Alternative Funders Bid Adieu to 2016, Show Renewed Optimism for 2017
December 12, 2016
After getting pummeled in 2016, many alternative funders have licked their wounds and are flexing their muscles to go another round in 2017.
“The industry didn’t implode or go away after some fairly negative headlines earlier in the year,” says Bill Ullman, chief commercial officer of Orchard Platform, a New York-based provider of technology and data to the online lending industry. “While there were definitely some industry and company-specific challenges in the first half of the year, I believe the online lending industry as a whole is wiser and stronger as a result,” he says.
Certainly, 2016 saw a slowdown in the rapid rate of growth of online lenders. The year began with slight upticks in delinquency rates at some of the larger consumer originators. This was followed by the highly publicized Lending Club scandal over questionable lending practices and the ouster of its CEO. Consumers got spooked as share prices of industry bellwethers tumbled and institutional investors such as VCs, private equity firms and hedge funds curbed their enthusiasm. Originations slowed and job cuts at several prominent firms followed.
Despite the turmoil, most players managed to stay afloat, with limited exceptions, and brighter times seemed on the horizon toward the end of 2016. Institutional investors began to dip their toes back into the market with a handful of publicly announced capital-raising ventures. Loan volumes also began to tick up, giving rise to renewed optimism for 2017.
Notably, in the year ahead, market watchers say they anticipate modest growth, a shift in business models, consolidation, possible regulation and additional consumer-focused initiatives, among other things.
MARKETPLACE LENDERS REDEFINING THEMSELVES
Several industry participants expect to see marketplace lenders continue to refocus after a particularly rough 2016. Some had gone into other businesses, geographies and products that they thought would be profitable but didn’t turn out as expected. They got overextended and began getting back to their core in 2016. Others realized, the hard way, that having only one source of funding was a recipe for disaster.
“Business models are going to evolve quite substantially,” says Sam Graziano, chief executive officer and co-founder of Fundation Group, a New York-based company that makes online business loans through banks and other partners.
For instance, he predicts that marketplace lenders will move toward using their balance sheet or some kind of permanent capital to fund their loan originations. “I think that there will be a lot fewer pure play marketplace lenders,” he says.
Indeed, some marketplace lenders are starting to take note that it’s a bad idea to rely on a single source of financing and are shifting course. Some companies have set up 1940-Act funds for an ongoing capital source. Others have considered taking assets on balance sheet or securitizing assets.
“The trend will accelerate in 2017 as platforms and investors realize that it’s absolutely necessary for long-term viability,” says Glenn Goldman, chief executive of Credibly, an online lender that caters to small-and medium-sized businesses and is based in Troy, Michigan and New York.
BJ Lackland, chief executive of Lighter Capital, a Seattle-based alternative lender that provides revenue-based start-up funding for tech companies, believes that more online lenders will start to specialize in 2017. This will allow them to better understand and serve their customers, and it means they won’t have to rely so heavily on speed and volume—a combination that can lead to shady deals. “I don’t think that the big generalist online lenders will go away, just like payday lending is not going to go away. There’s still going to be a need, therefore there will be providers. But I think we’ll see the rise of online lending 2.0,” he says.
Despite the hiccups in 2016, Peter Renton, an avid P2P investor who founded Lend Academy to teach others about the sector, says he is expecting to see steady and predictable growth patterns from the major players in 2017. It won’t be the triple-digit growth of years past, but he predicts investors will set aside their concerns from 2016 and re-enter the market with renewed vigor. “I think 2017 we’ll go back to seeing more sustainable growth,” he says.
THE CONSOLIDATION EQUATION
Ron Suber, president of Prosper Marketplace, a privately held online lender in San Francisco, says victory will go to the platforms that were able to pivot in 2016 and make hard decisions about their businesses.
Prosper, for example, had a challenging year and has now started to refocus on hiring and growth in core areas. This rebound comes after the company said in May that it was trimming about a third of its workforce, and in October it closed down its secondary market for retail investors. Suber says business started to pick up again after a low point in July. “Business has grown in each of the subsequent months, so we are back to focused growth and quality loan production,” he says.
Not long after he said this, Prosper’s CEO, Aaron Vermut, stepped down. His father, Stephan Vermut, also relinquished his executive chairman post, a sign that attempts to recover have come at a cost.
Other platforms, meanwhile, that haven’t made necessary adjustments are likely to find that they don’t have enough equity and debt capital to support themselves, industry watchers say. This could lead to more firms consolidating or going out of business.
The industry has already seen some evidence of trouble brewing. For instance, online marketplace lender Vouch, a three-year-old company, said in June that it was permanently shuttering operations. In October, CircleBack Lending, a marketplace lending platform, disclosed that they were no longer originating loans and would transfer existing loans to another company if they couldn’t promptly find funding. And just before this story went to print, Peerform announced that they had been acquired by Versara Lending, a sign that consolidation in the industry has come.
“I think you will see the real start of consolidation in the space in 2017,” says Stephen Sheinbaum, founder of New York-based Bizfi, an online marketplace. While some deals will be able to breathe life into troubled companies, others will merge to produce stronger, more nimble industry players, he says. “With good operations, one plus one should at least equal three because of the benefits of the economies of scale,” he says.
Market participants will also be paying close attention in 2017 to new online lending entrants such as Goldman Sachs’ with its lending platform Marcus. Ullman of Orchard Platform says he also expects to see more partnerships and licensing deals. “For smaller, regional and community banks and credit unions—organizations that tend not to have large IT or development budgets—these kinds of arrangements can make a lot of sense,” he says.
A BLEAKER MCA OUTLOOK
Meanwhile, MCA funders are ripe for a pullback, industry participants say. MCA companies are now a dime a dozen, according to industry veteran Chad Otar, managing partner of Excel Capital Management in New York, who believes new entrants won’t be able to make as much money as they think they will.
Paul A. Rianda, whose Irvine, California-based law firm focuses on MCA companies, likens the situation to the Internet boom and subsequent bust. “There’s a lot of money flying around and fin-tech is the hot thing this time around. Sooner or later it always ends.”
In particular, Rianda is concerned about rising levels of stacking in the industry. According to TransUnion data, stacked loans are four times more likely to be the result of fraudulent activity. Moreover, a 2015 study of fintech lenders found that stacked loans represented $39 million of $497 million in charge-offs.
Although Rianda does not see the situation having far-reaching implications as say the Internet bubble or the mortgage crisis, he does predict a gradual drop off in business among MCA players and a wave of consolidation for these companies.
“I do not believe that the current state of some MCA companies taking stacked positions where there are multiple cash advances on a single merchant is sustainable. Sooner or later the losses will catch up with them,” he says.
Rianda also predicts that the decrease of outside funding to related industries could have a spillover effect on MCA companies, causing some to cut back operations or go out of business. “Some companies have already seen decreased funding in the lending space and subsequent lay off of employees that likely will also occur in the merchant cash advance industry,” he says.
THE REGULATORY QUESTION MARK
One major unknown for the broader funding industry is what regulation will come down the pike and from which entity. The Office of the Comptroller of the Currency that regulates and supervises banks has raised the issue of fintech companies possibly getting a limited purpose charter for non-banks. The OCC also recently announced plans to set up a dedicated “fintech innovation office” early in 2017, with branches in New York, San Francisco and Washington.
There’s also a question of the CFPB’s future role in the alternative funding space. Some industry participants expect the regulator to continue bringing enforcement actions against companies. In September, for instance, it ordered San Francisco-based LendUp to pay $3.63 million for failing to deliver the promised benefits of its loan products. Ullman of Orchard Platform says he expects the agency to continue to play a role in the future of online lending, particularly for lenders targeting sub-prime borrowers.
Meanwhile, some states like California and New York are focusing more efforts on reining in online small business lenders, and it remains to be seen where this trend takes us in 2017.
MORE CONSUMER-FOCUSED INITIATIVES ON HORIZON
As the question of increased regulation looms, some industry watchers expect to see more industry led consumer-focused initiatives, an effort which gained momentum in 2016. A prime example of this is the agreement between OnDeck Capital Inc., Kabbage Inc. and CAN Capital Inc. on a new disclosure box that will display a small-business loan’s pricing in terms of total cost of capital, annual percentage rates, average monthly payment and other metrics. The initiative marked the first collaborative effort of the Innovative Lending Platform Association, a trade group the three firms formed to increase the transparency of the online lending process for small business owners.
Katherine C. Fisher, a partner with Hudson Cook LLP, a law firm based in Hanover, Maryland, that focuses on alternative funding, predicts that more financers will focus on transparency in 2017 for competitive and anticipated regulatory reasons. Particularly with MCA, many merchants don’t understand what it means, yet they are still interested in the product, resulting in a great deal of confusion. Clearing this up will benefit merchants and the providers themselves, Fisher notes. “It can be a competitive advantage to do a better job explaining what the product is,” she says.
CAPITAL-RAISING WILL CONTINUE TO POSE CHALLENGES
Although there have been notable examples of funders getting the financing they need to operate and expand, it’s decidedly harder than it once was. Renton of Lend Academy says that some institutional investors will remain hesitant to fund the industry, given its recent troubles. “It’s a valuation story. While valuations were increasing, it was relatively easy to get funding,” he says. However, industry bellwethers Lending Club and OnDeck are both down dramatically from their highs and concerns about their long-term viability remain.
“Until you get sustained increases in the valuation of those two companies, I think it’s going to be hard for others to raise money,” Renton says.
Several years ago, alternative funders were new to the game and gained a lot of traction, but it remains to be seen whether they can continue to grow profits amid greater competition and the high cost of obtaining capital to fund receivables, according to William Keenan, chief executive of Pango Financial LLC, an alternative funding company for entrepreneurs and small businesses in Wilmington, Delaware.
These companies continue to need investors or retained earnings and for some companies this is going to be increasingly difficult. “How they sustain growth going forward could be a challenge,” he says. Even so, Renton remains bullish on the industry—P2P players especially. “The industry’s confidence has been shaken. There have been a lot of challenges this year. I think many people in the industry are going to be glad to put 2016 to bed and will look with renewed optimism on 2017,” he says.
Prior to this story going to print, small business lender Dealstruck was reportedly not funding new loans and CAN Capital announced that three of the company’s most senior executives had stepped down.
OnDeck Announces New $200 Million Revolving Credit Facility with Credit Suisse
December 9, 2016
NEW YORK, Dec. 9, 2016 /PRNewswire/ — OnDeck® (NYSE: ONDK), the leader in online lending for small business, announced today the closing of a $200 million asset-backed revolving debt facility with Credit Suisse.
In addition to its other funding sources, OnDeck may now obtain funding under the new credit facility with Credit Suisse, subject to customary borrowing conditions, by accessing $125 million of committed capacity and an additional $75 million of capacity available at the discretion of the lenders.
“OnDeck has emerged as a leading provider of growth capital to small businesses around the country,” said Jon-Claude Zucconi, Managing Director, Credit Suisse. “The team’s innovative vision and commitment to financing is vital to expansion and growth in the small business community.”
Under the facility, loans will be made to Prime OnDeck Receivable Trust II, LLC, or PORT II, a wholly-owned subsidiary of OnDeck, to finance PORT II’s purchase of small business loans from OnDeck. The revolving pool of small business loans purchased by PORT II serves as collateral under the facility. OnDeck is acting as the servicer for such small business loans. The Class A Loans under the facility were rated by DBRS, Inc.
OnDeck intends to initially use a portion of this facility, together with other available funds, to optionally prepay in full without penalty or premium, the existing $100 million Prime OnDeck Receivable Trust, LLC facility which was scheduled to expire in June 2017. As a result, OnDeck will benefit from obtaining additional funding capacity through December 2018.
“This transaction marks a continuation of our financing strategy to diversify funding sources, extend debt maturities, and create additional funding capacity to pave the way for future loan growth,” said Howard Katzenberg, Chief Financial Officer, OnDeck. “We are pleased to have Credit Suisse, a leading global financial institution, support OnDeck in our mission to power the growth of small business through lending technology and innovation.”
About OnDeck
OnDeck (NYSE: ONDK) is the leader in online small business lending. Since 2007, the company has powered Main Street’s growth through advanced lending technology and a constant dedication to customer service. OnDeck’s proprietary credit scoring system – the OnDeck Score® – leverages advanced analytics, enabling OnDeck to make real-time lending decisions and deliver capital to small businesses in as little as 24 hours. OnDeck offers business owners a complete financing solution, including the online lending industry’s widest range of term loans and lines of credit. To date, the company has deployed over $5 billion to more than 60,000 customers in 700 different industries across the United States, Canada, and Australia. OnDeck has an A+ rating with the Better Business Bureau and operates the educational small business financing website BusinessLoans.com.
For more information, please visit www.ondeck.com.
About Credit Ratings
Credit ratings are opinions of the relevant rating agency. They are not facts and are not opinions of OnDeck. They are not recommendations to purchase, sell or hold any securities and can be changed or withdrawn at any time.
Safe Harbor Statement
This press release contains “forward-looking statements” within the meaning of the private Securities Litigation Reform Act of 1995 and other legal authority. Forward-looking statements include statements about the intended use of proceeds from the new facility and expected optional repayment in full of the existing facility, the extension of debt maturities and the availability of additional funding capacity, all of which are dependent upon compliance with the borrowing and other conditions of the new facility, as well as information concerning OnDeck’s business plans and objectives and financing plans including future loan growth. Forward-looking statements can also be identified by words such as “will,” “enables,” “expects”, “may,” “allows,” “continues,” “believes,” “intends,” “anticipates,” “estimates” or similar expressions. Forward-looking statements are neither historical facts nor assurances of future performance. They are based only on OnDeck’s current beliefs, expectations and assumptions regarding the future of its business, anticipated events and trends, the economy and other future conditions. Moreover, OnDeck does not assume responsibility for the accuracy and completeness of forward-looking statements. As such, they are subject to inherent uncertainties, changes in circumstances, known and unknown risks and other factors that are difficult to predict and in many cases outside OnDeck’s control.
As a result, you should not rely on any forward-looking statements. OnDeck’s expected results may not be achieved, and actual results may differ materially from OnDeck’s expectations. Important factors that could cause actual results to differ from OnDeck’s forward-looking statements are the risks that OnDeck may not be able to manage its anticipated or actual growth effectively, that its credit models do not adequately identify potential risks, and other risks, including those under the heading “Risk Factors” in OnDeck’s Annual Report on Form 10-K for the year ended December 31, 2015, Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and in other documents that OnDeck files with the Securities and Exchange Commission, or SEC, from time to time which are available on the SEC website at www.sec.gov. OnDeck undertakes no obligation to publicly update any forward-looking statements for any reason after the date of this press release to conform these statements to actual results or to changes in OnDeck’s expectations, except as required by law.
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SBA ‘SmackDown’ In Linda McMahon, As Pick for Administrator Brings More WWE to Small Business Funding
December 8, 2016
President-Elect Trump’s pick to head the Small Business Administration is Linda McMahon, the former CEO of World Wrestling Entertainment (WWE). The publicly-traded company has produced many household names over the years, from The Undertaker to Bret “The Hitman” Hart to The Rock.
In a public announcement, Trump said “Linda has a tremendous background and is widely recognized as one of the country’s top female executives advising businesses around the globe. She helped grow WWE from a modest 13-person operation to a publicly traded global enterprise with more than 800 employees in offices worldwide.”
If confirmed by the Senate, McMahon will succeed Maria Contreras-Sweet, who has held the position since 2014 and has had a pretty open attitude about online lenders. The former WWE exec taking her place might find even more common ground with the non-bank finance community given that Bret the Hitman Hart is the official spokesperson for a merchant cash advance company.
Sharpshooter Funding in Canada, which heavily features Hart in their marketing campaigns, is affiliated with First Down Funding, a US-company that also does small business funding. A joint-company press release from earlier this year quotes Hart as saying, “When you sit down and listen to the whole format and how it provides money to much needed businesses and small business owners that need financial support and extra funding. It’s a worthwhile endeavor, and I’m actually very grateful that Paul Pitcher involved me with it so far.”
Meanwhile, McMahon says she is up to the task. “Our small businesses are the largest source of job creation in our country,” she said in an announcement. “I am honored to join the incredibly impressive economic team that President-elect Trump has assembled to ensure that we promote our country’s small businesses and help them grow and thrive.”
LendingMania might be just around the corner in 2017.
SmartBiz Loans Ranked Number One Provider of Traditional SBA 7(a) Loans Under $350,000
December 5, 2016SAN FRANCISCO, CA – December 5, 2016 – SmartBiz Loans, the first SBA marketplace and bank-enabling technology platform, has ranked as the number one provider of non-Express, SBA 7(a) loans under $350,000 for the 2016 government fiscal year. SmartBiz also ranked number five among providers of under $350,000 traditional SBA 7(a) and Express 7(a) loans combined.
“SmartBiz’s success in this year’s SBA 7(a) ranking demonstrates how technology can support banks in meeting the needs of small businesses,” said Evan Singer, CEO of SmartBiz Loans. “SmartBiz is committed to creating the leading marketplace for both banks and small business owners, by matching small business owners with the bank best suited to their needs and enabling a higher percentage of SBA loans to be approved.”
SmartBiz generated $200 million in funded SBA 7(a) loans through its bank lending partners, which helped them earn the top spot. The data used is based on SBA lending data released in November, reflecting its 2016 fiscal year which ended on Sept. 30. Wells Fargo Bank, which was ranked just below SmartBiz, generated $155 million in funded non-Express SBA 7(a) loans under $350,000. This is the first time a technology platform and marketplace has achieved the number one position in SBA’s ranking of 7(a) loans.
“Small businesses are the driving force of the economy,” said Ann Marie Mehlum, retired Associate Administrator, Office of Capital Access, U.S. Small Business Administration. “By supporting them, the SBA and lending partners like SmartBiz are investing in the economy as a whole.”
SmartBiz is revolutionizing SBA lending. Its marketplace helps increase approval rates by automatically directing businesses to the right lender, while its advanced software streamlines the SBA loan application, underwriting and origination process. In this way, SmartBiz fills a critical gap in the small business loan market and enables small businesses nationwide to grow without settling for the sky-high rates of alternative online lenders or undergoing the typically slow and tedious traditional bank process.
About SmartBiz Loans
SmartBiz Loans is a unique combination of an online SBA loan marketplace and a bank enabling technology platform. The company’s online software provides SBA preferred lenders customized and automated origination, underwriting and documentation, making approval and funding fast and easy. Sophisticated algorithmic sorting in the SmartBiz marketplace also enables higher approval rates for small businesses because the right applications are automatically directed to the right bank. SmartBiz is based in San Francisco and was founded in 2009 by a team of experienced financial services entrepreneurs with backing from leading venture capital firms including Investor Growth Capital, Venrock, First Round Capital, Baseline Ventures, and SoftTech VC. Learn more at www.smartbizloans.com.
The Art of The ‘Thiel’ – With Fintech Leader On Trump’s Transition Team, Alternative Lenders Could Benefit
November 13, 2016
Peter Thiel is famous for a lot of things, co-founding PayPal, backing Hulk Hogan’s lawsuit against Gawker and being a billionaire venture capitalist, just to name a few. Accustomed to shaking up Silicon Valley with his investments and antics, these days Thiel stands to impart his wisdom on another region, Washington DC. That’s because last week he became part of the Executive Committee of President-Elect Trump’s transition team.
After speaking at the 2016 Republican National Convention and donating $1.25 million towards Trump’s election efforts, his allegiance to the campaign should come as no surprise. His support is said to be genuine too, and that’s perhaps because the two have relied on similar rhetoric to make their points.
“Competition is For Losers”
Who said that quote? If you thought Donald Trump, you’re wrong, but you wouldn’t be blamed for thinking that given that so much of Trump’s mantra was focused on America “winning.” Competition is For Losers is the title of a 2014 Wall Street Journal essay penned by Thiel, that argued a perfectly competitive marketplace, an economic utopia, is flawed. “In business, equilibrium means stasis, and stasis means death,” he wrote. Entrepreneurs should instead strive for a monopoly, to win, he explained.
Winning is certainly something Thiel has done a lot of, making him a role model of the Trump credo.
“I think they should be described as terrorists, not as writers or reporters.”
Who said that quote? If you thought Donald Trump, you’re wrong, but you wouldn’t be blamed for thinking that given Trump’s hostility towards the media. Thiel said that in 2009 about Gawker reporters, and he bottled up that disdain and unleashed it in the form of financial support for Hulk Hogan against Gawker in a lawsuit years later, the force of which crippled Gawker and put the company into bankruptcy. It’s a revenge narrative that sounds oddly Trumpesque.
While there are likely more contrasts between the two men than similarities like these, both share a special penchant for winning. And more to the point, in a Trump presidency, Thiel may have his ear.
That should be welcome news to fintech and alternative lenders, given Thiel’s strong financial interest in that sector. Small business lender OnDeck has already experienced a 43% increase in its stock price since Trump was announced the winner. Enova, which bought merchant cash advance firm The Business Backer, is up 13%. That’s no doubt in part a result of Trump’s campaign promises to put a moratorium on financial regulations and recent pledge to dismantle the Dodd-Frank Act.
But with Thiel, his ties to alternative lending and fintech were made evident when he gave the keynote speech at LendIt earlier this year in San Francisco, in which he colorfully reiterated his theory about competition being a losing endeavor. “If you want to compete like crazy, you should just leave the conference and try to open a restaurant in San Francisco,” he said.
Thiel participated in SoFi’s $80 Million Series C round and Avant’s $225 million Series D round. “There are a lot of banks in the United States, but not enough access to credit,” he said in an announcement for the latter at the time.
He also participated in ZestFinance’s Series C round and both OnDeck’s D and E rounds.
And more recently, his VC fund, Founder’s Fund, led the $100 million Series D round of Affirm. The fund has also invested in Able Lending, BitPay and Upstart.
Last month, Phin Upham, a principal of Thiel Capital, another of Thiel’s investment firms, dismissed Goldman Sachs’ recent attempt to cash in on tech-based lending. “I wonder if Goldman will actually be able to keep up, because this is not a mature industry, everything changes sometimes within months.”
The NY Times reported that Thiel will not be moving to Washington and may not have a formal role in the administration, but that he will have a voice.
“A page in the book of history has turned, and there is an opening to think about some of our problems from a new perspective,” the Times reported Thiel saying. “I’ll try to help the president in any way I can.”
If truly given the opportunity to do so, Thiel’s influence could be a boon to fintech and the larger economy as a whole.
At the Money2020 conference last month, Trump was largely and quite openly derided by industry leaders. They may soon be changing their tune.
Other members of the Executive Committee of the transition team include:
- Congressman Lou Barletta
- Congresswoman Marsha Blackburn
- Florida Attorney General Pam Bondi
- Congressman Chris Collins
- Jared Kushner
- Congressman Tom Marino
- Rebekah Mercer
- Steven Mnuchin
- Congressman Devin Nunesv
- Anthony Scaramucci
- Donald Trump Jr.
- Eric Trump
- Ivanka Trump
- RNC Chairman Reince Priebus
- Trump Campaign CEO Stephen K. Bannon
It is quite possible that we may soon be making fintech ‘Great Again’
Square Beats Revenue Estimates with $439 Million; Lending Business Grows 70%
November 2, 2016Square Inc’s stock jumped 7 percent on Wednesday, thanks to upbeat earnings reported Tuesday.
The Jack Dorsey-led company recorded a loss of $32 million for the third quarter, compared to $52 million in the comparable period last year, and beat analysts’ revenue estimates of $430 million, with a 32 percent jump in revenue totaling $439 million.
Square processed $13.2 billion worth of transactions through its point of sale devices, up 39 percent since last year and the company’s lending business, Square Capital grew 70 percent annually, extending $208 million through 35,000 loans. With this, it has originated over $1 billion in two years.
Square Capital loans are made by Celtic Bank and loan offers are presented using the Total Cost of Capital method, where cost is disclosed as a precise dollar amount so that potential borrowers will know exactly how much they will have to pay. By enforcing a fixed 18 month term, Square differentiates its loan product from a merchant cash advance or a purchase of future sales.
Square CFO Sarah Friar told CNBC that there is still a lot of room for growth in the Square ecosystem with existing merchants, even as the company extends credit to businesses that do not use Square for payments. Friar also said that the company is “executing on all cylinders” to beat estimates for revenue and growth.
Funders Prep for the Holiday Rush
November 1, 2016
As the year draws to a close sending everyone into a dizzying holiday frenzy, funders are prepared to fire on all cylinders to fuel their retail customers with cash.
The last quarter is crunch time for funders alike, who start preparing months in advance — designing new products, marketing and selling them. AltFinanceDaily spoke to a few to find out what business looks like at this time of the year and what’s in store for 2017.
For some, Christmas comes in August
At South Dakota-based Expansion Capital Group, the holiday prep started as early as August. “We think demand is going to be very strong and to accommodate for it, we started 60 days early,” said Marc Helman, director of strategic partnerships. The company launched four new products in August for a wide spectrum of borrowers — longer term products for existing customers and starter offers for new companies and those with challenged credit.
Since the demand peak is cyclical, most funders who have been around a while have the drill down to a science. For NYC-based funder Hunter Caroline, demand spikes up close to the tax extension period, in September and October. “We sit down with our marketing team, see which clients ramp up this time of the year and focus our sales efforts in that direction,” said Cody Roth, managing partner at Hunter Caroline. During the holiday season the company turns its attention to customers in mom and pop retail, restaurants, liquor stores and gift stores in small towns.
“We weigh a lot into seasonal businesses and have certain hybrid programs,” Roth said. “We collect a little bit more during the busy season and keep it down during the slow time.” For this year specifically, the two-year-old firm is pushing invoice factoring, purchase order financing and unsecured loan products apart from its usual business loan offering of up to $4 million for 24 months.
Plan, pilot, pivot
Q4 is also the time when companies plan and strategize for the year ahead. And for loan marketplace Bizfi, a lot of changes are in the offing. The company appointed John Donovan, a 30-year veteran in the payments and alternative finance industry as its new CEO. And while on track to approach nearly $600 million of fundings this year, Bizfi also decided to cut ties with some non-performing ISOs to increase efficiency. “We just told around a hundred sales offices we could not do business with them anymore to use resources for our own funding channels that have better conversion rates,” said Stephen Sheinbaum, founder and president of Bizfi.
Holiday Hangover
The holiday season is arguably one of the busiest times of the year for merchants, but it doesn’t have to be so for funders. Jason Reddish, CEO of New Jersey-based Total Merchant Resources advises all his clients to take the money when they don’t need it, asking clients to borrow early, put away the money and by November, have the capital pay for itself through the peak season. “The oldest problem with credit is that you get as much as you want when you don’t need it,” Reddish remarked. “You have access to cheap and the most flexible money when you don’t need it.”
The company tries to structure deals that way for some of its retail clients who see high holiday demand.“We see a pretty big spike going into the holidays and then there is a holiday hangover where they are absorbing all the money they borrowed,” Reddish remarked. “Until the hangover wears off in February and we get busy again.”
All things considered, funders are on their marks for the holiday. Will it be bright for them?
Smile, Dial and Trial? Why the Next Call Might be Your Worst Nightmare
October 26, 2016
Aaron Smith sued a merchant cash advance company in the United States District Court of Southern California earlier this year for allegedly making unsolicited calls to his personal cell phone registered on the Do-Not-Call list. His name has been changed for this story because he’s a vexatious litigator, even landing on an official list of vexatious litigants by the State of California in the early 2000s thanks to his tendency to file harassing lawsuits. But that’s not all, Smith has a criminal history that includes stalking and extortion and he’s served time in prison for his role in a multi-million dollar mortgage fraud RICO conspiracy.
These days he’s suing small business financing companies for alleged violating phone calls, at least five of which we could identify through San Diego court records just over the last several months. Two of the suits appeared while we were researching this story, which means that there could probably be even more by the time that you are reading this.
Smith presumably runs a business as his website has and still continues to advertise services to consumers. But if you are not an existing customer or have not been referred by an existing customer, his website warns that attempting to contact him by any means is a violation. Suffice to say that AltFinanceDaily did not attempt to contact Smith to get his side of the story.
In one complaint, Smith claims that the phone number receiving the unsolicited calls is a “private personal cellular telephone.” To his credit, a cursory glance of his business website does not appear to list any phone number for it at all. However, the Internet Archive Wayback Machine which allows users to see archived versions of web pages across time, revealed that very same phone number being prominently displayed on his business website for several years including up to as recent as September, 2015, after which it was removed. There’s reason then to question if Smith might be up to no good.
While the merits of Smith’s claims will be up to the courts to decide, his background doesn’t inspire confidence. Countless other plaintiffs using the Telephone Consumer Protection Act (TCPA) to file lawsuits have colorful backgrounds in their own right, a lot of which can be found using Google. But a suggestion relayed by some of our readers is that plaintiffs appear to be doing what they do for profit, not because they have been harmed by the calls they allegedly receive. AltFinanceDaily decided to conduct its own independent research on this issue.
SUING FOR PROFIT?
That’s just what the headline of a WDSU TV story alluded to in its coverage in 2004 of a stay-at-home Pennsylvania dad named Stewart Abramson. Titled, Man Who Turns Table On Telemarketers Turns Profit, Too, quotes Abramson as saying, “First, I’ll write them all and tell them that I’m willing to settle for the minimum statutory damages per call, which is $500, but if they don’t want to settle, then I’ll file a civil complaint.”
In a case he won against a debt consolidation firm for calling him with a prerecorded message, Abramson reportedly said, “It would have made sense for them to pay the minimum damages due me, but they wanted to put up a fight. I don’t mind. I’ll take more money.”
Abramson continued to say at the time that he felt empowered by Congress to stop this illegal activity and that he was just doing his part and making a little money for doing so. More than a decade later, Abramson’s name is still showing up as a plaintiff in TCPA cases, including in at least one complaint discovered by AltFinanceDaily against a small business financing company.
According to court records, the defendant contended that Abramson was “in the business of suing entities for violations of the TCPA,” an accusation the judge ruled irrelevant to the particular matter at hand.
Michael Goodman, a partner in the Washington DC office of law firm Hudson Cook, who was not asked about this case specifically, said in an emailed interview that generally accusing someone of being a serial plaintiff might not really help.
“Accusing a plaintiff of being a serial or professional TCPA plaintiff is unlikely to affect the outcome much, if at all,” Goodman said. “While there are outliers, the general rule is that the court will assess the merits of each case individually and will not ‘punish’ a plaintiff for being a serial or professional TCPA plaintiff.”
An email address for Abramson could not be located and given the special circumstances of his history, we did not attempt to call him.
If ever there was a TCPA celebrity however, it’d be Diana Mey, a self-described stay-at-home mom who started wrangling with telemarketers in 1998 after what her website described as “a series of intrusive telemarketing calls by a Sears affiliate pitching vinyl siding.”
She’s an important figure in TCPA history, not just because she’s been awarded millions through her lawsuits but also because she helped draft the FTC’s rules. Reports show her participating in FTC-hosted telemarketing forums in 2000 and 2002 and her name even appears in the footnotes of the FTC’s Telemarketing Sales Rule entered into the Federal Register in 2003. And so we followed Mey’s story online, noting that she has actually become famous for her pursuits, even appearing in a TV segment for ABC News in 2012. Her website at www.dianamey.com teaches others how they too can pursue monetary damages from telemarketers that engage in illegal practices.
“The first step is to write a formal ‘demand’ letter to the president of the company, stating that the letter is a formal claim for money […] for violations of the Telephone Consumer Protection Act of 1991,” her website advises.
It was quite a surprise then to discover that this Diana Mey was the same Diana Mey captioned as a plaintiff in a current case against a small business financing company. Almost two decades after her first experience, she is still filing lawsuits for alleged telemarketing violations.
Mey declined to respond to our questions even though they were not about that case, citing pending litigation.
“I’m a mom and I’m a housewife, and I’m an accidental activist,” Mey said in that 2012 ABC News interview. Others have referred to her as a “private attorneys general,” defined as someone who brings a lawsuit considered to be in the public interest.
That same title has been attributed to one Robert Braver who is the man behind www.do-not-call.com which launched in 1998 as “a consumer’s resource for stopping unsolicited telemarketing calls.” His comments appear in FCC records and he was also featured in a Dateline NBC special in 2002 about a new telemarketing scheme that was alarming consumers. Suffice to say Braver has been a consumer proponent in this area of the law for a long time, a role that has not come without risks.
According to Braver, the attorney for one telemarketer he sued, arranged to have his (then) elementary school age kids stalked and photographed, a terrifying ordeal that was only made worse after the attorney allegedly sent him a fax bragging about it. But he has continued on, noting that while he has gotten much fewer junk faxes, telemarketing calls have gotten more out of hand over time, to the point where they’re disruptive to everyday life.
“My wife is a middle school teacher,” Braver said. “She doesn’t work in the summer and gets home before I do when she is teaching. She typically leaves her phone in her purse in a spot in the kitchen and hangs out in in the den or back patio. It’s gotten so bad at times that when I need to call her, she doesn’t get up and run to look at her phone when it rings, and I have ignored unknown calls on my cell and let them go to voicemail, only to find out later that they were legit calls.”
And sometimes it’s a total mystery how they even get added to a list. “We have two teenage boys still at home, and they have cell phones too. Somehow my youngest son’s cell number got on a marketing list for student loan debt relief, and was getting 10-15 calls a day for a while,” Braver explained.
Contrast that with a story that appeared in the Dallas Observer in 2010 about one Craig Cunningham, another celebrity-like TCPA figure who still has active cases pending, public records reveal.
According to the story, Cunningham stays at home on a “dumpy couch” to wait for a particular type of phone call, “one from a representative of a debt collection agency or a credit card company, whom he’ll try to ensnare like a Venus fly trap,” the Observer reported. Cunningham is said to have learned his trade from online message boards, where we decided to look next to see if there was anyone out there indeed talking about TCPA lawsuits for profit.
On May 25, 2014, a participant using the pseudonym codename47 published a thread titled, TCPA enforcement for fun and for profit up to 3k per call on fatwallet.com, the exact kind of salacious headline that defendant companies have probably imagined in their worst nightmares. Codename47 has a big fan base it seems, with one user even suggesting to him that he should create and sell a “sue telemarketers” package so that people could do what he does for side income.
Codename47 is Craig Cunningham, who we reached out to with some questions through the fatwallet forum. He declined to answer them, citing pending litigation and the fact that he no longer does interviews.
One user on fatwallet in 2010 said of Cunningham, “It’s kind of hard to convince a Federal judge that you are a victim when you are trying to find a publisher for a book called CREDIT TERRORIST.”
WAIT, WHAT?
It now being six years later, no such book can be found in Amazon or through Google. A link to where purported information on it once was leads to a page-not-found error. The Archive Wayback Machine however, produces an interesting find.
Tales Of A Debt Collection Terrorist: How I Beat the Credit Industry At Its Own Game and Made Big Money From the Beat Down is the title of a proposed book in 2010 by Craig Cunningham and Brian O’Connell. O’Connell is a writer/content producer for TheStreet.com and a well-known and widely published author. He tells AltFinanceDaily that he wished he had written it with Cunningham but that they didn’t move forward with it.
But the proposal remains, including the description of Cunningham as being a highly sought after expert in the field of debt collection “revenge” industry.
Outside of fatwallet, the only other real mention of the proposed book could be found on a website called debtorboards.com. Lenders might find the website horrifying considering the forum’s tagline is “Sue Your Creditor and Win.” With more than 20,000 members and nearly 300,000 posts, the forum has an entire section dedicated to TCPA. Legal strategy is a dominant topic and it’s abundantly obvious that people are working together to stop companies from calling them.
Sadly, it’s not all innocent consumers out there. For example, the TCPA has invited abuse to the point where at least one person admitted to buying cell phones to maximize the chances of getting illegal calls so that they could sue. That’s what serial plaintiff Melody Stoops said in a June 2016 deposition as part of her case against Wells Fargo in the Western District of Pennsylvania.
Q. Why do you have so many cell phone numbers?
A. I have a business suing offenders of the TCPA business — or laws.Q. And when you say business, what do you mean by business?
A. It’s my business. It’s what I do.Q. So you’re specifically buying these cell phones in order to manufacture a TCPA? In order to bring a TCPA lawsuit?
A. Yeah.
Purchasing at least 35 phones, she even went so far as to register them with out-of-state area codes in places she thought were more economically depressed and therefore more likely to get violating calls. Stoops sent out so many pre-litigation demand letters and filed so many lawsuits that she could not be certain how many she sent out or how many suits she was in, according her to deposition.
Apparently Stoops found the line of legal perversion and crossed it. On June 24, 2016, the judge ruled in favor of Wells Fargo because she wasn’t injured by the calls she received, nor were the injuries she claimed within the “zone of interests” the law was meant to protect. “It is unfathomable that Congress considered a consumer who files TCPA actions as a business when it enacted the TCPA,” he wrote.
A TURNING POINT?
Hudson Cook law partner Michael Goodman said, “the impact of Stoops v. Wells Fargo is still to be determined, but I would say that it is significantly fact specific and therefore unlikely to result in large-scale changes in TCPA private actions. Stoops put a lot of effort into becoming a magnet for calls that could violate the TCPA. In many TCPA cases, consumers do not need to try that hard to receive a call that could prompt a TCPA suit.”
Stoops was pursuing calls while most of the advice and discussion uncovered online is about what to do if you get a call, not about how to create the calls in the first place. Even debtorboards, for example, is a registered non-profit, keeping consistent with its image as a consumer empowerment tool.
If the tide is turning though, it’s not in a direction favorable to telemarketers. Goodman said that “in July 2015, the FCC announced a new interpretation of the TCPA’s ‘autodialer’ standard that significantly expanded the definition and introduced a lot of unnecessary uncertainty as to what is and is not a regulated autodialer. That interpretation is currently being challenged in court. There’s a bit of a trend among courts requiring plaintiffs in autodialer cases to do more than simply allege that they were called with an autodialer. These courts, possibly in an effort to frustrate TCPA autodialer cases, are requiring plaintiffs to include circumstantial evidence of dialer use in their complaints: dead air, hang-up calls, generic messages, and so on. But the TCPA’s penalty structure still encourages suits that should not be brought.”
FCC Commissioner Ajit Pai, who was appointed by President Obama, voiced dissent to this new interpretation, echoing Goodman’s comments that it encourages frivolous suits.
An excerpt of Pai’s official dissent is below:
“Some lawyers go to ridiculous lengths to generate new TCPA business. They have asked family members, friends, and significant others to download calling, voicemail, and texting apps in order to sue the companies behind each app. Others have bought cheap, prepaid wireless phones so they can sue any business that calls them by accident. One man in California even hired staff to log every wrong-number call he received, issue demand letters to purported violators, and negotiate settlements. Only after he was the lead plaintiff in over 600 lawsuits did the courts finally agree that he was a “vexatious litigant.”
The common thread here is that in practice the TCPA has strayed far from its original purpose. And the FCC has the power to fix that. We could be taking aggressive enforcement action against those who violate the federal Do-Not-Call rules. We could be establishing a safe harbor so that carriers could block spoofed calls from overseas without fear of liability. And we could be shutting down the abusive lawsuits by closing the legal loopholes that trial lawyers have exploited to target legitimate communications between businesses and consumers.
Instead, the Order takes the opposite tack. Rather than focus on the illegal telemarketing calls that consumers really care about, the Order twists the law’s words even further to target useful communications between legitimate businesses and their customers. This Order will make abuse of the TCPA much, much easier. And the primary beneficiaries will be trial lawyers, not the American public.”
The FCC reviewed 19 individual petitions on the matter, some of which included relatively recent comments from the individuals we’ve mentioned so far. The appearance is that the FCC has collaborated with some individuals continuously over time or that individuals have collaborated continuously with the FCC. It might not matter though. Michael Goodman says that “the TCPA gives distinct enforcement rights to the FCC as well as persons who receive a call that violates the statute.”
“It isn’t really a matter of whether a particular violation should be handled by the FCC or privately,” Goodman adds. “Private plaintiffs have independent incentive to sue thanks to the TCPA’s penalty structure, and, compared to the FCC, private plaintiffs do not have to be as choosy in picking targets for actions.”
And what are the violations and penalties exactly? Goodman explained as follows:
“Depending on the specific TCPA provision at issue, private actions may be brought by individual consumers as well as businesses. The autodialer and prerecorded message provisions can be enforced by individuals and consumers, and they can sue based on a single improper call. For these provisions, the TCPA directs courts to award $500 per violation; courts do not have discretion to award a lesser figure. Courts do have discretion to award up to three times that amount (i.e., up to $1,500) per violation for willful or knowing violations. The TCPA’s do-not-call provisions are enforced by individual consumers, and this type of action requires more than one unlawful call in a 12-month period. For the do-not-call provisions, courts do have discretion to award less than $500 per violation (and can triple the penalty for willful or knowing violations).
The FCC has authority to obtain penalties of up to $16,000 per day of a continuing violation or per violation. FCC rules establish factors for the FCC to consider in calculating a proper penalty figure, including the nature of the violation, history of prior offenses, and ability to pay.”
“The base $500 per violation in statutory damages that consumers are entitled to hasn’t increased since the TCPA went into effect in 1992,” said activist Robert Braver. “This should be increased, especially since the TCPA does not allow for the recovery of attorney’s fees.”
Goodman said that private actions are much more common than FCC enforcement actions. That much is obvious. Private actions are becoming all too common in the small business financing industry where so many cases were uncovered through public records that we lacked the resources to follow them all.
More lawsuits might not be the cure though, according to Braver. He said that “more egregious telemarketing (massive robocall campaigns) should be criminalized on the federal level,” adding that “it’s one thing for an unscrupulous telemarketer to allow their shell corporation to have an uncollectible money judgment, but it’s another thing when individuals can wind up with a felony conviction on their records, and possible jail time.”
While that suggestion might antagonize telemarketers, Braver said that his cell phone, which is listed on the Do-Not-Call-Registry, can receive as many as 4-5 telemarketing calls per day, generally robocalls.
Whether plaintiff allegations from cases in this industry are true or not, legal fees over TCPA cases have continued to be an expense that many small business financing companies are contending with. Those costs have a way of being tacked on to the price of financing for small businesses that need capital, making it a lose-lose situation.
One marketing company in the industry who had to remain anonymous because settlement negotiations at the time were likely to include a non-disclosure clause, posed the question, “how are you supposed to help small businesses if you can’t actually call small businesses?”
“More and more merchants are using their cell phone as their business phone,” he argued. “The TCPA regulations need to be changed so that a merchant can’t claim his cell phone is his business phone one minute and his personal phone the next.”
Indeed, the motivations, facts and alleged damages in TCPA complaints are not always clear. And even though the plaintiffs don’t always win, the laws as they are, can make telemarketing difficult no matter how careful one is.
Still dialing for dollars these days? Just know that some folks may be just a little too happy that you called them. And for all the wrong reasons.
Good luck out there.
