JANUARY 2024

June 13, 2023
 
 
AI: GOOD OR BAD?
By The Babbling Barrister
 
It seems that all I hear about these days is AI, ChatGBT, and the like. I thought AI was steak sauce, but my refrigerator, which knows such things, tells me I’m wrong.
 
Artificial intelligence. I don’t mean to be critical, since I don’t know enough about this to harbor a strong opinion (does anyone?), but it sounds a tad oxymoronic to me (like military intelligence). For those of you who are a little unclear on what constitutes AI, the Oxford Dictionary defines it as “the theory and development of computer systems able to perform tasks that normally require human intelligence, such as visual perception, speech recognition, decision-making, and translation between languages.” ChatGBT, BTW, according to OpenAI, is “a sibling model to InstructGPT, which is trained to follow an instruction in a prompt and provide a detailed response.” That word “sibling” gives me a little agita.
 
Enough definitions. What are we talking about here? If I’m not mistaken, we have created machines to do what people do or used to do. That’s nothing new. Going backwards in time, in 1551 a guy named Taqi al-Din Muhammed ibn Ma’ruf invented the steam jack (an ingenious spit-turning device for a wood-fired hearth). The cotton gin was invented in the 6th century. The oldest machine known to humankind, the hand axe, dates back more than 100,000 years and perhaps as many as 1.6 million years ago. Then there is the wheel, the car, the plane, the rocket, the can opener. What would we do with all those cans without a can opener?
 
What happened from hand axe to AI? The brilliant but limited hand axe morphed into “tasks that normally require human intelligence.”  Visual perception. Hmm, ok. Speech recognition. That’s good. Perhaps now I can watch Macbeth and understand what they are saying. Language translation. Great, now they will understand me when I order dinner in Greece. Or LA. But decision making? I can’t decide whether that should concern me. I may need help with that decision.
 
Let’s take a look at some of  the pros and cons. The pros include reduction in human error. Also, taking risks so humans don’t have to (i.e., defusing bombs, going to Mars, eating hand-picked mushrooms, buying medication in Mexico). Available 24-7. Probably good? No lunch breaks, no sick days, no spring breaks to Ft. Lauderdale or Ibiza. But doesn’t someone have to keep an eye on them 24/7? Who’s going to do that? Not I.
 
Of course, there are other benefits of AI. And there are cons. Expensive to build. That’s a basic ROI issue. Making humans lazy. Or is that lazier? AI is or is likely to be addictive. From binge watching, videogames, cigarettes, and opioids, we already know the perils of addiction. Will AI make things worse? How about  unemployment? That goes hand in hand with laziness, which may be the true gateway to addiction. What will you do with your free time? Paint? Travel? Learn how to play the sitar? Build crop circles? And then what?
 
My pet peeve is AI as a decision maker. Intelligent decisions require more than just bare knowledge. It requires context, and emotion, based on experience and wisdom. The difference between intelligence and wisdom? Intelligence is knowing tomatoes are fruit. Wisdom is not putting them in your fruit salad.
 
Can machines think outside of the box they were built in? Can they assess the emotional impact on an otherwise logical decision? As Mr. Spock logically opined  “logic is the beginning of wisdom, not the end of it.”
 
 AI may be helpful in many areas as long as it does not get out of control. We do not want robots creating other robots (essentially reproducing) or taking over the planet. Hypothetically, with unlimited intelligence, but no emotional constraints, which might happen (since robots are more efficient than humans, and they “know” that). So, the people who develop AI must be careful they don’t create the monster that eventually killed its maker, Dr. Frankenstein. One more Spockism: “Computers make excellent and efficient servants, but I have no desire to serve under them.”
 
What are your thoughts on AI?
 
*Warning: This article was written by a human. No machines were killed in the process of this creation.

JUNE 2023

January 1, 2024
 
 
CALIFORNIA BANS CERTAIN FEES IN COMMERCIAL FINANCE TRANSACTIONS
By: Kenneth C. Greene, AACFB General Counsel 
 
On October 13, 2023, Governor Newsom signed Senate Bill 666 (nice number!). Commencing January 1, 2024, certain commercial finance providers may not charge a small business or small business owner specific fees, described below. “Small Business” is defined as an:
 
“independently owned and operated business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and that, together with affiliates, has 100 or fewer employees and average annual gross receipts of fifteen million dollars ($15,000,000) or less over the previous three years.
 
The fees which are prohibited are as follows:
 
  1. A fee for accepting or processing a payment required by the finance contract as an ACH debit, unless the fee is for a payment that fails due to insufficient funds;
  2. A fee for providing a current statement;
  3. A fee in addition to an origination fee that does not have a clear corresponding service, i.e., risk assessment, due diligence, or a platform fee;
  4. A fee for monitoring the small business’s collateral unless the account is delinquent for more than 60 days;
  5. A fee for terminating a UCC lien that exceeds 150% of the actual costs of filing the termination.
These limitations apply to transactions of $500,000 or less. There are also exemptions, including:
 
  1. Non-depository institutions, but not their subsidiaries;
  2. Lenders regulated by the Farm Credit Act;
  3. Real property secured transactions
  4. A person who makes  five or fewer commercial financing transactions in California in any 12-month period that are incidental to the business of that person (inapplicable to most financiers);
  5. Certain vehicle dealers; and;
  6. Certain vehicle rental companies.
 
Penalties for noncompliance include:
 
Actual damages sustained as a result of the violation, including, but not limited to, the amount of fees paid by the recipient that are prohibited by Section 1799.302.
 
  1. Statutory damages of at least five hundred dollars ($500) but not greater than two thousand five hundred dollars ($2,500).
  2. Injunctive relief.
  3. Attorney’s fees and costs.
  4. Any other relief that the court deems proper.
Two important takeaways from this newest legislative maneuver to reign in what California deems predatory or unfair practices. First, the law includes “covered entities,” and “covered entities” means either providers or brokers. Second, if providers need to change agreements that are already in place, i.e., to remove certain fees, query whether this will require new disclosures.
 
Only time will tell.
 

MAY 2023

May 30, 2023

CIRCUMVENTION: HEY, WHY NOT?
By The Babbling Barrister

Circumvention. An ugly word. What does it mean? According to Merriam-Webster, circumvention means “to manage to get around especially by ingenuity or stratagem.” Don’t let the “ingenuity” part impress you. Bernie Madoff was a genius, yet he was one of the most malevolent financial wizards the world has ever known. He destroyed countless families and lives.

What’s wrong with circumvention? Let’s start with borrower-initiated  circumvention. This is the where the borrower utilizes the services of a broker to locate a willing funder. Once the broker knows who the funder is, the borrower bypasses the broker and goes directly to the funder to avoid paying the broker’s commission.

Often a funder will recognize this ploy and send the borrower back to the broker or send the borrower home. Sometimes they don’t. That’s another issue. But let’s start with why the borrower, whatever the justification, is wrong.

The buyer thinks “all the broker does is make a few phone calls or maybe transmit my application to the lender.” Wrong. The broker may do a background check, a credit report, and perform other due diligence. They may prepare the application, review business operations, cash flow, time in business, or maybe inspect and/or appraise any collateral, and much, much more. They may spend dozens of hours on your application. And, if the application is denied, they don’t make a dime. It’s no different than real estate brokers who may spend weeks or months showing a property before it is sold. So, when the deal goes through, you pay the broker a commission, pure and simple.

What about the lender who circumvents the broker? In my mind this is even worse since the borrower may claim naiveté, but the lender certainly cannot. The same rationale applies to why the lender should never circumvent the broker or steal the broker’s clients. Except it’s way worse. These lenders are committing industry wide fraud. Not only are they stealing business from brokers, but they are undermining the trust and integrity that is essential to working relationships and camaraderie, the gears that drive the commercial finance machine.

Bottom line: Don’t do it. If the association catches you, it will terminate your membership with deep prejudice. If my clients catch you, they will sue you.

- Stay tuned for next week’s article- “AI: Hey, Why Not?