The Federal Trade Commission has launched an investigation into the merchant cash advance industry just days after FTC Commissioner Rohit Chopra called on the watchdog to tackle unfair small business lending practices.
The Washington Post reported late last week that the FTC has opened an investigation into potentially unfair contract terms imposed on small business borrowers by merchant cash advance companies and other small to medium-sized business (SMB) lending companies.
The district attorney of Manhattan has also launched a criminal investigation into the industry, while the New York State attorney general’s office is in the midst of a civil probe into the matter that revealed last year, reports said.
According to the news outlet, law enforcement’s initiatives are “an unprecedented level of government attention” for the sector, which has evaded regulators by classifying merchant cash advances as non-loans and, therefore, exempt from personal loan protections under state and federal law.
“One of the reasons we’re so interested in this market is that there seems to have been so little scrutiny given to it,” said FTC Bureau of Consumer Protection Director Andrew Smith in an interview with the publication, which said representatives for Manhattan District Attorney Cyrus Vance and New York Attorney General Letitia James both declined to comment.
According to Smith, the FTC’s probe is in its early stages but could result in further civil actions or changes in regulation.”Let’s say confessions of judgment are an unfair practice,” he said. “We could make a rule, or we could bring an enforcement action against a company that’s using them in an unfair way.”
He did not specify whether particular lenders were under investigation.
The FTC’s Chopra spoke at a forum in Washington, D.C. earlier this month calling out the issue of potentially abusive contract terms in the small business financing community that “have led to a flood of questionable legal actions against SMB borrowers.
“The FTC is the sole federal regulator and enforcer in the small business financing marketplace,” he said. “We will need to determine whether certain contract terms and business practices constitute a violation of the law.”