What happened

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 financing to routinely continuing ACH collections after the financing obligation was satisfied. Although the practices alleged in the complaint are highly unusual in the industry, FTC Commissioner Rohit Chopra issued a concurrent statement claiming otherwise and calling for intense scrutiny of this form of small-business financing.

Commissioner Chopra wrote:

As the Commission proceeds into litigation in these matters and further studies this market, I hope that we will uncover additional information about business practices in this opaque industry. In particular, we should closely scrutinize the marketing claim that these payday-style products are “flexible,” with payments contingent on the credit card receivables of a small business. In reality, this structure may be a sham, since many of these products require fixed daily payments, and lenders can file “confessions of judgment” upon any slowdown in payments, with no notice or due process for borrowers.

This raises serious questions as to whether these “merchant cash advance” products are actually closed-end installment loans, subject to federal and state protections including antidiscrimination laws, such as the Equal Credit Opportunity Act, and usury caps.

Why it matters

Although the FTC has shown interest in MCAs for some time, Commissioner Chopra’s statement crystallizes the importance of robust “true sale” compliance programs for companies offering this product. In addition to FTC interest, the California Department of Business Oversight also has expressed concern about the product, especially versions employing fixed daily ACH withdrawals without a meaningful “true-up” mechanism.