO for Capital Stack, LLC/eProdigy Financial in New York. In reality, Cardis was a massive fraud and a ponzi scheme, the Attorney General alleges. The company raised tens of millions of dollars from duped investors.
Brown is one of twelve defendants, but is described as the most senior financial executive of the firm whose principal role was to draft and send investor update letters, which contained a host of false statements and omissions.
Among the allegations against Brown is that he lied to investors about being close to finalizing deals with Sony, Warner, and Universal. “At the time of Defendant Brown’s representation, only one introductory meeting between Cardis and each music company had taken place, and the parties had not even executed non-disclosure agreements,” the complaint says. Several other business deals Brown announced were either imaginary, had never made it past a simple introduction, or had already been outright rejected by the prospective partner.
Despite being the CFO, Brown did not even maintain a basic income statement, a formal share registry, or comprehensive records of its debts and obligations. When the scheme was suspected by investors, Brown doubled down on the lies, the complaint says.
On September 24, 2015, a Cardis investor emailed Defendant Brown asking for the “latest on Cardis” and whether it was “a complete loss,” while mentioning a recent investor lawsuit. Defendant Brown, copying Defendant Rosenblatt, responded that the lawsuit claiming fraud was “frivolous,” while claiming that Cardis’ relationship with Roc Nation was “developing” and ongoing. In fact, the lawsuit had merit, and Cardis’ relationship with Roc Nation was long over.
On February 28, 2018, a Cardis investor recorded a telephone conversation with Defendant Brown. The investor asked “what happened to the cash” investors put into Cardis. Defendant Brown responded by detailing the Company’s large budget and staff, while failing to disclose the substantial misuse of investor funds. The investor also questioned Defendant Brown about various investor lawsuits against Cardis and its principals. The investor asked: “After reading those lawsuits, why should we think that the company has any future?” In response, Defendant Brown told the investor “the lawsuits were not the most credible lawsuits,” attributing them to “angry investors.” Defendant Brown later told the investor “none of those lawsuits have any merit to them.” In fact, there was substantial merit to the investor lawsuits.
These misrepresentations and omissions were material to investors because they bore directly on Cardis’ viability.
The New York Post ran a story that labeled Cardis a Bernie Madoff-style scheme that falsely claimed ties to Jay-Z’s entertainment company.
The defendants stand accused of Material Misrepresentations, Repeated and Persistent Fraud and Illegality, Actual Fraud, Equitable Fraud, and Constructive Fraud. The Attorney General is pursuing restitution for victims, a ban from the securities industry in the State of New York, and to liquidate the company.
The docket # is 452353/2018 in the New York Supreme Court. The allegations have not yet been proven. According to LinkedIn, Brown currently lists himself as the President of GMA USA, LLC, President of CoreFund Capital LLC, and the CFO of Nanovibronix. He also lists being the CFO of eProdigy Financial for almost 3 years until early 2017.
AltFinanceDaily’s Most Popular Stories of 2018
December 22, 2018
Five of the top 10 most read stories of 2018 were related to the saga of 1st Global Capital; The bankruptcy, SEC charges, the revelation that they had made a $40 million merchant cash advance, and finally the devastating news of that deal falling apart. We decided to lump all of them together in our #1 slot, but first, the following story was the most independently read of 2018:
The Saga of 1st Global Capital
1. Largest MCA Deal in History Suffers Multiple Closures was picked up by ABC News in California, placing AltFinanceDaily’s website on TV for the first time.
These were the other most read stories related to 1st Global Capital
- 1 Global Capital Files Chapter 11
- Syndication at Heart of SEC and Criminal Investigation into 1st Global Capital
- 1st Global Capital Charged With Fraud by SEC
- The Largest Merchant Cash Advance in History
Bloomberg Businessweek began publishing a series in November about the allegedly scandalous merchant cash advance industry. An initial review by AltFinanceDaily uncovered questionable holes in their reporting, but when the series’ senior editor thanked a state senator for proposing legislation in response, suspicious ties were uncovered, followed by one Bloomberg reporter wiping his twitter account clean. Bloomberg’s exaggerated series dubbed #signhereloseeverything has spawned a highly popular counterseries that has challenged Bloomberg’s reporting. We call it #tweetherewipeeverything. The following stories were all in the year’s top 12 most read, but we’ve lumped them together here at #2.
The Bloomberg Blitz
2. Multimillionaire CEO Claims Predatory Lenders are Causing Him to Sell His Furniture for Food
The other two were:
Arrested for Data Theft
3. CAUGHT: Backdoored Deals Leads to Handcuffs was the year’s third most read story.
MCAs are Not Usurious
4. It’s Settled: Merchant Cash Advances Not Usurious came in at #4 this year, ending the debate that has persisted in hundreds of cases at the trial court level in New York State.
In October 2016, the plaintiffs sued defendant Pearl in the New York Supreme Court alleging that the Confession of Judgment filed against them should be vacated because the underlying agreement was criminally usurious. As support, plaintiffs argued that the interest rate of the transaction was 43%, far above New York State’s legal limit of 25%. The defendant denied it and moved to dismiss, wherein the judge concurred that the documentary evidence utterly refuted plaintiffs’ allegations. Plaintiffs appealed and lost, wherein The Appellate Division of The First Department published their unanimous decision that the underlying Purchase And Sale of Future Receivables agreement between the parties was not usurious.
Debt Settlement Company Sued
5. ISOs Alleged to Be Partners in Debt Settlement “Scam” in Explosive Lawsuit was #5 in 2018. The lawsuit ultimately settled and resulted in a big payout to the MCA companies.
A Broker’s Bio
6. The Broker: How Zach Ramirez Makes Deals Happen was #6. AltFinanceDaily interviewed Zachary Ramirez to find out what makes a successful broker like him tick, how he does it, and what kinds of things he’s encountered along the way.
Ban COJs?
7. Senate Bill Introduced to Ban Confession of Judgments Nationwide was #7. Although this is related to the Bloomberg Blitz, the introduction of this bill fits more neatly into a category of its own.
Who’s Funding How Much?
8. A Preliminary Small Business Financing Leaderboard was #8. Despite this being published early in the year and offering detailed origination volumes for several companies all in one place, it wasn’t as well-read as all the drama that unfolded later in the year. Unsurprisingly, a chart of The Top 2018 Small Business Funders by Revenue ranked right behind this one, but we’ve lumped it in with #8 since it’s related.
Thoughts by Ron
9. Ron Suber: ‘This Industry Will Look Very Different One Year From Now’ was #9. Known as the Magic Johnson of fintech, the 1-year prediction by former Prosper Marketplace president Ron Suber, originally captured in the LendAcademy Podcast, resonated all throughout the fintech world. Will he be proven correct?
A Rags to Riches Tale
10. How A New Hampshire Teen Launched A Lending Company And Climbed Into The Inc. 500 was #10.
Josh Feinberg was not a complete newbie when he started in the lending business in 2009, but he also had a long way to go to find success. His dad had been in the business for 15 years and shortly after graduating high school, Josh started to work in equipment financing and leasing at Direct Capital in New Hampshire, his home state. He then had a brief stint working remotely for Balboa Capital, but he wasn’t sure that finance was for him.
He was 19, with a three year old daughter, and he took a low paying job working at a New Hampshire pawn shop owned by his brother and a guy named Will Murphy.
“I was making $267 a week at the pawn shop and I was having to ask friends to help me pay my rent for a room,” Feinberg said. “So at that point, I realized that something needed to change.”
