South Dakota On The Brink of Reopening Business Lending

In November 2016, voters in South Dakota approved Initiated Measure 21, which prohibited state-licensed money lenders from making a loan that imposes total interest, fees, and charges at an all-in annual percentage rate greater than 36%. The rate cap includes all charges for ancillary products or services and any other charge or fee incidental to the extension of credit. The rate cap applies to commercial and personal loans originated after November 16, 2016. The measure, which does not apply to state and national banks, bank holding companies, other federally-insured financial institutions, or state-chartered trust companies or to businesses that provide financing for goods and services they sell, significantly inhibited the ability of commercial lenders to originate loans to businesses and merchants in the state. Now, the South Dakota Legislature is poised to re-open lending in the state.

Senate Bill 166, which the Senate and the House have approved, would exempt “business to business lending” from the reach of the 36% rate cap. “Business to business lending” is defined as a loan of more than $5,000 made to a borrower with a federal employer identification number “in furtherance of a business or commercial venture that is not for personal, family, or household use and is not secured by a nonpurchase money security interest in a motor vehicle.” Commercial lenders would still need the money broker license, however, to lend directly in the state.

Republican Governor Dennis Daugaard is expected to sign the bill, which would take effect July 1, 2017.

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New York Bill Calls For Study of Online Small Business Loans

In what likely signals the first step in an ongoing campaign to regulate small business lending in the Empire State, New York Assembly Bill 10440, introduced May 27, 2016, would requires the Superintendent of Department of Financial Services to study and issue a report on online small business lending products and platforms that originate from lenders licensed by New York state or advertised to small businesses within the state. The study mandate would capture all online lenders advertising to New York merchants, whether they originate the loans through a bank partnership or directly as an unlicensed lender relying on the law of another state.

The study must address – at a minimum – the following:

(a) whether online lenders are offering credit at reasonable and transparent  interest rates and charging reasonable and transparent fees and  payment terms;

(b) whether lenders  offer  inclusive  and  non-discriminatory  credit access and observe fair lending practices;

(c) what type of underwriting is conducted before issuing credit;

(d)  whether lenders report loan repayment information to major credit bureaus and consult the borrower’s credit data when underwriting a loan;

(e) whether lenders are offering small businesses the opportunity  for further financial and business planning and the opportunity to establish a more traditional, long-term banking access to credit; and

(f)  a  review  of  any other products or practices the superintendent deems relevant to small business access to capital.

The study must be completed by January 1, 2018.

The New York legislature adjourns June 16, so it seems unlikely that the bill would be approved this session.

New York-2015-A10440-Introduced

Forum Selection Clause Upheld in the 7th Circuit

The extension of financing to small business has undergone something of a revolution in the last few years. With the growth of Independent Sales Organizations and the advent of online lending, more and more small businesses are obtaining credit from alternative finance sources. Many of this alternative financiers operate with certain contractual clauses hard-baked into their merchant-facing agreements. A recent U.S. Court of Appeals decision sheds light on one clause commonly found in these agreements – the forum selection clause.

A forum selection clause, although anathema in a consumer financing agreement, is fairly common in a commercial agreement. The clause binds the parties to face lawsuit (or bring lawsuit) in a specific court. For small business financiers with a nationwide footprint, the forum selected is usually one that is convenient to them, but inconvenient to merchants who do not happen to reside in the same location. Forum selection clauses allow small business financiers to obtain consistency in the enforcement of judgments and certainty of processes necessary to file litigation. Forum selection clauses are generally not prohibited in a commercial setting. Continue reading “Forum Selection Clause Upheld in the 7th Circuit”

2016 Consumer Financial Services Conference

Hudson Cook LLP recently held its Consumer Financial Services Conference. I presented on two panels. The PowerPoint presentations for each follow:

BANK PARTNERSHIP AND THE VALID WHEN MADE DOCTRINE: UPDATE ON MADDEN V MIDLAND

Panelists:
Cathy Brennan, Partner, Hudson Cook, LLP, Hanover, MD
Meghan Musselman, Partner, Hudson Cook, LLP, Hanover, MD
Joseph Vitale, Partner, Schulte Roth & Zabel LLP, New York, NY

Description of Panel:
In the recent decision in Madden v. Midland Funding, LLC, the U.S. Court of Appeals for the Second Circuit held that National Bank Act preemption of state usury laws did not apply to accounts owned and serviced by Midland Funding, LLC, a non-bank debt buyer, even though a national bank originated the account. The panel will discuss how the decision undermines the “valid when made” theory and impedes the ability of national banks to sell loans they originate, thus reducing their ability to lend. The panel will also discuss the impact on anyone involved in a bank partnership model of lending and on those purchasing loans or lines of credit. Panelists will also discuss strategies for addressing the challenges presented by Madden, including licensing and deal structure responses.

Madden Panel

MERCHANT CASH ADVANCE AND SMALL BUSINESS LENDING SESSION: REGULATORY DEVELOPMENTS INCLUDING ISO AND BROKER ISSUES AND GOVERNMENT ADVOCACY

Panelists:
Cathy Brennan, Partner, Hudson Cook, LLP, Hanover, MD
Shawnielle Predeoux, Associate, Hudson Cook, LLP, Hanover, MD
Tom Sullivan, Executive Director, Coalition for Responsible Business Finance, Washington, DC

Description of Panel:
Panelists discuss recent activity by federal regulators and industry efforts to advocate for increased access to capital for merchants. Discussion also includes legal developments and best practices for working with independent sales organizations and brokers.

MCA Panel

Ohio Considers Regulation of Confessions of Judgment

In a commercial lending context, courts and legislatures have generally assumes that the parties to the agreement have relatively equal bargaining power. Because of this understanding – that a business borrower is more sophisticated than a consumer borrower – regulation has been more “hands off” with regard to the terms commercial loans may contain. One such clause frequently found in commercial loan agreements is a confession of judgment clause, also called a cognovit judgment. A confession of judgment is written authorization by the borrower directing the entry of a judgment against him in the event he defaults in payment.  A confession of judgment clause in a loan agreement permits the creditor on default to appear in court and confers judgment against the borrower. Continue reading “Ohio Considers Regulation of Confessions of Judgment”

Asset Purchase or Consumer Loan: One State High Court Weighs In

In a case closely watched by players in the asset purchase space, the Colorado Supreme Court ruled that the purchase of a future interest in the litigation proceeds of a tort lawsuit – usually automobile accidents, slip and falls, construction site injuries and medical malpractice – constituted a loan subject to that state’s consumer credit laws.  Selling an interest in the potential proceeds of personal injury cases is not new. The Purchaser pays the Seller, who is a plaintiff in a tort lawsuit, money in exchange for the right to receive a  portion of the proceeds of litigation.  Although the Colorado case touches on the form of the transaction in the merchant cash advance space, the applicability of the decision to such transactions seems limited to consumer transactions. Continue reading “Asset Purchase or Consumer Loan: One State High Court Weighs In”