FTC Wants Tighter Small Biz Lending Scrutiny

The U.S. Federal Trade Commission (FTC) is eyeing tighter scrutiny of small business lending practices as Commissioner Rohit Chopra calls on the regulator to combat predatory SMB loan contracts, reports in Bloomberg said on Wednesday (May 8).

Chopra spoke at an agency forum in Washington, D.C., calling out the small business lending industry’s issue of abusive loan terms that “have led to a flood of questionable legal actions” against borrowers.

“We are accountable for cleaning up this market,” he added, calling on the FTC to take a tougher stance on predatory small business lending. “The FTC is the sole federal regulator and enforcer in the non-bank small business financing marketplace. We will need to determine whether certain contract terms and business practices constitute a violation of the law.”

Reports pointed to the merchant cash advance industry in particular, an unregulated area of small business finance that often requires SMB borrowers to agree to confessions of judgment, which means those borrowers agree to lose any court dispute that may arise in the future as a condition of obtaining financing. The publication said the merchant cash advance industry has secured more than 25,000 favorable judgments against small businesses since 2012, which enable lenders to seize SMBs’ assets without review by a judge, Bloomberg said.

FTC Bureau of Consumer Protection Head Andrew Smith, who also spoke at the event, said, “We are very concerned about reports of unfair and deceptive marketing, sales and collection practices in the small business finance market. He added that the FTC has “broad authority” under the Federal Trade Commission Act to address the issue, which has garnered growing attention in recent years as small business advocates call on federal regulators to expand consumer borrower protections.

The FTC prohibits the use of confessions of judgment under the 1984 Credit Practices Rule, but the regulation applies only to consumers, and not to small business borrowers.

In response, Katherine Fisher, a Hudson Cook LLP lawyer representing the merchant cash advance industry, told the publication the FTC should not expand that confessions of judgment ban to include small businesses, because the factors that force consumers into agreeing to a confession of judgement do not apply to borrowers of a merchant cash advance.

Some state-level legislative initiatives, such as those seen in California, have worked to expand borrower protections to include small businesses in recent months.