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THE ALTERNATIVE LENDING REPORT Volume 1, No. 1 April 20, 2017

input/output GLOVES COME OFF IN COLORADO COMMENTARY ‘TRUE LENDER’ CASES Addressing the Lack of Transparency in Small Company Lending...... 2 By Steve Evans STRATEGY “True lender” lawsuits filed in Colorado and Madden v. Midland Funding, LLC, With SBA Budgets on the Chopping highlight the ongoing legal ambiguity of from 2015 as legal authority for claims Block, What’s the Lending marketplace lenders using the bank partner alleging usury and other violations of the Environment Going Forward?...... 3 model. The latest dispute began earlier this state’s Uniform Consumer Credit Code. LEGAL & REGULATORY year when Colorado’s attorney general filed Referring to the Madden case, Colo- • Recent Litigation Illustrates complaints in state court against Marlette rado argues that “a bank cannot validly Why Merchant Cash Advances Funding and Avant of Colorado on behalf assign [federal interest rate exportation] Are Not Loans...... 6 of the administrator of the state’s Uniform to a non-bank.” However, in that earlier • Bankrupt NuLook Now Facing RICO Suit...... 8 Consumer Credit Code. Later amended Madden case, the dispute involved the and removed to federal court, the suits sale and assignment of charged-off debt NEW TECHNOLOGY allege violations based on earlier true lender – not loan originations under an ongoing & PRODUCT LAUNCHES and loan assignment cases. According to arrangement between a non-bank lender Platform announcements, new software and services, and notable the complaints, these non-bank companies like Marlette and Avant, and federally product releases...... 10 are the true lenders because they market insured institutions like Cross River and and service loans originated by New Jersey- WebBank. The banks earlier this month INDUSTRY NEWS based Cross River Bank and WebBank, a jumped into the fray with filings for A recap of recent news of importance to lenders, brokers, state-chartered institution in Utah. The declaratory judgment against Colorado. and service providers...... 12 banks sell the loans to their partners. “The decision in Madden was incor- rect based on longstanding banking legal LOAN TAPE Relevant Litigation Still Pending precedent,” says Mike Tomkies, a partner M&A + Partnerships...... 14 In both cases, the AG’s complaint cites with Dreher Tomkies in Columbus, OH, New Investments...... 15 the 2014 case CashCall, Inc. v. Morrisey, specializing in banking and finance law. Indices/Funds of Interest/SBA Activity...... 16 Credit Conditions/Indicators...... 17 Turn to True Lender on page 20

LENDER SATISFACTION Satisfaction percentages of applicants ONLINE PLATFORMS HAVE who were approved for financing: CHANGED BROKERING DYNAMICS Small Bank 80% 1% % By Gary M. Stern

Situated in his lower Broadway office, Nick Defonte who runs Broad- Credit Union 78% 19% 3% way Advance is in the crosshairs of small business lending. Defonte offers accounts receivable financing, often in the garment industry or for retailers. Even as small company finance strategies like factoring have changed the CDFI 77% 22% 1% traditional lending landscape, Broadway Advance still also serves as a broker, connecting clients to online lenders such as OnDeck, Fundation, Kabbage, Credibly and ForwardLine, to name a few. Large Bank 61% 2% 1% Most online lenders offer a specialty. For example, Kabbage specializes in lines of credit of $2,000 to $100,000 with a six-month to one-year repay- Online 6% 3% 19% ment schedule; Accion lends to businesses open less than six months, and Lender Rapid Advance advances up to 250% of monthly credit card sales. In the past, savings banks and community banks issued these small busi- Satisfied Neutral Dissatisfied Turn to Brokering Dynamics on page 18 Source: Small Business Credit Survey, Federal Reserve Banks For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

THE ALTERNATIVE LENDING REPORT Commentary

EDITORIAL Editor & Publisher Steven Dresner ADDRESSING THE LACK OF TRANSPARENCY Contributing IN SMALL COMPANY LENDING Editor By Steven Dresner Steve Lord People who take news reporting seri- thresholds to define the scope of the Contributing Writers ously consider the “Five W’s” principles to small company lending market. We Steve Evans live by. According to the Five W’s, infor- do not cover consumer lending, except Grant Harvey mation can only be considered complete where we believe information in that Tim Lloyd if you’ve answered the questions of who, segment would be useful to our readers. Brian O’Connell what, when, where, and why. And so I A final note about our coverage: Gary Stern thought it would be fitting to introduce While we publish information about Jane Yu you to The Alternative Lending Report by developments globally, our primary focus answering these questions. is on the United States. Production Editor Gary Newman Who’s the publisher? DealFlow Why are we doing this? There’s very Financial Products (a/k/a “DealFlow”), little transparency in this market. With- Operations is the publisher of The Alternative Lend- out government-mandated loan report- Lenny La Sala ing Report. As a company, we have con- ing, or public aggregation of data, there’s siderable experience providing news, simply not enough information for peo- Technology Tarun Gupta information, and analysis across a variety ple to make good business decisions. of deal markets. Since 2003, our team Our call-to-action at DealFlow has has worked to make capital markets always been to make markets more

THE ALTERNATIVE LENDING REPORT more efficient by offering unique insight efficient through information and data. to thousands of clients of our publica- That’s what we’re aiming to do in the DealFlow Financial Products, Inc. P.O. Box 122 tions, events, and database services. small company lending segment. Syosset, NY 11791 If you’re a lender, broker, or service What’s our publishing frequency? T (516) 876-8006 provider, we’re working for you – and Our first product, Small Business Lend- F (516) 876-8010 The Alternative Lending Report is meant ing Daily, is a free electronic newsletter [email protected] to serve as your trade publication. that’s published Monday through Friday www.smallbusinesslending.io What does the report cover? The and delivered to your inbox. We cover a The Alternative Lending Report™ is published Alternative Lending Report is dedicated broad swath of topics in our Daily email on the first and third Thursday of every month, except the second Thursday of August and the second to covering the small business lending such as “traditional” bank lending and Thursday of December. Subscription rate: $995 per year for 22 issues, delivered electronically. ecosystem including alterative investment we aggregate original articles, research All rights reserved. © 2017 DealFlow Financial structures, online and marketplace lend- reports, and news releases. Products, Inc. Photocopy permission is available ing, and non-bank financing structures The Alternative Lending Report is pub- solely through DealFlow Financial Products. Copy- ing, distributing electronically by email, or duplicat- such as factoring, invoice financing, mer- lished in PDF on the first and third Thurs- ing this publication in any manner other than one chant cash advance, and revenue-based day of each month. As we enhance our permitted by agreement with DealFlow Financial Products is prohibited. Such actions may constitute financing. As the flag on the cover of this website, new information will be updated copyright infringement and leave perpetrators sub- ject to liability of up to $150,000 per infringement report suggests, we’re focused on innova- daily on SmallBusinessLending.io. (Title 17, U.S. code). The Alternative Lending Report tions in finance and technology, legal and In the near future, we will also be and The Alternative Lending Conference™ are trademarks of DealFlow Financial Products. regulatory dynamics, and strategy within launching innovative webcasts, live events The Alternative Lending Report is a general-circula- the alternative lending segment. and training programs, and subscription- tion publication. No information herein should be Regarding the borrowers we’ll cover, based analytics. As these products and construed to be recommendations to purchase, retain, or sell securities, or to provide investment we are using criteria based on the size services come online, we’ll notify you and advice of the companies mentioned or advertised. No fees are accepted for publishing any editorial of a loan (approximately $1M credit keep an open channel for your feedback. information. DealFlow Financial Products, Inc., its or below) and/or the size of the com- In the meantime, we hope The Alternative subsidiaries, and its employees may, from time to time, purchase, own, or sell securities or other pany (approximately $20M in revenues Lending Report meets your expectations. investment products of the companies discussed or or below). Academic whitepapers and If you’d like to subscribe to the report, call advertised in this publication. industry experts commonly use these us at (516) 876-8006.

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WITH SBA BUDGETS ON THE CHOPPING BLOCK, WHAT’S THE LENDING ENVIRONMENT GOING FORWARD? By Brian O’Connell

At a time when small business own- a “business as usual” mindset ahead of KEY SBA 2018 ers are bullish on the U.S. economy – Congressional budget negotiations. BUDGET POINTS and their own prospects – the Trump “We don’t expect that any budget administration is pulling back on fed- changes would impact TD Bank’s over- • 5% of SBA cuts come from govern- eral funding for smaller companies. all ability to lend via the Small Business ment grant programs, an area where According to a White House draft pro- Administration to small businesses,” says the White House says the private sec- posal, the U.S. Small Business Admin- Tom Pretty, head of SBA Lending at TD tor should carry more of the load. istration is facing a 5% budget cut for Bank. Pretty notes that SBA loans are • Dollar amounts linked to SBA loan fiscal year 2018, or $43.2 million in typically done via a financial institution, guarantees and to disaster assistance actual dollars. with a small portion of the loan guaran- programs are also under the axe. teed by the SBA. “Because the SBA does not lend directly to • Programs to be eliminated include “TD Bank continues to grow its small businesses, the proposed PRIME technical assistance grants, SBA portfolio and the proposed budget adjustment is unlikely Regional Innovation Clusters, and budget changes wouldn’t impact to affect the agency’s borrowing Growth Accelerators, the latter two program,” he states. rolled out by the Obama administration. our ability to serve our customers.” “It’s our belief the small • The proposed budget also abolishes business economy continues the Minority Business Development Tom Pretty, to be vibrant, and these busi- Agency, run by the Commerce Depart- TD Bank nesses need capital to expand,” ment, and which promotes the cre- he adds. “TD Bank continues ation of minority-owned businesses. to grow its SBA portfolio and The timing isn’t exactly stellar for the proposed budget changes wouldn’t • The lion’s share of the 5% SBA budget the Trump Administration, or for small impact our ability to serve our custom- cuts comes from SBA counseling and businesses. ers.” training programs, which are geared Opening the year, small business Pretty also notes the SBA designates primarily to keep U.S. small businesses owners seemed downright giddy about certain banks such as TD Bank as “Pre- up and running, and out of default. their profit prospects, as the NFIB ferred Lenders,” which means they are • Saved from the budget axe are fund- small business optimism index stood at “able to process and close SBA loans ing for 7(a) and 504 loans. a 43-year high. Correspondingly, banks more quickly than other institutions,” he and lenders seem bullish, too, as loans to says. Also putting lenders like TD Bank small business percentages rose by a dou- on the inside track is the fact that the ble-digit margin in 2016, and as business bank participates in all of the SBA loan mixed signals which should be worked lending at domestic mega-banks and big offerings, including SBAExpress Loan, out in more detail in May,” notes Gregg lenders were at post-recession highs at 7(a) Loan, 504 Loan and the USDA Landers, managing director at CBIZ the end of 2016. Loan (for agriculture businesses). MHM, a national accounting and pro- But as the conventional wisdom “Mixed Signals” fessional services provider. had it, a new, self-described “business For Small Businesses Landers believes the guaranteed loan friendly” regime pulling the levers at programs (the 7(a) for general business 1600 Pennsylvania Avenue would be That doesn’t mean lenders won’t be loans and 504 loans for capital) may supportive of small businesses – but the watching the Trump administration weather any SBA budget storms, but proposed 2017 SBA budget has given closely as it steers the SBA over the next microloans, which target very small low- both business owners and lenders pause four years – they will. income businesses and provides some heading into the second half of 2017. “The Trump administration’s impact business skills assistance, may be affect- Lenders, though, aren’t backing away on small businesses through the SBA is ed. “If that’s the case it would certainly from small businesses yet, as they adopt still up in the air as there appears to be negatively affect those small low-income

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THE ALTERNATIVE LENDING REPORT Strategy

related businesses more than the typical pair of agency mainstays over the years – SNAPSHOT OF U.S. SMALL small business,” he states. the 7(a) Loan Program and the SBA 504 BUSINESS LENDING CLIMATE One “big issue” also looms large, Loan Program, says Manuel Henriquez, Landers says – How do small businesses founder and CEO of Hercules Capital, a • Lenders are approving small business get the money to survive and grow if large non-bank provider of venture debt rates at a 63% approval clip, and they don’t have SBA loan options? to both expansion-stage and established small business loan approval rates “You could companies. jumped by 23% in December, 2016 – argue there “It’s highly a sign that lenders are optimistic the are more capi- “There are alternative lenders, likely that Trump administration will be business tal alterna- especially relative to equipment or concerns pri- friendly. tives for small tangible asset purchases and you marily sur- business today round the • Big banks such as Bank of America, than there may see more demand for them...” SBA’s 7(a) Wells Fargo, and JP Morgan, are see- were ten or Loan Pro- ing small business loan growth rising, twenty years Gregg Landers, gram, the in many cases at double-digit growth. ago,” he adds. CBIZ MHM agency’s pri- • Loan rates at smaller banks, credit “For example, mary program unions, and alternative lenders are we now have for helping either down or flat in early 2017. crowd source possibilities, and arguably start-up and existing small businesses, more alternative lending companies that with financing guaranteed for a variety • Both business owners and lenders are charge higher interest for collateralized of general business purposes,” says Hen- wondering how Trump administration business loans. You could also argue the riquez. “After all, SBA does not make policies (along with the drive to reduce other side as well – that because regu- loans itself, but rather guarantees loans regulations) will impact the small busi- lations have become more onerous, the made by participating lending institu- ness lending environment in 2017. SBA and big lenders won’t be as promi- tions. In this way, taxpayer funds are only nent in filling this void. In that regard, used in the event of borrower default. higher risk small business loans simply This reduces the risk to the lender but ment of its community,” he adds. “CDCs become too unprofitable for banks to not to the borrower, who remains obli- work with SBA and private-sector lend- address.” gated for the full debt, even in the event ers to provide financing to small busi- Landers also sees larger problems that of default.” nesses through the CDC/504 Loan have little to do with SBA budget cuts Henriquez also cites concerns about Program, which provides growing busi- that are curbing small business financing the SBA 504 loan program, which works nesses with long-term, fixed-rate financ- so far in 2017. in conjunction ing for major “Banks, independent or not, are so with Certified fixed assets, heavily regulated now that smaller loans, Development “I certainly expect to see less such as land especially if there is no track record or Companies banks willing to underwrite and build- weak collateral making the loan riskier, throughout thereby causing a liquidity crunch ings.” become unprofitable for a bank,” he says. the United Henriquez “There are alternative lenders, especially States, for the or crisis in the SMB market.” says that if relative to equipment or tangible asset acquisition of these pro- purchases and you may see more demand owner-occu- Manuel Henriquez, grams were for them, however, they typically charge pied commer- Hercules Capital cut back much higher rates for the loan and are cial real estate because of often more oriented towards short term or machinery budget issues, loans.” and equipment. and the SBA is unable to serve as the Trouble with “The SBA 504 program provides guarantor for these loan programs, small SBA Mainstays fixed-rate, long-term financing for busi- businesses could suffer on the cash nesses in need of brick-and-mortar financing front. If there are specific concerns about financing,” he notes. “Non-profit Certi- “I certainly expect to see less banks a slimmer SBA budget going forward, fied Development Companies are set up willing to underwrite thereby causing some lending industry insiders point to a to contribute to the economic develop- a liquidity crunch or crisis in the SMB

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THE ALTERNATIVE LENDING REPORT Strategy

market,” he says. “That’s especially true Without the SBA acting as a back- BASEL 3 and higher current regula- as the actual number of banks able to stop, banks would have to charge higher tions, I don’t see many banks rushing in participate under either of these pro- rates to help offset any bad loans, he to fill this void, and I don’t expect to see grams are very limited, and shrinking. adds. “Higher rates that would compen- community banks step in to underwrite They will continue to lend, but certainly sate for higher risk means less borrowers these higher risk loans without the SBA not at the levels they have been if the will seek those loans, because they would 7(a) or 504 program,” Henriquez says. funding for these programs are cut.” be potentially too expensive, thus lead- While nobody’s calling the proposed Even if banks do lend, the loan land- ing to an adverse selection of weaker or SBA budget cuts a total game-changer, scape would shift, and not in favor of desperate borrowers willing to accept lenders do see a potential shift in loan small companies. those higher rates – even though they availability for small companies down “Lenders, in essence, would be may already be at elevated risk of default, the road – a scenario small business assuming the underwriting of great risk before facing the higher costs of capi- owners certainly don’t want to experi- assets and loans and having to absorb the tal or cost of loans they would need to ence, although a tighter SBA budget total risk of loans, without the SBA loan accept.” means they’ll have little to say about the programs which serves to dampen any “Unfortunately, given the realities of situation. material losses,” Henriquez explains.

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THE ALTERNATIVEGLOVES LENDING COME OFF INREPORT COLORADO adden . idland Funding ‘TRUE LENDER’and CASES - ntelliene or small bsiness leners, ome o from 2015 as legal authority for claims alleging usury and other violations of the input/output By Steve Evans state’s Uniform Consumer Credit Code. 2 “True lender” lawsuits filed in Colorado Referring to the Madden case, Colo brokers an servie proviers...... rado argues that “a bank cannot validly COMMENTARY highlight the ongoing legal ambiguity of assign [federal interest rate exportation] Addressing the Lack of Transparency marketplace lenders using the bank partner to a non-bank.” However, in that earlier in Small Company Lending 3 model. The latest dispute began earlier this Madden case, the dispute involved the STRATEGY ...... year when Colorado’s attorney general filed sale and assignment of charged-off debt With SBA Budgets on the Chopping complaints in state court against Marlette – not loan originations under an ongoing Block, What’s the Lending Funding and Avant of Colorado on behalf arrangement between a non-bank lender Environment Going Forward? 6 of the administrator of the state’s Uniform like Marlette and Avant, and federally inane LEGAL & REGULATORY Consumer Credit Code. Later amended insured institutions like Cross River and - • Recent Litigation Illustrates 8 and removed to federal court, the suits ...... WebBank. The banks earlier this month Why Merchant Cash Advances allege violations based on earlier true lender Are Not Loans jumped into the fray with filings for ...... and loan assignment cases. According to declaratory judgment against Colorado. • Bankrupt NuLook Now Facing RICO Suit the complaints, these non-bank companies “The decision in Madden was incor are the true lenders because they market enoloy rect based on longstanding banking legal NEW TECHNOLOGY 10 and service loans originated by New Jersey- & PRODUCT LAUNCHES precedent,” says Mike Tomkies, a partner based Cross River Bank and WebBank, a with Dreher Tomkies in Columbus, OH, Platform announcements, ...... new state-chartered institution in Utah. The True Lender on page 20 software and services, and notable specializing in banking and finance law. banks sell the loans to their partners. , Turn to product releases. 12 Relevant Litigation Still Pending Leal elatory INDUSTRY NEWS ...... In both cases,ashall the AG’s Inc. complaint . orrisey cites A recap of recent news of 14 importance to lenders, brokers, the 2014 case and service providers. 15 ...... 16 - LOAN TAPE ...... 17 M&A + Partnerships Stratey ...... ONLINE PLATFORMS HAVE New Investments Indices/Funds of Interest/SBA Activity Credit Conditions/Indicators CHANGED BROKERING DYNAMICS LENDER SATISFACTION By Gary M. Stern % 1% Situated in his lower Broadway office, Nick Defonte who runs Broad Satisfaction percentages of applicants80% - who were approved for financing way Advance is in the crosshairs of small business lending. Defonte offers oll reeive isonte lan priin o only 3% accounts receivable financing, often in the garment industry or for retailers. 19% Small Bank Even as small company finance strategies like factoring have changed the 78% - traditional lending landscape, Broadway Advance still also serves as a broker, 1% connecting clients to online lenders such as OnDeck, Fundation, Kabbage, an omplimentary aess to or Small Credit Union 22% 77% Credibly and ForwardLine, to name a few. Most online lenders offer a specialty. For example, Kabbage specializes 1% in lines of credit of $2,000 to $100,000 with a six-month to one-year repay CDFI Brokering Dynamics on page 18 Bsiness Lenin Diretory. 2% ment schedule; Accion lends to businesses open less than six months, and 61% Turn to Rapid Advance advances up to 250% of monthly credit card sales. 19% In the past, savings banks and community banks issued these small busi Large Bank 3% 6% Online issatisfied Call us today at (516) 876-8006. Don't miss this offer.Lender Neutral Satisfied

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THE ALTERNATIVE LENDING REPORT Legal & Regulatory

RECENT LITIGATION ILLUSTRATES WHY MERCHANT CASH ADVANCES ARE NOT LOANS By Mark Dabertin, Pepper Hamilton LLP

To the casual observer, the African v. Four Paws Orlando LLC1 as follows: On October 25, 2016, the New hyena is unquestionably a type of wolf or “For a true loan it is essential to pro- York Supreme Court issued a decision wild dog. No one can deny that hyenas vide for repayment absolutely and at all in Pearl Capital Rivis Ventures, LLC v. and wolves look alike. For zoological events. . . [In contrast, where] payment RDN Construction, Inc.2 that turned purposes, however, the hyena is a type of or enforcement [of an MCA] rests on the absence of language in the par- feline; albeit one that bears an uncanny upon a contingency, the [MCA] agree- ties’ contested MCA agreement speci- resemblance to a canine. In the finan- ment is valid even though it provides fying that the sale of receivables to the cial world, a merchant cash advance, or for a return in excess of the legal rate maker/defendant was without recourse “MCA,” is analogous to a hyena. An of interest.” to the seller/plaintiff. In the absence of MCA strongly resembles a loan, but for Briefly, in the case of a loan, all funds such language, the court found that the legal purposes constitutes plaintiff was absolutely a purchase and sale con- obligated to repay and tract, i.e. it’s a different In the case of a merchant cash advance, a person the parties’ arrangement animal. therefore amounted to Analogies aside, MCA who advances funds to another in exchange for an a loan with a usurious plays an important role ownership interest in that party’s business receivables interest rate of approxi- in small business financ- mately 180% per year. ing. The merchant cash may see a profit, or suffer a loss, depending on how In this regard, the advance industry arose those receivables perform. The distinction between a court drew a distinc- during the recent financial loan and a merchant cash advance matters because it tion between the risk crisis when many banks that purchased receiv- ceased making loans to is not uncommon for the cost of an MCA arrangement ables may not perform small businesses. If accu- to equate to an interest rate which exceeds the usury as expected and “the rately understood and risk of nonpayment properly structured, a mer- cap of most states. that is inherent in every chant cash advance offers loan and that may only mutual benefits to both be compensated for by suppliers and recipients of this increas- that were advanced to the recipient statutory interest; the risk of loss by the ingly popular source of funding. must be repaid to the advancing party death or insolvency of the borrower is New York Litigation Summary (i.e., the lender) in full on or before the the risk that every person runs who lends specified payment due date, usually with money on personal security only.”3 Because New York has both a rela- interest added. In the case of a mer- In IBIS Capital Group, the New York tively low usury cap and a high popu- chant cash advance, on the other hand, Supreme Court first cited numerous lation of small businesses, New York a person who advances funds to another New York cases in support of the posi- courts are frequently called upon to in exchange for an ownership interest tion that in order to constitute a loan, interpret whether a given MCA arrange- in that party’s business receivables may the principal sum given to one party ment constitutes a loan. As a result, a see a profit, or suffer a loss, depending must be absolutely repayable and not review of relevant New York cases is on how those receivables perform. The contingent upon future events.4 The helpful in understanding the key differ- distinction between a loan and a mer- court then proceeded to review specific ences between the two. chant cash advance matters because it is provisions from the parties MCA agree- The key difference between an not uncommon for the cost of an MCA ment stating that: (i) IBIS would receive installment loan and a merchant arrangement to equate to an interest rate a percentage of Four Paws’ daily sales, (ii) cash advance was summarized by the of 150% or higher, which far exceeds the transaction was not a loan, and (iii) Supreme Court of New York, Nassau the criminal usury cap of most states. the agreement would be governed by the County in its recent March 16, 2017 For example, New York ‘s criminal usury Uniform Commercial Code (which does decision in IBIS Capital Group, LLC limit is 25%. not govern loans).5 According to the

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THE ALTERNATIVE LENDING REPORT Legal & Regulatory

court, the foregoing offered persuasive upon with all amounts advanced would Furthermore, to compensate for evidence that the contested transaction become due and payable.8 the risk of making the merchant cash did not constitute a loan and hence was Finally, the court opined that even advance, it is not uncommon for the not subject to usury.6 if the agreement had established a party advancing funds to charge a fac- The IBIS Capital Group decision is loan, Four Paws could not show that tor rate, which may seem analogous notable for several other reasons. First, IBIS had intended to charge a usuri- to a finance charge. What ultimately in finding that the agreement did not ous rate of interest, which is required matters, however, is whether repay- create a loan, the court addressed defen- in order to prove criminal usury under ment hinges upon the performance of dant Four Paws’ contention that the par- New York law. In this regard, the court the purchased receivables or an abso- ties’ agreement established a “set and noted that “[t]he only time the parties lute obligation to repay on the part of finite fixed daily payment” that could could have possessed sufficient data to the individual business owners, which be used to calculate a usurious interest calculate the comparable equivalent to might take the form of a personal rate. In this regard, the court noted that an interest rate, would have been too guarantee of financial performance or it was unable to find such a provision, late for IBIS to have possessed usuri- costly late charges that are payable from but opined that even if one had existed, ous intent.”9 sources besides the receivables and the principal repayment would be con- MCA Deal Structure which effectively remove the business tingent upon Four Paws ability to sell risks associated with the latter. their product, noting that the agreement That a merchant cash advance closely In sum, having a full and accu- called for Four Paws to repay to IBIS resembles a loan is understandable. For rate understanding of a merchant cash any amounts received directly related to example, in the case of a sole proprietor- advance is important for both recipients future sales.7 ship, it would be imprudent not to under- and providers of capital. For the recipi- Second, the court noted that the write the individual owner of the business ent, knowing that there is nothing inher- MCA agreement included no due date for either relationship – in the case of an ently untoward about a merchant cash MCA, for the pur- advance and understanding why usury pose of ascertaining does not apply can be helpful in address- whether and to what ing the true risks associated with such extent continued relationships. For the provider, having funding of the busi- sound knowledge of structuring mer- ness might be avail- chant cash advance agreements can be able. helpful in avoiding unnecessary litiga- In addition, as in tion and potentially costly pitfalls. IBIS Capital Group, the parties may find Mark T. Dabertin is special counsel in the it advantageous to Financial Services Practice Group of Pep- structure payments per Hamilton LLP. Mr. Dabertin has in a manner similar over 25 years of broad-based experience in to a loan, but ulti- financial services law and consumer and mately subject to regulatory compliance. He can be reached at [email protected] or (610) the performance of 640-7841. the receivables.

Notes 1 IBIS Capital Group, LLC v Four Paws Orlando LLC, 2017 N.Y. Misc. LEXIS 884, 2017 NY Slip Op 30477(U) (N.Y. Sup. Ct. Mar. 10, 2017). 2 Pearl Capital Rivis Ventures, LLC v RDN Constr., Inc., 54 Misc. 3d 470, 41 N.Y.S.3d 397, 2016 N.Y. Misc. LEXIS 3945, 2016 NY Slip Op 26344 (N.Y. Sup. Ct. 2016). 3 Pearl Capital, 2016 N.Y. Misc. LEXIS 3945, at * 7. 4 IBIS Capital Group at *2. 5 Id. at *8. 6 Id. at *9. 7 Id. at **8-9. 8 Id. at *9. 9 Id. at *10.

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THE ALTERNATIVE LENDING REPORT Legal & Regulatory

BANKRUPT NULOOK NOW FACING RICO LAWSUIT By Steve Evans

“NuLook is no longer lending,” said resulted in the outright theft of GWG’s GWG alleges the NuLook and PSC a woman who answered the company’s collateral and the diversion of earmarked defendants engaged in a sophisticated phone last week. cash belonging to GWG into certain shell game, in which payments owed to Suspending merchant cash advances Defendants’ own pockets.” GWG were instead diverted to other may be the least of NuLook Capital’s Neither NuLook attorney Randall NuLook investors and to PSC affili- worries as it now faces a RICO lawsuit Jacobs nor GWG attorney Edward ates. GWG says more than $300,000 from one of its creditors in the midst of Stone returned calls seeking comment. was diverted in this manner in Novem- Chapter 11 bankruptcy. Defendants named in the suit could not ber. Another $300,000 owed to GWG The Massapequa, NY-based MCA be reached. and under PSC’s control allegedly went financing company filed for bankruptcy Other companies named as defen- missing between February and March protection this month in the Eastern dants are International Professional Ser- of this year, GWG says in the lawsuit. District of New York. The filing lists vices Inc., its subsidiary, PSC Financial These “non-ordinary course payments” primary creditors who likely rendered NuLook are owed $2,799,402 insolvent by mid-March if (PacerMonitor: bit. GWG alleges the NuLook and PSC defendants not earlier, GWG says. ly/2oLB1UR). The “While pretending to largest single credi- engaged in a sophisticated shell game, in which be working towards curing tor is GWG MCA out payments owed to GWG were instead diverted to Nulook’s default under the of Minneapolis, on the Loan, the RICO defen- hook for more than $2 other NuLook investors and to PSC affiliates. dants were actually looting million according to the the assets of Nulook, mak- filing. ing non-ordinary course GWG is a specialty finance compa- and PSC’s agent, ACHWorks. cash payments to insiders and/or sub- ny that’s primarily been engaged in the ACHWorks collected on merchant ordinated creditors and repeatedly and life settlements business but also feeds cash advances owed to NuLook, which systematically pledging Nulook Collat- capital directly to small businesses as in turn owed GWG. PSC took a portion eral to other entities and diverting funds well as providing secured loans to MCA of the collections for its fees. At some away from GWG so the RICO defen- funders. Parent company GWG Hold- point in February, collection efforts on dants could profit,” the suit states. ings expanded 13 months ago after pick- debtors suddenly stopped, GWG says in Merchant payments that were sup- ing up a $4.3 million portfolio of loans the suit, as did payments to GWG. posed to be made to NuLook and and advances from a subsidiary of Walk- NuLook CEO Anthony Mannino, then forwarded to GWG were instead er Preston Capital – including the loan NuLook co-founder and partner Robert siphoned off to PSC insiders and others, to NuLook. Aurigema, and PSC Executive Director the suit alleges. NuLook filed for Chapter 11 less Joel Nazareno are also named defen- NuLook did make a $500,000 pay- than a week after GWG brought the dants in the case. ment to GWG in June 2016 in an effort RICO suit against the company. GWG’s Nazareno was convicted in 2001 of a to shore up the borrowing base deficien- suit alleges fraud against NuLook and “pump and dump” securities fraud scheme cy on its loan from GWG. NuLook’s other defendants under RICO statutes. while working as a broker at Hanover “Mannino and Aurigema both repre- As outlined in the complaint, GWG Sterling, a penny-stock firm that col- sented to GWG that the proceeds from accuses the defendants of an “egregious lapsed in 1995 (NY Daily News: http:// this $500,000 payment came from an illicit scheme to defraud GWG out of nydn.us/2pC5Idx). In that case, the court equity investment in NuLook that was millions of dollars. Beginning sometime found Nazareno and a co-defendant were made by an investor in PSC. This criti- in 2014, and continuing through today, personally responsible for bogus trades cal representation turned out to be false,” Defendants, in bad faith, through the of as much as $37 million. He was sen- the lawsuit states. GWG contends that use of fraud and deceit and with the tenced to five years in prison and ordered the money actually came from a high- specific intent to cause harm to GWG, to make restitution of $10 million. GWG priced factoring deal with PSC that embarked upon a series of related and claims Nazareno is the leader of the caused further erosion to the value of the continuous transactions that ultimately alleged scheme in the current case. NuLook collateral. SmallBusinessLending.io 8 April 20, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

THE ALTERNATIVE LENDING REPORT Legal & Regulatory

“It turns out that this was one of ments back on track and attempted to year after taking on high-risk loans to many factoring deals done with PSC in send demand letters earlier this year, small businesses looking to leverage fast blatant disregard of the GWG Loan and GWG learned that NuLook and PSC cash against a cut of future credit card in violation of GWG’s perfected security had merged and relocated to a new receipts. Small business owners with interest in the Collateral,” the suit states. shared office space in New Hyde Park, a bad credit rating often turn to MCA GWG also says PSC had claimed NY, the suit states. operators who will in some cases cut a that member referral companies for its GWG in its most recent 10K for Dec. check the same day. Interest rates tend to loan syndication business had passed 31 noted, “The secured loan to Nulook be sky high, but so are the risks. a background check and that neither Capital LLC had an outstanding balance It’s a double-edged sword for some the companies nor its principals were of $2,527,000 and a loan loss reserve of MCA funders charging rates as high involved in past fraudulent or criminal $600,000 at December 31, 2016. We as triple digits. The payback schedule activity. However, the lawsuit notes that deem fair value to be the estimated col- on an MCA can create further cash- PSC especially encouraged transactions lectible value on each loan or advance flow problems for the merchant, leading with a company called American Fund- made from GWG MCA. Where we into a spiraling debt trap that requires ing Group, which is controlled by Mark estimate the collectible amount to be less more and more advances, and some- Mancino, another former broker with than the outstanding balance, we record times bankruptcy at the end of the Hanover Sterling. a reserve for the difference.” (SEC.gov: line. Because many consumer advocate Mancino was indicted and eventu- bit.ly/2oVnxpN) groups recommend an MCA as a loan ally pleaded guilty for his role in the As of March 16, the amount owed of last resort, merchants who’ve reached same securities fraud scheme as Naza- to GWG was $2,073,398.13, the com- that stage may have done too little too reno more than a decade ago (Leagle: bit. pany says. GWG in its lawsuit also seeks late. Repayment amounts typically fluc- ly/2pRsI7q). default interest on the loan at an annual tuate with the merchant’s sales, so a few When GWG was unable to get pay- rate of 35%. down months will extend the time for Before NuLook’s repayment – adding to the cost of the Sin p or te payments ceased, advance. Since there’s usually no benefit GWG also alleges to early repayment, merchants will also NuLook was often spread repayments out over time. “double counting One source in the MCA industry says pledged MCA’s and NuLook acquired a reputation for pur- email nesletter including defaulted suing shorter-term, high-risk deals and MCA’s and other like Icarus may have flown too high, too ineligible receiv- fast. ables on their Bor- A court hearing for a preliminary rowing Base and injunction and appointment of a receiver generally overstat- for PSC is set for April 20. ing the amount of GWG is asking for full recovery of its Collateral available capital, treble damages and costs. to support Nulook’s obligations to GWG under the Unless your company holds a multi- Loan.” user license, it is a violation of U.S. NuLook’s total copyright law to photocopy or debts are as much as $10 million, accord- reproduce any part of this publication, ing to the com- or forward it electronically, without reate nes rom aron te eb pany’s bankruptcy first obtaining permission from eatrin timely inormation on bot filing. DealFlow Financial Products. For traitional an nonbank lenin. Many merchant details about upgrading your license, cash advance opera- Get it today. Get it every day. Free. contact us at (516) 876-8006 or tions have been www.smallbusinesslendingdaily.com [email protected]. clobbered in the last

SmallBusinessLending.io 9 April 20, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission. New Technology & THE ALTERNATIVE LENDING REPORT Product Launches

Androscoggin Bank Launches sumer credit risk and detect fraudulent up to $500,000 for businesses with a Online Business Lending Tool activity. Members report loan applica- minimum of two years of verifiable oper- tions and fund provisions and receive ations. bit.ly/2pjAJTs Androscoggin Bank aims to beat information on the applicant’s recent online-only lenders at their own game financial activity. The quick response North State Bank Launches through a new business lending plat- makes high-velocity fraud activities like with nCino’s Bank O/S form. Executives expect momentum to loan stacking harder to accomplish. bit. grow as entrepreneurs take advantage ly/2ovm5bu nCino, a developer of cloud bank- of a quick turnaround time for getting ing of banking solutions, announced loans approved. According to company Orca Launches Peer-to- that North State Bank went live with executives, a formal marketing plan will Peer Comparison Tool its Bank Operating System, central- be rolled out in the second half of this izing and automating the commercial year. bit.ly/2pBByGl UK research company Orca loan process. nCino’s Bank Operating announced the launch of its new plat- System aims to improve time manage- Global Debt Registry Adds form, which offers standardized met- ment, in order to shift bank resources to Prosper to Network rics to compare P2P investments. The meaningful customer interactions. bit. platform allows users to perform due ly/2ozIoyJ Global Debt Registry, a loan valida- diligence on P2P investments and tion platform for institutional inves- benchmark them in a similar man- MoolahSense Launches tors, has added Prosper Marketplace to ner to traditional assets so people can Invoice Financing Service its verification network. GDR says the make risk-adjusted, informed invest- partnership will enable Prosper inves- ment decisions. The platform will Crowdfunding platform Moolah- tors access to their due diligence tools also offer market data such as inter- Sense has launched an invoice financing to ensure data integrity. Prosper piloted est rates, default rates, bad debt rates service, to help small and medium-sized GDR connectivity in 2016 and is now and a platform’s financial standing. bit. enterprises looking to raise short-term offering GDR’s solutions as a turn-key ly/2pjl06R financing of more than $15,000. To system. bit.ly/2nNqzgD qualify, companies must have tax invoic- Experian Teams Up with es with fixed payment terms of 15 to 90 FICO Launches Solution BioCatch to Combat Fraud days. bit.ly/2ofWYHU to Help Lenders Automate Decisions Credit bureau Experian has joined CWB and Payfirma forces with BioCatch to use behavioral Partner on New Merchant FICO has launched FICO Origina- biometrics to help clients spot fraudsters Services in Canada tion Manager Essentials to help financial applying for loans. BioCatch’s software, institutions make faster small business which was integrated in Experian’s fraud CWB Financial Group and Pay- lending decisions. Delivered as a cloud prevention platform, analyzes the way firma announced a strategic partnership service, the loan origination system users interact with devices and web- to provide CWB with a white labeled streamlines and automates the decision sites by tracking a wide range of fac- version of Payfirma’s payment technol- process and gives institutions access to a tors including how fast they type or the ogy platform, PayHQ. The release of variety of analytics. The company claims way they move their mouse across a web CWB PayHQ allows CWB to add an lenders using their solution can process page. bit.ly/2ovpneY omni-channel merchant services plat- small business loan applications in as form to its portfolio of business services little as 60 seconds. bit.ly/2p3JxQg Signature Bank Launches products. The platform is scheduled to Conditional Loan launch on May 1. bit.ly/2oI7f3w ID Analytics’ Says its Lending Approval Program Network Will Reduce Fraud Aspire Announces Signature Bank launched what it New Securitizations ID Analytics hopes its near real-time described as a new program for loan Data and Analytics Online Lending Network will reduce approvals, specifically for businesses fraud committed against participating looking for a quick response time. The Aspire Financial Technologies members. The Online Lending Network 48-Hour Conditional Loan Approval announced the release of a new asset- uses cross-industry data to assess con- Program is available for business loans level disclosure module that will pro-

SmallBusinessLending.io 10 April 20, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission. New Technology & THE ALTERNATIVE LENDING REPORT Product Launches vide market participants with loan-level platform to meet the needs of investors self-invested personal pension, or “SIPP,” characteristic and performance data for in the segment. bit.ly/2ovFsBv leading what it sees as a growing shift asset pools of U.S. public securitizations. within the industry towards pension- The module is part of Aspire’s Gateway FMS.next Platform Enhanced grade investment vehicles. The P2P TM platform, which enables users to with More Functionality investor, which selects loans across lend- research, monitor, and forecast their con- ing platforms, aims to give UK investors sumer or SME loan risk exposure, across Profile Software, an international exposure to higher-return assets than multiple use cases. bit.ly/2ocMolY financial solutions provider, announced traditional pension savings products. bit. the latest upgrade in the FMS.next ly/2pxfgsR Quick.me Launches Alternative Finance platform, to offer Financing Platform for enhanced capabilities that streamline the Payix and Nortridge Beauty & Wellness Sector marketplace lending process. FMS.next Announce Collections Tools Alternative Finance, the advanced financ- Fintech startup Quick announced the ing platform of Profile Software, utilizes Payix and Nortridge Software beta launch of their financing platform FMS.next’s functionality to address the announced they have formed a stra- aimed at small business owners in the needs of lenders and borrowers in an inte- tegic alliance to help lenders connect beauty and wellness space. Combining grated environment. bit.ly/2ovD25Q with borrowers and improve their abil- machine learning with human emotional ity to collect payments. The alliance intelligence, Quick aims to provide per- LendingClub Introduces allows Payix to offer real-time integra- sonalized financing recommendations New iOS App tion between its suite of collections tools that should translate into lower rates and the Nortridge Loan System. bit. LendingClub introduced a new iOS and shorter approval times — without ly/2okWtgT mobile application, LendingClub Invest. the collateral requirements typical in the The company says investors will now industry. bit.ly/2ocH69V Alfa Finance Launches have more access to and control of their P2P Lender DoFinance FactorTrust Announces investment portfolios. Investors said Reporting Format for that some of the most important func- Latvia-based Alfa Finance Group has tionality they use on a regular basis is launched a new P2P lending platform Non-Prime Lenders checking their account summaries. With named DoFinance. The online lender is FactorTrust announced FlexFormat, this insight, the company crafted a user said to be available in all EU and EEA what it hopes will become a standard in interface that consolidates the inves- countries. According to the company, reporting short-term loan data for products tor’s total account value, available cash, unlike many P2P lenders DoFinance focused on underbanked consumers. The returns and holdings. bit.ly/2oImw4z will enable investors to access their money before the term of the loan ends underbanked typically are consumers with ORIX Launches Online Lending traditional credit scores under 700. Flex- with a 14 to 28 day advance notice. bit. Format provides a single format designed Business for Japanese SMEs ly/2okBjPS around the needs of short-term lenders and ORIX Corporation and Yayoi Co. Oracle Powers DecisivEdge’s allows customers to submit data to Factor- announced that they are launching a new Trust, which then maps the data, and passes Lending/Leasing as a online lending business using accounting Service Product it on to credit bureaus. bit.ly/2ocAsAR big data and a proprietary artificial intelli- Opus Releases New gence-based credit model. The company DecisivEdge, a business consult- will provide Internet-based lending to small Version of OpusNotes ing and technology services company, businesses in Japan. A new credit model is launched its lending and leasing as Opus Fund Services, a provider under development. bit.ly/2ofTHZe a service (LLaaS) product, powered by Oracle. DecisivEdge is reportedly of hedge fund administration ser- BondMason Launches vices, has launched a new release of onboarding its first customer, a mid- the OpusNotes loan accounting plat- Self-Invested Personal sized lessor of residential HVAC equip- form for marketplace lending vehicles. Pension Program ment, to the platform and is working Since institutional capital started to be with several other interested lenders. bit. BondMason has become the first deployed into the marketplace lending ly/2pyVzhE peer-to-peer service provider to launch a asset class, Opus has been refining its

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THE ALTERNATIVE LENDING REPORT Industry News

Research & Markets Predicts for consumer loans. The state’s posture is introduce a 2.0 version this year. bit. P2P Lending Will Grow at setting off alarms in the marketplace lend- ly/2oRKAlo a CAGR of 51.5% by 2022 ing industry, where websites frequently partner with banks in arrangements that Small Businesses Hate Fintech Research and Markets announced its are designed to work around state-by-state Lenders More than Big Banks “Global Peer to Peer Lending Market” interest rate caps. bit.ly/2pxUir6 report and said the P2P lending market The Federal Reserve Bank of New was valued at $26,064 (million) in 2015 States Oppose OCC’s York released its 2016 small business and is projected to reach $460,312 (mil- Proposed Fintech Charter credit survey, which provides an idea lion) by 2022, growing at a CAGR of of the experiences of over 10,000 firms 51.5% from 2016 to 2022. They reported While most would agree that a fin- across the U.S. While small business that in 2015, small business loans domi- tech charter has the potential of facilitat- expectations don’t say much about the nated the market, whereas consumer ing innovative companies, states are not economy, the survey does report useful credit loans are anticipated to grow at a likely to cede their regulatory territory information on how small business own- robust rate, in terms of market share. bit. easily. State attorneys general, state regu- ers view various sources of credit. The ly/2pvRvSf lators and the Conference of State Bank results for fintech startups, specifically Examiners all oppose the OCC’s move online lenders, are not as terrific as one MPL Securitizations Total as an attack on federalism and state reg- might expect. bit.ly/2pdXWcT $3B in First Quarter ulatory oversight. Those groups fear that the preemptive effect of a federal charter Rep. Graves says Congress Seven marketplace lending securitiza- will nullify their ability to protect con- Needs to Support Small tions took place in the U.S. in the first sumers. bit.ly/2oRYLqS Business Lending quarter of 2017, with a total value of $3 billion, according to new research from NJ Bankruptcy Case Takes Aim Representative Sam Graves, chair- PeerIQ. This is up from $2.4 billion in at Small Business Financing, man of the House Committee on Small the fourth quarter of 2016. The alterna- MCA and Bank Partnerships Business, wrote an article discussing a tive lending research firm reports that well-worn theme among small business total issuance to date now stands at $18 A complaint filed by the bankruptcy owners. He said Washington needs to billion, comprised of 80 U.S. MPL deals trustee for Lam Cloud Management, “stand to the side and let the American since September 2013. bit.ly/2pxYwzc LLC in the United States Bankruptcy entrepreneur lead the path to recovery.” Court for the District of New Jersey Many would contend that Rep. Graves Key SBA Program in Danger challenges two small business financing is part of the beltway elite that’s actu- of Hitting Legislative Cap models: (i) merchant cash advances; and ally blocking the path of entrepreneurs (ii) small business loans originated under through his lack of support of key lend- It is becoming increasingly likely bank partnerships. The complaint is ing programs like the SBA’s 504 pro- that a supplemental appropriation will another recent challenge involving usury gram, which is set to expire in coming be needed to keep the Small Business and bank partner programs and warrants months. bit.ly/2ol4xhC Administration’s 7(a) loan-guarantee attention from entities involved in small program operating through September. business lending. bit.ly/2okc9Rr Marathon Partners At $11.3 billion, the program’s volume Calls for Vote Against halfway through its fiscal year is about Banks Get More Goodies OnDeck’s Directors 9% ahead of the scorching pace set a year in Updated Dodd- earlier. bit.ly/2okkt3o Frank Overhaul Plan Marathon Partners announced it released a letter that was sent to the board Online Lenders Spooked House Financial Services Commit- of directors of OnDeck Capital express- by Colorado’s Tough tee Chairman Jeb Hensarling is likely ing concerns about the direction of the Stance on Interest Rates to reintroduce a Dodd-Frank overhaul company and making recommendations bill by the end of the month. The Finan- on steps to improve shareholder value. The ongoing battle over the inter- cial Choice Act has been the House Marathon also announced its intention est rates that online lenders can charge GOP’s flagship financial reform bill and to vote against the three incumbent direc- has moved to Colorado, which is taking passed out of committee in the last Con- tors up for election at OnDeck’s upcom- aggressive steps to enforce its 12% rate cap gress, but Hensarling has said he would ing annual meeting scheduled on May

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THE ALTERNATIVE LENDING REPORT Industry News

10. In its letter to the board, Marathon Wall Street Reform and Consumer Pro- delivered to Governor Cuomo for execu- recommended two courses of action for tection Act are out, which include possi- tive action. The controversial lender OnDeck: Fully rationalize the company’s ble changes to the leadership structure of licensing proposal, which appeared in cost structure to achieve profitability and the top housing agencies. According to Part EE of the initial proposal, has been reduce the pressure on the organization the summary of bill changes, the origi- “intentionally omitted” from the amend- to grow its loan portfolio, and seek the nal CHOICE Act would restructure the ed budget bill passed by the Legislature. sale of the company to a partner where FHFA and OCC as bipartisan commis- bit.ly/2pekryb OnDeck can thrive without the risks of sions. The new CHOICE Act 2.0 cuts destabilizing confidence in the business. a lot of those proposed changes, and Accion Report Suggests bit.ly/2nZHkp0 instead, the FHFA director would be Data Can Lead to removable at will by the president, with Financial Inclusion China Rapid Finance Sets no changes to the current law regarding Terms for U.S. IPO OCC and NCUA. bit.ly/2px9isl A new report released by Accion finds potential for financial service pro- China Rapid Finance, a peer-to-peer HSBC to Pay $2M to viders to leverage data-driven innova- lender based in Shanghai, announced that Resolve Fraud Lawsuit tions to improve business operations and it has set the terms for its upcoming US Over SBAExpress Loans reach the world’s financially underserved. IPO. The company plans to raise $105M Despite this, the report contends that through the offering of 10 million shares Joon H. Kim, the acting U.S. attor- many service providers do not adequate- priced between $9.50 to $11.50 a share. ney for the Southern District of New ly use data to its full potential. Early At $10.50 a share, China Rapid Finance York, and Eric S. Benderson, the acting adopters often start by using alternative would have a fully diluted market value of general counsel of the U.S. Small Busi- sources – such as mobile call records, $586M. Founded in 2001, China Rapid ness Administration, announced that the utility payments, and social media activ- Finance is a consumer lending market- United States has settled a civil fraud ity – to extend credit to “thin-file” or place that aims to serve China’s emerging lawsuit against HSBC Bank. The gov- “credit-invisible” customers. Accion says middle class. bit.ly/2oJ4kqU ernment’s complaint, filed on April 10, that such data can drive innovation in 2017, sought damages and civil penalties business activities such as verifying cus- Small Businesses Hold under the False Claims Act for miscon- tomer identity, digitizing workflows for Fast to Aversion to Debt duct in connection with HSBC’s partici- automated business processes, analyz- pation in the SBAExpress loan program, ing customer behavior to develop per- Small business owners are holding which was designed to help start-ups sonalized products, and using real-time fast to their aversion to taking on more and existing small businesses. HSBC messaging services to improve customer debt, even though they’re optimistic agreed to pay $2,118,861.36 to resolve service. bit.ly/2oq68Sp about the future. That’s the finding of a the government’s claims, and admitted, report on small business credit released acknowledged, and accepted responsibil- Transparency Remains last week by 12 Federal Reserve regional ity for conduct alleged in the complaint. a Sticking Point for banks across the country. The report, bit.ly/2pxfyAb based on a 2016 survey, found that about Online Lenders three-quarters of company owners used Controversial NY Lender The recent small business credit personal funds when their businesses Licensing Proposal Removed survey by the Federal Reserve Bank of needed cash, instead of seeking financing from Budget Bill New York found 46% customer satisfac- including loans. And only 19% of com- tion at online lenders like Lending Club panies expect to increase their debt level A New York lender licensing proposal and OnDeck Capital with a 19% rate of this year, down from 34% that did so in that threatened to create new regulatory dissatisfied customers – compared with 2016. bit.ly/2oSn3Ro burdens for financial service provid- large banks’ 61% of customers who indi- Republicans Propose ers and to potentially adversely affect cated they were satisfied with their small credit availability to New York resi- business loan process and 15% of whom Drastic Overhaul of dents and businesses, has been removed expressed dissatisfaction. Almost half of Dodd-Frank and CFPB from a New York State budget bill. The all customers specified that their dissat- amended budget bill, S. 2008-C/A. isfaction came from a “lack of transpar- The updates to the leading Repub- 3008-C, has passed both houses of the ency.” bit.ly/2o0sizp lican effort to replace the Dodd-Frank New York State Legislature and been SmallBusinessLending.io 13 April 20, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission.

THE ALTERNATIVE LENDING REPORT Loan Tape

M&A + Partnerships (April 1 through April 18) During the period April 1 through April 18, 2017, M&A deal activity and strategic partnership announcements in the alternative lending and small business lending segments included the following companies/transactions. DATE COMPANIES STRUCTURE DEAL DESCRIPTION 4/3/17 Pacific Premier Bancorp, Acquisition Pacific Premier Bancorp announced that it has completed the acquisition, effective as of April 1, 2017, Heritage Oaks Bancorp of Heritage Oaks Bancorp, a California-chartered banking corporation headquartered in Paso Robles, California. 4/4/17 Fundbox, Zoho Partnership Fundbox and Zoho announced a partnership in which Zoho will offer Fundbox to its user base in the U.S. Under the partnership, Zoho will provide access to Fundbox's technology to streamline and automate the business borrowing experience within the Zoho ecosystem. 4/4/17 Consumer Capital Group Partnership Partnering with Yilongdai, CCG Yin Hang can provide better financial advisory service for micro, small-to- Inc., CCG Yin Hang, medium sized enterprises ("SMEs") in China. Yilongdai 4/4/17 FTN Financial, Coastal Acquisition FTN Financial, a division of First Tennessee Bank, has completed the acquisition of Coastal Securities, a Securities national leader in the trading, securitization and analysis of Small Business Administration (SBA) loans. 4/4/17 AltFi Data, Lendix Partnership AltFi Data, an independent analytics firm, has announced a deal with business loans marketplace Lendix. The French online lender now joins UK-based firms Zopa, Funding Circle, RateSetter and MarketInvoice, as well as US-based Prosper Marketplace, in supplying data to the analytics firm. 4/4/17 Bond Street, NerdWallet Partnership Bond Street announced plans to partner with NerdWallet to help more small business owners access fair and affordable financing. The two will create resources, guides and webinars to support the growth of businesses. In addition, entrepreneurs can access financing from Bond Street via NerdWallet’s Small Business Loan Tool. 4/5/17 Flagstar, Opes Advisors Acquisition Flagstar will operate Opes Advisors as a separate division with its own brand, providing a strategic expansion to Flagstar’s retail home lending franchise. 4/6/17 PacWest Bancorp, CU Merger PacWest Bancorp and CU Bancorp announced the signing of a definitive agreement and plan of merger Bancorp whereby PacWest will acquire CU Bancorp in a transaction valued at approximately $705 million. 4/6/17 Tradeshift, CreditEase Partnership Tradeshift has partnered with CreditEase to deliver a trade financing app that will bring low-cost financing to millions of businesses in China. CreditEase, a peer-to-peer lender in China (and globally), can now deliver accounts receivables financing to millions of fast-growing small and medium enterprises (SMEs). 4/7/17 NewOak, LendingArch Partnership LendingArch, the Calgary-based online and point-of-sale lending platform, announced a partnership with NewOak, a New York-based asset management and institutional advisory firm who have advised on over $5.5 trillion in assets on behalf of the world's top banks, institutions, law firms and regulators. This partnership gives NewOak the ability to purchase up to $2 billion worth of loans originated through LendingArch's platform over the next three years. 4/10/17 Experian, BioCatch Partnership Credit bureau Experian has joined forces with technology firm BioCatch to use behavioral biometrics to help its clients spot fraudsters applying for credit cards and other lending products online. 4/12/17 North State Bank, nCino Partnership nCino, a cloud banking solution, announced that North State Bank has successfully gone live with its Bank Operating System, centralizing and automating the commercial loan process, ultimately enhancing overall borrower experience. 4/12/17 BayCom Corp, First ULB Merger BayCom and First ULB announced the receipt of regulatory and shareholder approvals of the merger of Corp First ULB with and into BayCom, and the subsequent merger of United Business Bank with and into Bay Commercial Bank. 4/12/17 CWB Financial Group, Partnership CWB Financial Group (CWB) and Payfirma announced a new strategic partnership, the first of its kind in Payfirma Canada, that will provide CWB with a white labeled version of Payfirma's payment technology platform, PayHQ. 4/12/17 ArmadaUSA, Davis Acquisition Armada Group USA, has acquired 50% of the issued and outstanding common shares of Bahn, d/b/a Commercial Finance Davis Commercial Finance. 4/12/17 NCSS, Kabbage Partnership The National Cybersecurity Society (NCSS) entered into a strategic partnership with Kabbage Inc., an online financial technology company that provides funding directly to small businesses through its automated lending platform. 4/12/17 CreditEase, Jerusalem Partnership CreditEase Wealth Management signed an MOU with the School of Business Administration, the Hebrew School of Business University of Jerusalem to jointly boost strategic cooperation in internship, educational resource sharing, Admin. cultural events and commercial exchanges.

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THE ALTERNATIVE LENDING REPORT Loan Tape

DATE COMPANIES STRUCTURE DEAL DESCRIPTION 4/14/17 Fifth Third Bank, Accion Partnership Fifth Third Bank announced an investment and expanded partnership with the Accion U.S. Network - the largest network of nonprofit small business lenders in the United States - to support lending to underserved small businesses in Florida, Indiana, Illinois, Michigan and Ohio. 4/18/17 Payix, Nortridge Software Partnership Payix and Nortridge Software announced a strategic alliance to help lenders connect with their borrowers and improve collections. The alliance allows Payix to offer real-time integration between its suite of collections tools and the Nortridge Loan System.

New Investments (April 1 through April 18) During the period April 1 through April 18, 2017, new investment activity in issuers operating in the alternative lending and small business lending segments included the following companies/transactions. DATE COMPANY BUSINESS DESCRIPTION AMOUNT STRUCTURE USE OF PROCEEDS INVESTORS 4/3/17 Cadence Cadence Bancorporation operates $150,000,000 IPO Organic growth; general Not applicable Bancorporation as a bank holding company for corporate purposes Cadence Bank, N.A. that provides commercial banking products and services to businesses, high net worth individuals, business owners, and retail customers in the United States. 4/3/17 China Rapid China Rapid Finance Limited, $105,000,000 IPO Increase capitalization and Not applicable Finance through its subsidiaries, provides financial flexibility, liquidity, consumer lending marketplace in employee retention the People’s Republic of China. 4/5/17 Wecash Wecash provides big data $80,000,000 Venture, Development of AI-enabled China Merchants Venture analytics services. Series C lending system for financial Capital Management Co., institutions, expand partnership Ltd., Forebright Capital, network, expanding in Latin SIG, Dongfang Hongdao America Capital, Lingfeng Capital 4/10/17 Funding Circle Funding Circle Limited operates $182,000,000 Private Equity Investments in line with Accel, Baillie Gifford, DST an online marketplace for small its investment policies and Global, Index Ventures, business loan lenders and seekers. objectives; working capital Ribbit Capital, Rocket Internet, Sands Capital Ventures, Temasek, Union Square Ventures. 4/12/17 First Circle First Circle offers consumer $2,500,000 Venture, Seed To further develop technology Accion Venture Lab, Deep lending, mortgages, and asset- and a data analytics platform Blue VC, 500 Startups, IMJ, based lending services. and Key Capital 4/12/17 Lend LEND connects investors with $3,500,000 Venture, Platform development and Polytech Ecosystem borrowers. Series A marketing, automation Ventures, Angel Investors enhancement, customer usability 4/13/17 4finance 4finance Holding S.A. offers $325,000,000 Debt To refinance 2019 USD notes Not disclosed at time of Holding S.A. online single and installment loan and call 2018 SEK notes; growth/ publication services. corporate purposes 4/13/17 Global Financial Global Financial Credit, LLC, Undisclosed Private Equity Acquisitions, financing Lovell Minnick Partners Credit a specialty finance company, relationships, and other provides pre-settlement cash corporate development efforts advances. 4/17/17 Perfios Perfios Software Solutions Pvt. Ltd. $6,200,000 Venture, Team expansion, international Bessemer Venture Partners provides personal finance software Series A expansion, and potential application to manage personal acquisitions finance. 4/17/17 SmartCoin SmartCoin Financials Pvt Ltd. $500,000 Venture, Seed Hiring; upgrading technology; Unicorn India Ventures develops a micro lending scaling operations application to disburse unsecured loans to individuals beyond the salaried class.

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THE ALTERNATIVE LENDING REPORT Loan Tape

Indices of Interest All data as of April 19, 2017 or last reported date. Constituents refer to either stocks or individual loans included as members of the index. Information sources include Nasdaq and company web sites. INDEX TICKER VALUE CONSTITUENTS TYPE KBW/Nasdaq Fintech Performance Index KFTX 1,128.52 49 Fintech Cliffwater Direct Lending Index CDLI 3,139.00 > 6,000 Comm. Loan Orchard US Consumer Online Lending Index n/a 1,500.08 1,350 Cons. Loan Funds of Interest FUNDS TICKER MKT. CAP CURRENT PRICE 12-MO. % CHANGE VPC Specialty Lending (in GBP) VSL n/a 0.773 -14.88 Ranger Direct Lending (in GBP) RDL n/a 10.19 2.90 SME Loan Fund PLC (in GBP) SMEF n/a 99.17 3.52 River North Marketplace Lending (in USD) RMPLX n/a 25.20 n/a

SBA Year Over Year Activity Comparison (For week ended April 7, 2017) The following table includes information about Small Business Administration loans for the current year to date, broken down by size, and compares that activity with the similar period from last year in order to gauge changes in credit formation and composition. 2016 2017 YOY CHANGE All Activity YTD (7A) $11,313,811,600 $12,421,946,400 9.79% Existing vs. New Business (% of All) 64% 36% 64% 35% Size Breakdown Amount Amount $150K and Under $1,111,085,200 10% $1,074,925,500 9% >$150K - $350K $1,316,902,000 12% $1,355,554,600 11% >$350K - $2M $5,378,404,800 48% $5,690,329,200 46% >$2M $3,507,419,600 31% $4,301,137,100 35%

SBA Year Over Year Activity Comparison SBA Loan Size Breakdown For week ended April 7, 2017 YTD as of April SBA Loan Size Breakdown7, 2017 YTD as of April 7, 2017 $14

$12 9% $10 11% 34% $8 $ Billions $6

$4 46%

$2

$0 $150K and Under >$150K - $350K >$350K - $2M >$2M 2016 2017

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THE ALTERNATIVE LENDING REPORT Loan Tape

Thomson Reuters/PayNet Small Business Lending Indices (As of February 2017)

The Small Business Lending Indices from Thomson Reuters/PayNet track credit activity within the U.S. small business sector. The nearby chart graphs two of these mea- sures, the Small Business Lending Index, which tracks the net volume of new commercial loans and leases to small busi- nesses, and the Small Business Delinquency Index, which follows the percentage of reporting small businesses that are 91 to 180 days past due (DPD) on payment as an indicator of financial stress and default risk. Taken together, the indices provide meaningful insights into business cycle trends, eco- nomic growth, capital investment and employment within the small business niche of the U.S. economy.

Net Percentage of Banks Tightening Standards for C&I Loans to Small Businesses

Taken from the U.S. Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, the nearby chart shows the net percentage of banks polled that have indicated they are tightening credit standards for small businesses. Declines in the measure suggest fewer banks are raising standards, and thus suggest easing credit condi- tions; rises mean businesses may encounter greater difficulty obtaining financing. Gray areas indicate periods of recession.

U.S. 10-Yr./3-Mo. Spread Versus Recession Probability U.S. 10 yr./3-mo. Spread Versus Recession Probability

4.00 50%

3.50 45% Declines in the yield spread between 10-year U.S. Treasury bonds and 3-month U.S. Treasury bills tend to lead increases 3.00 40% in the chances of a recession. The nearby chart shows the 2.50 35% yield spread (blue line) graphed against the U.S. Federal 2.00 30% Reserve’s Recession Probability Indicator (background) back

1.50 25% to January 1988. Sharp drops in the spread generally fore- shadow rises in the probability indicator, increasing the likeli- 1.00 Percentage Points 20% hood of recessionary conditions 12 months later. 0.50 15% Currently, the gradual saw-tooth movement down in 0.00 10% spreads since the end of the financial crisis has broadly coin-

-0.50 5% cided with global zero-interest rate policies and quantita- tive easing, and has not yet generated a meaningful increase -1.00 0% in recession probability, which although off its 2016 lows, remains very low. Recession Probability (RS) 10-Year/3-Month Yield Spread (LS)

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THE ALTERNATIVE LENDING REPORT Brokering Dynamics

Continued from front page ness loans, but Defonte attributes the the minute. And if you go to an online years,” he added. advent of the Dodd-Frank Act to their lender, you won’t find someone to help Furthermore, most online lenders retrenchment. “Banks are shying away you,” Gusmano asserted. Most online base their lending on analytics. If the from lending to small businesses because lenders would dispute that point, since criteria are met, they can turn a decision it takes the same amount of money to many offer personalized loan specialists. around in a day or so, as opposed to what underwrite a file for $5,000 as it does for Determining which online lender fits used to take over a week with the more $5 million. It’s a lot of work and banks for each client is executed on a case-by- cumbersome banks. shied away from it,” he says. case basis. Aggregators And that void created the niche of These business brokers identify the Replacing Brokers small business lenders that offer online online lender that maximizes the bor- capital with fast turnarounds. But the rower’s chances of obtaining a loan. Despite the positive role that brokers industry is changing at a rapid pace. Some online lenders won’t offer capi- play in the online lending process, Mike While brokers still play a role in recom- tal to start-ups and require more of a Michalowicz, a Morristown, N.J.-based mending cli- track record, business consultant, said that their role ents to online but some do. is fading fast. He says they operate in a lenders, some “Some lend- painstaking and antiquated way and are experts say “Each loan is idiosyncratic. It’s ers like to quickly being replaced by targeted web- their days are never one size fits all.” fund deals for sites and aggregators that send custom- numbered. six months ers to online platforms. Factors Gary Lockwood, because the Brokers, he noted, represent “more and brokers Business Capital Consultants margins are of a one-on-one mentality.” The broker like Broadway higher. Some shops out the loan for a fee, but that can Advance rec- fund differ- take some time to investigate. Online ommend can- ent types of aggregators can perform that same task didates to online lenders that fill the void industries,” Lockwood stated. Each loan in minutes with a much greater preci- that most banks deserted: offering small is idiosyncratic, and Lockwood said, “It’s sion. Online lenders are faster, cheaper business loans. Many borrowers are des- never one size fits all.” and more effective than brokers, Micha- perate to make payroll or obtain quick In the online lending industry, fund- lowicz concluded. cash for expansion. “They don’t have ing varies greatly depending on each With the traditional bank, the larger three months to act on this opportuni- lender. Some cater to micro loans and the loan, the more circumspect the loan ty and often have three days,” Defonte start as low as $2,000; but many offer officer is because it wants to maximize pointed out. capital with a $10,000 threshold. Some the chances that the loan will be repaid. If the small business doesn’t meet the reach a maximum at $250,000 but some Hence, small businesses must show a criteria that Broadway Advance sets as a go to several million. demonstrated track record of rising rev- factor, then it morphs into a broker and Online lenders – like traditional enue and supply sufficient collateral or for a fee connects the client to the online offline lenders – consider a range of the loan is denied. lender that best makes a match. factors to grant loans including: FICO Online lenders are appealing to a Similarly, Richard Gusmano, manag- scores, financial records, average check- wider range of customers than banks. ing director at Huntington, N.Y.-based ing account balance, monthly sales and With online loans, “People making deci- Business Capital Consultants, and Gary even how seasonality affects sales. sions are more tuned in, understand the Lockwood, its chief operating officer, Online lenders are increasingly fill- next generation of businesses, and often serve as brokers connecting borrowers ing a valuable niche by supplying objec- embrace innovative businesses,” Micha- to the right online lender. Gusmano said tively evaluated short-term loans, which lowicz noted. Hence, their criteria won’t many clients are hungry for capital and most banks disdain. “A restaurant doing be as rigid, and they’ll understand that don’t know where to obtain it so they $50,000 a month in sales with a 600 profits take time to build and still grant turn to brokers for assistance. credit score likely will end up with an loans. “If you own a print shop in the online lender,” Gusmano said. “Most Michalowicz is seeing smaller inde- West Village and want to expand, your banks won’t look at [lending to] a res- pendent savings and community banks accountant isn’t telling you how to do taurant outside of equipment financ- and credit unions, starting to explore it. Your attorney isn’t telling you how to ing. And most banks won’t grant a loan electronic lending themselves. “They’re do it, and if he is, he’s charging you by unless the restaurant is operating for two being more proactive in modernizing

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THE ALTERNATIVE LENDING REPORT Brokering Dynamics

their lending approach and becoming Moreover, Wood says because Fun- Finally, Carter landed at Smartbiz more like online lenders,” he said. dera operates by scale, it offers lower and submitted all the necessary financial Electronic platforms have disrupted fees than brokers. Often the broker’s fee data. After a week, Smartbiz authorized lending for small business, Michalowicz is incorporated into the loan, spiking it. the $250,000 loan. But the entire process concluded. “It’s fast, easy, efficient. You Loans that Fundara expedites start as took several more weeks until Smartbiz can obtain it quickly with little effort low as $2,000 and can rise to $2 million. approved an SBA loan sponsored by and get money within 24 hours. That’s While Fundera handles a diverse mix First Home Bank, with his studio – not the big advantage,” he said. of small businesses, its most prevalent his house – as collateral. “It was much Fast and efficient might also describe customers are “traditional Main Street easier than going for an SBA loan to a Fundera, a Wall Street-based aggrega- businesses, including three top retail- bank,” Carter added. tor, which launched in 2014, and directs ers: restaurants, ecommerce and gen- The online loan enabled him to stay small business borrowers to the most eral contractors,” Wood said. The major competitive. “It allowed me to get people appropri- driving force on board much quicker,” he said. ate lender. It for taking OnDeck’s Shrinking doesn’t lend “We provide a technology platform out a loan is Broker Channel money, but cash flow and expedites the that replaces loan brokers.” paying bills, Speed also prevails at OnDeck Capi- process. Meredith Wood, maintain- tal, which specializes in making loan In the pre- ing inventory decisions quickly, within a day in many online days, Fundera and updating cases, and deposits funding in a day or banks weren’t equipment. so, explained Kimberly Solarz, its direc- open on week- Fundera tor of brand marketing. OnDeck focuses ends or evenings, explained Meredith directs clients to the lowest interest rates on businesses that have been in opera- Wood, the vice-president of content at that suit their business. Half of its staff tion for more than a year, which gener- Fundera. “With online lending, all of a consists of loan specialists, who augment ate $100,000 in annual revenue, though sudden, a business owner can have access what is executed online, with one-on- average revenue is $500,000. It offers to loans at any hour of the day,” she one consultations. term loans from $5,000 to $500,000 and noted. Once the loan is approved, Fundera lines of credit up to $100,000. Moreover, online lending amplifies maintains contact and arranges metrics Over the years OnDeck has part- access to a whole host of borrowers who to remind clients to pay loans back and nered with a variety of brokers, includ- previously were shut out and couldn’t avoid any surcharges. Then it strives to ing consultants, accountants, funding meet traditional banking criteria. help customers with any subsequent advisors and attorneys but that number “Online lenders take on more risk than loans, depending on their capital needs. has been dwindling. The percentage of traditional banks,” she said. When Russell Carter, founder of loans to customers via its “funding advi- Fundera’s mission is to help small Philadelphia, Pa.-based Body Cycle Stu- sor program” dipped from 41 percent in business owners understand and navigate dios, which specializes in spin classes, was 2014, to 28 percent in 2015 and 27 per- loans. “We provide a technology plat- looking to borrow $250,000 to renovate cent in 2016. form that replaces loan brokers,” Wood his studio and hire new instructors, he Solarz said that OnDeck has been said. started with the credit union where he focusing on collaborating with brokers Business owners access Fundera’s banks. But they presented several hurdles “whose values we’re aligned with. Some website, complete an application, pro- including wanting his house as collateral. brokers are better than others. Over vide financial data, and then the site Instead, he turned to Fundera. A loan the last three to five years, we’re work- offers three or four options that vary specialist guided him along the way, but ing with a smaller number who exhibit from SBA loans to targeted online lend- even then, some obstacles cropped up. much stronger quality.” ers. “We know our borrowers and pro- Fundera asked him for three years of vide insight based on past experience,” bank statements and income statements Wood stated. Borrowers can plug their and directed him to an online lender. Have news that may be of interest to QuickBooks accounts directly into the But that lender also wouldn’t authorize website, expediting and streamlining the the loan without his house as collateral, readers? Please email us at process, compared to the manual method forcing him to return to Fundera for [email protected] that most brokers employ. another option.

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THE ALTERNATIVE LENDING REPORT True Lender

Continued from front page

“Now that the banks are involved in River and WebBank have countersued two key principles of federal banking Colorado it brings in the federal pre- for a declaratory judgment, arguing, law. First, a bank’s right to offer their emption. Banks are stepping in and among other things, that Colorado did home state’s interest rates to borrowers claiming ownership of these programs, not join them in the enforcement action in other states under Section 27, and the so there’s going to be some fight. There’s against Avant and Marlette in an effort so-called “valid-when-made” principle, a lot of precedent to support these loan to dodge Section 27. Under that section, meaning a loan that is non-usurious programs, which have been done for 30 the FDIA lets state-chartered banks when originated cannot become usuri- years. This will probably be a test case.” “charge the interest rates of the banks’ ous after assignment or sale. Depending on how the cases play home states to borrowers nationwide, Essentially, Cross River argues that out, “this may be an existing federal bank- opportunity for another ing law overrides Colo- district court to come in “Banks are stepping in and claiming ownership of rado’s enforcement efforts and straighten this out,” these programs, so there’s going to be some fight... against the bank’s partner, Tomkies says. “The valid- This will probably be a test case.” Marlette. Further, Cross when-made doctrine is River says it “continues to a cardinal rule of usury, Mike Tomkies, retain a randomly-selected according to the Supreme Dreher Tomkies population of the loans Court. The Madden case to maturity and sells oth- was not properly present- ers to Marlette, though it ed to the court with all appropriate legal notwithstanding individual states’ laws retains an ongoing economic interest even theories.” regarding the terms, including interest in the loans it sells.” There is also a gray zone in the cur- rates and fees, on which loans may be Colorado’s action against Marlette rent litigation, since the ruling in the extended.” “directly challenges Cross River’s feder- Madden case noted that loan assign- Whatever the outcome, another ally protected rights to originate loans to ments under different circumstances attorney familiar with the legal issues in borrowers nationwide with interest rate might lead to a different legal decision. play says the impact won’t be immedi- [and other] terms permitted by its home Still, Colorado claims that the banks ate, but could cause banks and non-bank state … and to sell those loans to third cannot assign to partners the ability to partners to scrutinize their contractual parties with the assurance that the loans’ export interest rates. The attorney gen- arrangements and shore up any problem original terms will remain valid after the eral argues that loans sold to the banks’ areas so the non-bank does not bear all loans are sold,” Cross River says in the partners should fall under Colorado law the legal and financial risks of the loan. filing. The bank also says “underwriting governing interest rates and late fees – “These cases are litigated in a federal guidelines and the credit policy … are even though interest rate caps on state court in Colorado and don’t bind any- established by Cross River and approved bank loans are preempted by Section 27 body who’s not involved,” the attorney by its Board of Directors.” of the Federal Deposit Insurance Act. says, speaking on condition of anonym- The bank also addresses the issue of Colorado’s similar amended com- ity. “Madden was a debt-buying opera- its own legal risk, stating it “is respon- plaint filed in federal court against Avant tion but it raises the same questions: sible for consumer compliance and is alleges that Avant – and not WebBank When a bank sells a loan to a non-bank accountable to its prudential regulators – originated the loans, and bears all cost does the non-bank have the ability to for any potential violation.” Cross River and expenses. The complaint also claims charge the same interest? You can make also notes that the lending model under that Avant is responsible for interacting loans in states that have usury limits. But attack is “essential to the way Cross with customers and for “all servicing and the [Madden] case showed the ability River does business” and adheres to administration of the Avant Loans, even to export interest rates is like a driver’s “FDIC, OCC, and interagency guidance during the period before WebBank sells license. Just because you buy a car from on third-party lending.” the loans to Avant or its affiliates.” Colo- somebody doesn’t mean you have a driv- MPLs Using Bank-Partner er’s license to operate it.” rado also argues that funding for Avant Model at Risk Loans comes from Avant. A spokesman Cross River’s filing seeks protection for the state AG said the office does not of its “statutory and contractual rights The outcome of the Cross River and comment on pending cases. to freely extend credit and to freely sell WebBank cases and Colorado’s enforce- Defending their business model and loans on a nationwide basis.” Cross River ment efforts could set legal precedent potentially their very livelihood, Cross alleges that the Colorado suits ignore and have a major impact on marketplace

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THE ALTERNATIVE LENDING REPORT True Lender

lenders that use the bank-partner model, ed the Office of the Comptroller of the national banks would apply to all special as well as credit cards and other loan Currency to push for a special-purpose purpose national banks, even uninsured products in which banks sell loans to national bank charter. This would give ones.” non-bank financial services companies. fintech companies a set of umbrella “They’re not really taking appli- If Colorado prevails against Avant and regulations to follow, rather than regis- cations for those charters yet and it Marlette, there could be serious reper- tering on a state-by-state basis and fol- remains to be seen what the terms will cussions for fintech companies as well as lowing different rules in each. The OCC be,” says the attorney following the true chartered banks, which depend on sell- also sets higher capital requirements lender cases. “I wonder if any fintechs ing loans to manage their balance sheets. for a special charter to reflect “off bal- would qualify based on the requirements Cross River and WebBank did not ance sheet” activities a fintech might be that have been articulated to date. Much respond to requests for comment. involved in. higher capital requirements (compared “If these cases turn out badly for the “The reality today is that the 4,000 to banks) would be one obstacle.” companies it would seriously affect their fintech companies out there are already ability to buy and service loans,” says the competing with national and state banks, attorney following the cases. “Another without regard to any of the national option is to just stop lending in Colora- bank responsibilities and under a patch- do. There’s also a question as to whether work of supervision,” OCC Comptrol- Have news that may be of interest to other states will do the same thing. You ler Thomas Curry said when the special readers? Please email us at have a lot of cases where it’s a copycat charters were announced. “In some ways, [email protected] thing.” [this] levels the playing field because True lender ambiguities have prompt- statutes that by their terms apply to

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