The FTC’s recently-filed lawsuit against two merchant cash advance providers and their chief executive officer and president for alleged unfair and deceptive conduct in violation of the FTC Act serves both as an illustration of the FTC’s focus on small business financing and a reminder of the FTC Act’s application to business-to-business activity.
The FTC alleges in its complaint that the defendants engaged in deceptive acts or practices through the following conduct:
- Representing in advertisements that they did not require collateral or personal guarantees from business owners when, in reality, they did require business owners to grant a purported security interest or lien on all business property they owned including accounts, equipment, inventory and other assets and to sign personal guarantees of the entire amount funded should the business default.
- Representing in contracts that the defendants would provide a certain amount of funding (labeled the “Purchase Price”) when, in reality, the amount provided was substantially less than the Purchase Price as result of the withholding of fees that are mentioned “several pages in to the contract without any indication that they are deducted from the ‘Purchase Price’—the funds promised to consumers.”
The FTC also alleges that the defendants engaged in unfair acts or practices by withdrawing money from customers’ accounts in excess of the amounts authorized by continuing to withdraw money after a customer had fully repaid the “Purchased Amount.” To the extent the defendants refunded the unauthorized amounts (which the defendants attributed to a debit delay), they allegedly often did so only in response to customer complaints.
In addition to a permanent injunction to prevent future FTC Act violations, the FTC seeks consumer redress including restitution and refund of monies paid. (The U.S. Supreme Court recently agreed to decide whether Section 13(b) of the FTC Act, which expressly gives the FTC authority to seek injunctive relief, also authorizes the FTC to seek monetary relief, such as restitution.)
In May 2019, the FTC held a forum, “Strictly Business,” that explored small business lending practices, regulations, and policies. The forum consisted of three panels: (1) Overview of the Small Business Financing Marketplace, (2) Case Study on Merchant Cash Advances, and (3) Consumer Protection Risks and the Path Ahead.
While the FTC’s lawsuit highlights the FTC Act’s application to merchant cash advances, providers of small business financing should keep in mind that small business loans and other forms of small business financing are often treated the same way as consumer loans for purposes of other federal laws as well as state laws.