FTC and NY AG Target Merchant Cash Advance CompaniesOn June 10, 2020, the Federal Trade Commission and the  New York Office of the Attorney General filed actions against two merchant cash advance (MCA) companies – RCG Advances and Ram Capital Funding – and individuals associated with both companies in the Southern District of New York and the Supreme Court of the State of New York County of New York. Both the FTC and New York AG assert several claims against the defendants related to the marketing, offering, and collecting of MCA. These lawsuits pose a particularly threatening challenge to the MCA industry, and provide insight into the types of claims state and federal regulators will bring against MCA companies in the future. That being said, the allegations are just that: allegations. We have not yet seen a response by the MCA companies that are defendants in this matter, and as with most litigation, the record can be more nuanced than is suggested by the initial legal complaint. Moreover, as identified below, there are open issues of pure law that may serve as fodder for future motion practice.

Marketing

The primary allegations by the FTC concerning marketing relate to misleading claims. For instance, the FTC alleges that although the defendants’ websites state that the MCA requires “no personal guaranty of collateral from business owners,” the contracts actually contain a “personal guaranty” provision. Also, the FTC alleges that defendants “buried” fees in the contracts “without any language alerting consumers that [the fees] are withdrawn upfront.” Relatedly, the FTC claims that the defendants provide consumers with “less than the total amount promised by withholding various fees ranging from several hundreds to tens of thousands of dollars prior to disbursement.”

Collection Practices

The FTC specifically targets the defendants’ alleged use of confessions of judgment. In a nutshell, a confession of judgment is a document signed by the MCA customer in which the customer accepts liability in the event that the advance is not repaid. This document allows an MCA company to obtain a judgment against the MCA customer without the need for trial or other traditional legal process. Under recent New York legislation, confessions of judgment executed by individuals living outside of New York after August 30, 2019, are unenforceable. According to the FTC, the use of confessions of judgment conflicts with the defendants’ contracts that “provide that Defendants will not hold consumers in breach if payments are remitted more slowly.” Notably, it is unclear whether the FTC’s allegations related to confessions of judgment relate at all to New York’s new law limiting the practice. Moreover, the FTC’s complaint does not state whether these confessions of judgment were executed before or after August 30, 2019, or whether they were executed by non-New York MCA customers. Finally, the FTC also claims that defendants made threatening calls to consumers related to repayment of the advances.

Recharacterization

Along with similar claims and allegations advanced by the FTC, the New York AG contends that defendants “disguise each loan as a ‘Purchase and Sale of Future Receivables,’ but in reality, . . . the transactions a[re] loans.” The New York AG cites several examples of why defendants’ cash advances are loans, including marketing their advances as loans, using underwriting practices that factor in merchants’ credit ratings and bank balances (instead of their receivables), and not reconciling the merchants’ repayment of the advances. According to the New York AG, since the merchant cash advances are actually loans, they violate New York’s civil and criminal usury laws.

Takeaways

Although the FTC’s and New York AG’s complaints do not foreclose the future of merchant cash advances as a viable financial product, the complaints do provide a glimpse into what merchant cash advance companies should expect in a regulated future for the industry. This is not necessarily a problem for an industry that has been largely unregulated. In particular, the New York AG’s complaint related to recharacterization of merchant cash advances as loans provides significant guidance for not only the drafting of the MCA agreement, but also the underwriting and marketing of the MCA. For those in the industry, it is now clear that both state and federal regulatory authorities have taken interest in MCAs and will file actions against perceived bad actors. As such, MCA companies should evaluate their agreements, marketing materials, underwriting processes, and collection techniques to avoid future enforcement actions. Additionally, MCA companies should consider creating or improving existing compliance programs in order to mitigate risk in anticipation of a more-regulated future.

Print:
EmailTweetLikeLinkedIn
Photo of Lauren G. Raines Lauren G. Raines

Lauren Raines is a member of the Banking and Financial Services Practice Group and the Real Estate Practice Group. Lauren divides her time between transactional and litigation matters and regularly handles both commercial lending transactions and financial services litigation. This hybrid practice has…

Lauren Raines is a member of the Banking and Financial Services Practice Group and the Real Estate Practice Group. Lauren divides her time between transactional and litigation matters and regularly handles both commercial lending transactions and financial services litigation. This hybrid practice has allowed Lauren to better serve her transactional clients by advising them on the potential areas of conflict that could arise later in litigation, and to effectively advocate for her litigation clients due to her broad understanding of real estate principles.

Lauren has successfully handled countless contested commercial and consumer mortgage foreclosure trials for banks and mortgage servicers across the state of Florida. Lauren also has experience handling lender liability claims, usury actions, lien priority claims, fraudulent transfer claims, and violations of federal and Florida consumer protection statutes. Lauren also regularly represents merchant cash advance companies in enforcement actions, bankruptcy litigation and defending against usury, RICO, preference and lien avoidance claims.

Photo of Brian R. Epling Brian R. Epling

Brian Epling assists financial services clients, including small dollar lenders, auto finance companies, and mortgage servicers, with navigating regulatory compliance and litigation issues.

On the regulatory compliance side, Brian has assisted financial services clients with policies and procedures to comply with state and…

Brian Epling assists financial services clients, including small dollar lenders, auto finance companies, and mortgage servicers, with navigating regulatory compliance and litigation issues.

On the regulatory compliance side, Brian has assisted financial services clients with policies and procedures to comply with state and federal law and investor requirements. With respect to litigation, practicing in both Tennessee and Kentucky, Brian has successfully argued dispositive motions and appeals involving alleged violations of the Truth in Lending Act, Real Estate Procedures Act, and Fair Debt Collection Practices Act. Additionally, he has represented auto finance companies in administrative matters against the state. View articles by Brian.

Photo of Christopher K. Friedman Christopher K. Friedman

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated…

Chris Friedman is a regulatory compliance attorney and litigator who focuses on helping consumer finance companies and small business lenders, as well as banks, fintech companies, and other participants in the financial services industry, address the challenges of operating in a highly regulated sector. Chris focuses on both small business lenders and alternative business finance products and has helped non-bank small business lenders, banks who make small business loans, commercial credit counselors, lead generators, and others in the industry. He helps clients launch new products, conduct due diligence, engage in compliance reviews, evaluate litigation risk, and solve some of the unique legal problems faced by companies who work with small businesses. In that vein, Chris has written extensively about the upcoming rulemaking related to Dodd-Frank 1071, which will require data collection and reporting by companies making loans to certain small businesses.