Rapid Increase in Loan ‘Stacking’ Alarms Lenders

Triple-digit interest cash advance loans being offered by online lenders to small businesses who are already in debt are prompting fights between lenders and calls for more regulation over a practice driving some borrowers into bankruptcy.

The practice called “stacking” has led to lawsuits by at least two lenders who say the additional loans have kept them from being able to be repaid.

“Stacking is one of the most dangerous and damaging practices in the industry,” Sam Hodges, co-founder and U.S. managing director of online lender Funding Circle, told Bloomberg BNA in a Nov. 12 interview.

‘An Epidemic.’

And, it’s on the upswing, said Daniel Hines, president of Corporate Turnaround, a New Jersey-based company that specializes in helping struggling businesses reach settlements with creditors to avoid bankruptcy.

Though no official statistics exist on the practice, Hines said the percentage of its clients with merchant cash advance loans tripled from 24 percent in 2012-13 to 73 percent in 2014-15.

The percentage of those borrowers with multiple cash advance loans nearly doubled from 36 percent to 65 percent over the same time frame, he said, and the percentage with more than three outstanding advances doubled from 15 percent to 35 percent, with some having nine or 10 loans, Hines said.

“Merchant cash advances as a vehicle for small businesses has really exploded in the last couple of years,” Hines said in a Nov. 18 interview with Bloomberg BNA.

Several online lenders, including Funding Circle, identified loan stacking as a problem in their public comments in response to the Treasury Department’s request for information into online marketplace lending. In one case, Opportunity Fund, a California-based nonprofit that refinances cash advance loans at lower interest rates, said it was approached by the owners of a Southern California bakery that was making daily payments of more than $600 to four “high-cost, short term lenders.”

“The payments ate up more than 25 percent of their daily revenue,” Opportunity Fund said in its Sept. 29 letter to Treasury. “For a food business such as a bakery, with profit margins typically around 10 percent, that level of indebtedness is simply not sustainable in the long term.”

The bakery eventually shut down, putting its 13 employees out of work, Opportunity Fund said.

“In cases such as these—and we’re aware of scores of similar examples—each shuttered business represents not just the damaged dreams and credit of the individual owners, but lost jobs, vacant storefronts, and the loss of local goods and services, as well,” Opportunity Fund said.

The practice of lenders stacking loans on small business borrowers “is becoming an epidemic in small business lending,” Candace Klein, chief strategy officer for the online lender, Dealstruck, Inc. told Bloomberg BNA in a Nov. 18 interview. The company has filed suit with other lenders over stacking loans.

Bombarded With Offers.

A common practice, Hines and Hodges said, is for lenders to monitor Uniform Commercial Code financing statements when a small business takes out a loan, and offer the borrower even more loans. “The business is bombarded with e-mails and phone calls,” Hodges said. In many cases, the rates and interest are not clear, he said.

The loans are repaid through regular, sometimes daily debits from the business’ bank accounts, that “literally sucks the money out of the business,” Hodges said.

“The businesses are struggling and they think the next loan is going to be a savior for them,” Hines said. “Some companies out there are charging 135 percent interest. How can somebody agree to pay that in their right mind? They’re not reading [the terms], or being told not to read it, or they’re just so desperate, they just want the money and they’ll worry about it later,” he said.

“The sales pitch is I can get you money in five minutes and I’m not going to require documentation, and I’m not going to require a lien on your business,” Klein said.

Like Klein, Hines and Hodges were speaking in generalities and not about any particular company.

In response to the practice, Dealstruck began counseling its borrowers not to take out other loans, Klein said. The company also stopped doing business with brokers who were pushing loans to borrowers with outstanding debts. “Now, we’re taking on the stackers, because our borrowers can’t afford to do so” she said, referring to the lawsuits.

Court Battles.

Another lender, Small Business Financial Solutions, LLC, the business lending arm of RapidAdvance, filed a lawsuit July 9 against EBF Holdings, LLC, and FB Funding, LLC, in what the defendants called “a first of its kind” action (Small Bus. Fin. Solutions LLC v. EBF Holdings LLC, Del. Super. Ct., N15C-05-088, amended complaint filed 7/9/15).

MyBusinessLoan.com then filed suit Sept. 9 against five lenders, Fora Financial Business Loans, LLC, Funding Metrics, LLC, New Era Lending, LLC, Richmond Capital Group, LLV, and Pearl Beta Funding, LLC in the U.S. District Court for the Southern District of California (MyBusinessLoan.com, LLC v. Fora Fin. Bus. Loans LLC, S.D. Cal., 15-cv-02254, complaint filed 9/30/15).

In its suit, Small Business Financial Solutions (SBFS) said it lent Jaime Borgerding Construction and Handyman Services $48,000 in August 2014, with the borrower agreeing to repay the lender $60,960 through daily payments of $381 debited from the business’ bank account. In October 2014, according to the lawsuit, Borgerding received an additional $24,275 loan from FB Funding and EBF, and FB began debiting $399 daily from Borgerding’s bank account.

“As a direct result of these funds being withdrawn from Borgerding’s account, Borgerding was unable to make the required payments to SBFS,” the company’s complaint said. Small Business Financial Solutions said it lost $47,244.

The lawsuit alleged the same thing happened with a $250,000 loan that SBFS gave C.J.’s Transportation Services in January 2014, as well as a $25,000 loan given to Traina Services LLC in April 2015.

“RapidAdvance is unaware of any other way to address the problem of stacking,” besides SBFS filing the lawsuit, the parent company said in a Nov. 23 statement to Bloomberg BNA. RapidAdvance said it’s confident of being able to “recover the losses it sustains as a result of the improper contractual interference committed by third-parties” and plans to file other suits if necessary “against those companies that engage in the practice of stacking.”

In the other lawsuit, MyBusinessLoan.com said it gave NDM Group, of Tampa, Fla., a $200,000 credit line on March 31, 2015. However, in June and July, NDM also received loans from Funding Metrics, New Era Lending, Richmond Capital and Pearl Beta Funding, all of whom debited funds from NDM’s bank account and prevented NDM from being able to repay MyBusinessLoan.com, the lawsuit said.

Other lenders involved in the two suits declined to comment or did not respond to inquiries.

In a bid to dismiss the litigation by SBFS, lenders EBF and FB called it a “first-of-its-kind lawsuit” that tries to prevent competitors from being able to make loans “not based on any law or regulation,” but on contracts between SBFS and its borrowers, to which these competitors “were not privy.”

EBF and FB said there’s no evidence the companies improperly targeted Borgerding, C.J.’s Transportation Services or Traina Services or convinced them not to pay Small Business Financial Solutions.

“There is a complete absence of factual allegations showing the Defendants purposefully induced the third-party business to breach their agreements with the plaintiff,” EBF and FB said.

Need for Regulations?

Lenders condemning stacking are divided over what to do about it. Klein called for regulations barring merchant cash advance lenders from making loans to those who cannot pay them back.

Brayden McCarthy, head of policy and advocacy for online marketplace lender Fundera, said he is also in favor of regulating merchant cash advances.

“Like locusts, some lenders knowingly stack on top of other lenders, and do so also knowing that the borrower in question has little to no chance of being able to repay existing debt plus the new loan or cash advance while still running their business profitably,” he said. “That’s wrong, and lenders should be required to do some form of an ability-to-repay test.”

The Consumer Financial Protection Bureau (CFPB) is taking a similar approach in its proposed rules on consumer payday lending, by requiring lenders to determine the borrower’s ability to repay before extending credit. Lenders would generally have to avoid making a second loan until 60 days after the first one is paid off, unless they can document that the borrower’s financial circumstances have improved enough to repay a new loan without reborrowing.

After three loans in a row, lenders would be prohibited from making a new short-term loan to the borrower for 60 days. The CFPB, however, does not have jurisdiction over small-business lending.

Consumer groups and some lenders responding to the Treasury RFI want small businesses to have the same protections as individual consumers. And Treasury has taken notice of those comments.

“All borrowers—businesses as well as consumers—should have the same protections. Small businesses are run by people. Those people receive protection as individual consumers, but when they are called ‘small businesses,’ they get no protection,” Antonio Weiss, counselor to the Treasury secretary, said in an Oct. 29 speech.

It’s unclear which federal regulator would be responsible for potential rule on loan stacking. Giving the CFPB jurisdiction over small-business lending would likely require legislation, at a time when the bureau is under fire for overreach by Congress, Gary Kalman, executive vice president of the Center for Responsible Lending, said in an Oct. 20 e-mail.

Fundera’s McCarthy said there is a need for clearer loan disclosure requirements.

“We’ve seen examples of borrowers taking out multiple expensive short-term loans or cash advances which drain their finances because they had no idea that they actually qualified for cheaper alternatives. This happens in part because the small-business lending market is imperfect: there’s a litany of options which are often described in ways that are confusing and obviate cross-comparisons, making it hard for borrowers to know which option is the best for them.”

In its letter to Treasury, Funding Circle said that many online lenders do not engage in stacking loans. The company cautioned against regulations that “would lead to a substantial burden on online marketplace lending” and urged them to “take into account the significant benefit provided by online marketplace lenders to [small- and medium-sized businesses], and ultimately, the U.S.”

To contact the reporter on this story: Kery Murakami in Washington at kmurakami@bna.com

To contact the editor responsible for this story: Mike Ferullo at mferullo@bna.com