In August 2020, the Federal Trade Commission filed a lawsuit against two merchant cash advance (MCA) providers in a New York federal district court, alleging unfair and deceptive conduct. The defendants filed a motion to dismiss in November, claiming the FTC does not have statutory authority to file the lawsuit.
While it remains to be seen whether the FTC’s charges will be dismissed, this case highlights the growing call for enhanced scrutiny of the MCA industry. If you have obtained a cash advance and believe that the terms have been represented or you are facing default, it takes an experienced debt relief specialist to protect your rights.
According to the FTC’s complaint, the MCA providers and two officers violated Section 5 of the FTC Act by misrepresenting the terms of financings and engaging in gross misconduct. The Act applies to business-to-business activity, including small business financing, as well as business-to-consumer transactions.
The FTC also alleged that the defendants engaged in deceptive acts or practices by:
- Routinely continuing collections after financing obligations had been satisfied
- Making misrepresentations in advertisements about collateral, personal guarantees, security interests, and liens
- Failing to disclose fees in MCA agreements
In their motion to dismiss, the defendants argued that the FTC lacks authority to bring the lawsuit because the relevant provision of the FTC Act only allows the commission to take legal action against alleged imminent or ongoing illegal conduct, not past misconduct.
The defendants also contend the FTC failed to adequately review the related ads and MCA contracts in making its assertions. In its opposition to the motion to dismiss, the FTC re-asserted that the defendants were engaging in deceptive and unfair practices.
Why This Matters
The FTC has shown interest in merchant cash advances for some time and the FTC Commissioner is calling for enhanced scrutiny of these products. The overarching issue is whether merchant cash advances are purchase contracts or whether these products are closed-end installment loans subject to state and federal protections and usury laws.
In this regard, state regulators and lawmakers have raised alarms about abuses in the merchant cash advance sector, which have become more prevalent during the COVID-19 pandemic. At this juncture, the outcome of the FTC’s lawsuit remains to be seen, but it may be a harbinger of things to come for this form of business financing. In the meantime, business owners who are at risk of defaulting on a merchant cash advance should consult with an aggressive debt relief specialist.