The FTC’s recent announcement that it has entered into a settlement with two of the defendants (RAM Capital Funding LLC and Tzvi Reich) in a lawsuit filed by the FTC against two merchant cash advance providers and three of their officers for alleged violations of the FTC Act serves as a reminder of the FTC’s continuing focus on small business financing as well as the FTC Act’s application to business-to-business activity.
In its amended complaint filed in June 2021, the FTC alleges that the defendants engaged in deceptive and unfair acts or practices in violation of the FTC Act through conduct that included making unauthorized withdrawals from small businesses’ bank accounts in excess of the agreed repayment amount, using confessions of judgment unfairly, threatening to use violence to induce consumers to make payments, and making misrepresentations in connection with advertising and marketing the financing such as that personal guarantees were not required and no upfront costs were charged.
The FTC also alleges that the defendants’ use of customers’ financial information (e.g. bank account numbers, routing numbers) to withdraw more than a specified amount from customers’ bank accounts violated the Gramm-Leach-Bliley Act’s prohibition on using false statements or representations to obtain customer information of a financial institution.
The stipulated order permanently bans the two settling defendants from the merchant cash advance and debt collection industries and requires them to pay $675,000 to the FTC. It also requires the defendants to vacate any judgments against their former customers and release any liens against their customers’ property.
In April 2021, the FTC announced that it had settled its lawsuit against Yellowstone Capital LLC, a provider of merchant cash advances, and its chief executive officer and president for alleged unfair and deceptive conduct in violation of the FTC Act. Many of the allegations in the FTC’s complaint were similar to those made in the amended complaint filed against RAM Capital Funding LLC and the other named defendants. The Yellowstone settlement required the defendants to pay $9,837,000 to the FTC to be used in providing refunds to the impacted businesses.
This FTC settlement underscores the trend among federal and state regulators to bring consumer-type protections to the aid of small businesses – a trend which we expect to continue through enforcement activity, state legislation, and the CFPB’s small business data collection rule. Small business lenders and merchant cash advance providers should take note of this trend and evaluate their compliance efforts to account for these emerging risks.
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