Cash is still a hard commodity for businesses looking to grow or recover from losses. Alternative finance options have proven to be a go-to savior for these businesses. Now, alternative finance options are any money lending finance that does not come from the normal banks or financing institutions. But with the law having a tough time keeping up, alternative finance related legal matters have been interesting to say the least. There are already a few cases dubbed as the most famous alternative finance lawsuits.
Most states have realized an urgency in coming up with legal rulings regarding alternative finance to save customers from potholes they would have other wisely fallen into.
The Most Famous Alternative Finance Lawsuits
Let’s look at a few legal rulings alternative finance targeting chartered banks and trust companies, MCAs and more.
New York Passes New Law Related To Trust Companies And Chartered Banks – 2001
A new law in New York that was scheduled to be effective from February 1, 2022, targeted trust companies and chartered banks.
These institutions are to provide their customers with a notice that states that customers are accepting alternative payment schedules to reduce their credit score or rating. Governor Kathy Hochul signed the legislation back on November 3, 2021, and added the section to the New York Banking Law.
The new legal rulings alternative finance only applies to New York’s trust companies and chartered banks.
However, it fails to apply to any other federally chartered and New York state-chartered institutions like savings and loan associations, credit unions and savings banks. The new law entails:
Requirement of the disclosure; when a customer with an existing loan establishes an alternative payment schedule, the banks or trust company must provide a written disclosure on the consequences the alternative finance schedule has on the customer’s rating or credit score.
The banks are to disclose this information at the time of the loan application, when the loans are given to the customer and when requesting alternative finance be established for the loan. These disclosures should be done before the actual alternative payment schedule is established.
The new legislation addresses the need to let the customer know what they are getting themselves into. Before this law, some banks usually led customers to believe that alternative finance would not hurt the customer’s score rating with the financial institution.
Even with an alternative finance option, the banks still say that the customer has defaulted and reported late payment. To make matter worse, most customers are unaware of this and do not understand that alternative finance does nothing to preserve their credit rating.
Lending Disclosure Requirement – 2001
Effective June 21, 2021, the new lending disclosure affects fintech companies and non-banks based in New York, including MCA- Merchant Cash advance.
At that time, the New York governor, Andrew Cuomo, signed SB5470 that expanded New York’s financial services law that required fintech and non-banks to provide lending disclosures to small businesses. These lending disclosures should be similar to those under the Truth section in the lending ACT. Which are other famous alternative finance lawsuits.
However, the disclosure primarily applies to legal rulings alternative finance companies like MCAs providers with transactions that do not exceed $500,000. The law includes all sorts of transactions, such as factoring, sales-based, etc.
Fintechs are to disclose to small businesses at any point when a specific financing offer has been extended with the disclosure conforming to formatting determined by the superintendent in the department of financial services. Generally, the disclosures include:
- Finance charge
- Total repayment amount
- Payment amounts
- Repayment penalties; if any
- Description of all other potential charges
- The total amount of commercial financing; if the disbursement amount is different, disclose it too
- The estimated APR, or the APR in case of sales-based factoring
- Estimated or financing terms for sales-based transactions
- If applicable, description of security interests or collateral requirements, etc.
Factoring Transactions In The MCA Industry
Though the law offers a straightforward approach to traditional lending, it is less clear regarding MCA or sakes-based transactions.
MCA providers have two options when calculating estimated APR and term; the opt-in or historical method. Providers only have to select one method to apply to all MCA transactions and inform the superintendent of their choice.
For instance, when you choose to use the opt-in technique, it must report the date to the superintendent annually before it undergoes a review process.
For factoring transactions, providers calculate the estimated APR on a “single advance, single payment transaction” per federal truth according to the lending ACT appendix J. The purchasing amount is hence considered the financing amount:
Purchase amount – finance charge= payment amount; where the due date is the receivables term
The New York laws raises the below issues.
MCA disclosures, especially the application of fixed-financing metrics- APR and term, raises several issues:
- To begin with, financing recipients can compare financing goals, but an accurate comparison is impossible since providers elect between various techniques for calculating APRs and terms.
- Next, the MCA transaction provides an estimated APR and term standing in tension against the established NY case law. The estimates also go against institutions including fixed terms and reflect the transaction’s sales nature.
- Thirdly, small financing recipients’ record-keeping does not have available data required to conduct the historical method. It becomes difficult to determine the transactions in a short time frame. When choosing the elect, the opt-in method paints them in a bad picture since they only have to choose one method to calculate estimates; the DFS reports these financial institutions as having failed to comply with the ACT.
- Fourthly, DFS should draw a clear line as to an unacceptable deviation between actual and estimated APRs for any provider operating with the opt-in method. DFS should also determine whether providers voluntarily submitting annual reports to DFS takes advantage of the opt-in’s more flexible approach.
- Finally, the ACT is unclear whether a financing recipient has a private right to sue the lending institution.
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