Louisiana is proposing changes to their factoring statute along the lines of what Maryland enacted in reaction to the systematic fleecing of lead paint victims in Baltimore. Changes include but are not limited to: requiring a $50,000 surety bond, bans on deal poaching, restrictions on discounts rates. These changes are a mixed bag. On one hand, it protects annuitants against price gouging and creates stability in the factoring industry. On the other hand, it has serious shortcomings.

This legislation is a great first step to cleaning up the factoring industry because it addresses its biggest flaw: the lack of barrier to entry. There has been an influx of scamming fly-by-night con artists over the last few years who have wreaked havoc on unsuspecting annuitants and the factoring industry, in general. Anyone with even a passing knowledge of the factoring business can set-up shop using the powerful online legal databases and skip-tracing tools available today, no matter the potential ethical implications. Fast forward to the point that most, if not all, states have similar surety bond and compliance requirements. These small-time hustlers will not have the economies of scale to absorb the cumulative cost of the bonds, the licensing, and the staff to handle compliance. The poaching ban will further dissuade them since it’s a significant part of their current revenue. Most will move on and nobody will miss them.

The ban on deal poaching is also key to industry stability. The Robin Hood narrative touted by poachers to protect annuitants from the relatively few incidents of true gouging will be nullified through pricing regulations in the legislation. In reality, though, poachers usually just steal their competitors’ investment in marketing, staff and other overhead; expenses poachers don’t have. It’s sending the industry into a tailspin. There is no long-term benefit derived from the continued theft of a competitor’s work product. That can only come from real competition on a level playing field.

Speaking of competition, one significant shortcoming to this bureaucratic approach to regulation could be the lack thereof in states with smaller populations. There are likely a hundred transactions concluded in California for every single deal in Wyoming or Montana. Many firms will look at the cost of bonds and annual registration and not bother competing. Many states may see very limited competition, if any at all. Case in point, after two years, only a couple firms have registered in Maryland.

This legislation also doesn’t address another huge ethics issue in the factoring business, namely, the incessant harassment and coercion of annuitants through data mined from court records. It’s not just the shady fly-by-night operators who engage in this harassment. The big firms are also relentless telemarketers. My clients often complain about the incessant calls and the complete disregard of pleas to stop. These big firms treat the Telephone Consumer Protection Act like a pesky annoyance to doing business. How many annuitants are coerced into unwarranted transactions through relentless telemarketing? I have seen quite a few firsthand. At least limit court record marketing to junk mail and let annuitants decide if they want to reach out, or not. A few lines in this legislation regarding unsolicited phone calls could end this abuse for good.

Lastly, it’s certainly no coincidence that the largest beneficiary of these changes will be the big “cash now” firms. They have the volume of business required to easily absorb these compliance costs. A poaching ban also benefits them most since they are the easiest targets with the highest losses. The big firms will score a massive win since their upside will be enormous when compared with the added cost. They’ll get their cake and be able to eat it too. It will be like 2003 all over again, but with pricing regulations.