On June 10, 2020, the Federal Trade Commission and the New York Attorney General’s Office filed lawsuits 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 New York State Supreme Court New York County. The FTC and New York AG assert several claims against the defendants relating to the marketing, offering and collection of MCA. These lawsuits represent a particularly threatening challenge to the MCA industry and provide insight into the types of claims that state and federal regulators will bring against MCA companies in the future. That being said, allegations are just that: allegations. We have yet to see a response from the MCA companies who are defendants in this case, and as with most litigation, the record may be more nuanced than the original legal complaint suggests. In addition, as noted below, there are open questions of pure law that could serve as material for future motions practice.
The FTC’s main marketing claims relate to misleading claims. For example, the FTC alleges that although the defendants’ websites state that the MCA requires “no personal warranty guarantees from business owners”, the contracts actually contain a “personal guarantee” provision. Further, the FTC alleges that the defendants “buried” the charges in the contracts “without any language alerting consumers that [the fees] are removed in advance. Along the same lines, the FTC says defendants are providing consumers “less than the total promised amount by withholding various fees ranging from several hundred to tens of thousands of dollars before disbursement.”
The FTC specifically targets the defendants’ alleged use of judgment confessions. In short, a confession of judgment is a document signed by the MCA client in which the client accepts responsibility in the event that the advance is not repaid. This document allows an MCA company to obtain judgment against the MCA client without the need for a trial or other traditional legal process. Under recent New York legislation, judgment confessions made by people living outside of New York after August 30, 2019 are unenforceable. According to the FTC, the use of judgment admissions conflicts with defendants’ contracts which “provide that defendants will not hold consumers in breach if payments are made more slowly.” Notably, it’s unclear whether the FTC’s claims of judgment admissions relate to New York’s new law restricting the practice. Additionally, the FTC’s complaint does not specify whether these judgment admissions were executed before or after August 30, 2019, or whether they were executed by non-New York MCA clients. Finally, the FTC also claims that the defendants made threatening calls to consumers related to the repayment of the advances.
Along with similar claims and allegations advanced by the FTC, the New York AG argues that the defendants “disguise each loan as a ‘purchase and sale of future receivables,’ but in reality, . . . transactions one[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 consider credit ratings and merchants’ bank balances (instead of their receivables) and non-reconciliation of merchants’ reimbursement. advances. According to the New York AG, because merchant cash advances are actually loans, they violate New York’s civil and criminal usury laws.
Take away food
While the complaints from the FTC and New York AG do not rule out the future of merchant cash advances as a viable financial product, the complaints provide insight 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 regarding the recharacterization of merchant cash advances as loans provides important guidance not only for the drafting of the MCA agreement, but also for the underwriting and marketing of the MCA. For industry players, it is now clear that state and federal regulators have taken an interest in MCAs and will take action 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 enhancing existing compliance programs to mitigate risk in preparation for a more regulated future.