On August 3, 2020, the Federal Trade Commission (FTC) filed a complaint against a merchant cash advance (MCA) provider and two of its officers, alleging misconduct ranging from grossly misrepresenting the terms of the funding to the systematic pursuit of ACH recoveries after the funding obligation was satisfied . Although the practices alleged in the complaint are highly unusual in the industry, FTC Commissioner Rohit Chopra issued a declaration claiming the opposite and calling for a careful examination of this form of small business financing.
Commissioner Chopra wrote:
As the Commission prosecutes these cases and investigates this market further, I hope we will uncover additional insights into the business practices of this opaque industry. In particular, we should look closely at the marketing claim that these payday-type products are “flexible,” with payments contingent on small business credit card receivables. In reality, this structure may be a sham, as many of these products require fixed daily payments, and lenders can file “admissions of judgment” if payments slow, without notice or due process for borrowers.
This raises serious questions about whether these “merchant cash advance” products are in fact closed installment loans, subject to federal and state protections, including anti-discrimination laws, such as the equal credit opportunity and wear limits.
why is it important
Although the FTC has had an interest in ACMs for some time, Commissioner Chopra’s statement crystallizes the importance of strong “true sale” compliance programs for companies offering this product. In addition to the FTC’s interest, the California Department of Business Oversight has also expressed concern on the product, especially versions using fixed daily ACH withdrawals without a meaningful “true-up” mechanism.