FTC and NY AG Target Merchant Cash Advance Companies | Bradley Arant Boult Cummings LLP

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On June 10, 2020, the Federal Trade Commission and the New York Attorney General’s Office filed actions against two merchant cash advance (MCA) companies – RCG Advances and Ram Capital Funding – and individuals associated with two companies in the Southern District of New York and New York State Supreme Court New York County. The FTC and New York AG are making several claims against the defendants regarding the marketing, offering and collection of MCA. These lawsuits present a particularly threatening challenge to the MCA industry and provide an insight into the types of claims state and federal regulators will file against MCA companies in the future. That being said, the allegations are just that: allegations. We have yet to see a response from the MCA companies who are defendants in this case, and like most litigation, the case may be more nuanced than the initial legal complaint suggests. Additionally, as noted below, there are open-ended questions of pure law that can serve as fodder for future motion practice.

Marketing

The main FTC marketing allegations are misleading claims. For example, the FTC alleges that although the defendants’ websites indicate that the MCA does not require “any personal guarantee of collateral from business owners”, the contracts do in fact contain a “personal guarantee” provision. Further, the FTC alleges that the defendants “buried” the charges in contracts “without any language alerting consumers that [the fees] are withdrawn in advance. At the same time, the FTC says defendants are providing consumers “less than the total amount promised by withholding various fees ranging from several hundred to tens of thousands of dollars before payment.”

Collection practices

The FTC specifically targets the accused’s alleged use of admissions to judgment. In summary, an admission of judgment is a document signed by the MCA client in which the client accepts responsibility for failure to repay the advance. This document allows an MCA company to obtain a judgment against the MCA client without the need for a lawsuit or other traditional legal process. Under recent New York legislation, admissions of judgment made by people living outside New York after August 30, 2019 are inapplicable. According to the FTC, the use of admissions of judgment conflicts with defendants’ contracts which “provide that defendants will not hold consumers in default if payments are made more slowly.” Notably, it is not clear whether the FTC’s allegations of judgment admissions relate to New York’s new law restricting the practice. Additionally, the FTC complaint does not specify whether these admissions of judgment 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 appeals to consumers regarding the repayment of the advances.

Recharacterization

Along with similar claims and allegations made by the FTC, the New York AG maintains that the defendants “disguise every loan as a ‘buy and sell of future receivables’, but in reality,. . . operations one[re] ready. The New York AG cites several examples of why defendants’ cash advances are loans, including marketing their advances as loans, using underwriting practices that take into account the credit ratings of merchants and traders. bank balances (instead of their receivables), and do not reconcile the repayment of the merchants of the advances. According to the New York AG, because cash advances from merchants are actually loans, they violate New York’s civil and criminal usury laws.

Take away food

While the FTC and New York AG complaints 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 do. should be expected 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 complaint regarding the reclassification of merchant cash advances into loans provides important guidance not only for the drafting of the MCA, but also for the underwriting and marketing of the MCA. For industry players, it is now clear that both state and federal regulatory authorities have taken an interest in ACMs and will take legal action against perceived bad players. As such, MCA companies should evaluate their agreements, marketing materials, underwriting processes, and collection techniques in order to avoid future enforcement actions. Additionally, MCA companies should consider creating or enhancing existing compliance programs to mitigate risk for a more regulated future.

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