COVID-19 Brings A Focus To Lending Practices: The FTC Provides Guidelines

Small businesses that need capital, but which cannot otherwise qualify for loans through standard banking sources, often turn to merchant cash advance companies, which provide money to small businesses based on their current revenues.

The borrowers typically give access to their bank accounts for daily and weekly repayments. However, when those current revenues were affected by the COVID-19 pandemic, many borrowers found themselves targeted by lenders and their abusive collection tactics.

Many borrowing employers claim that even after their revenues vanished during COVID-19 shutdowns, the lenders kept withdrawing money and, in some cases, moved to freeze the borrowing employers' assets. Some borrowers claim the cash advance companies physically threatened, with violence and kidnapping, the borrowers and their families.

The Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) are focusing on these lenders. Because the merchant cash advance companies are not banks, merchant cash advance companies have been subject only to few regulations.

Effective interest rates on the cash advance companies' advances can be astronomical, between 400 percent and 1,000 percent, in some cases. Officials investigating merchant cash advance companies say they are examining whether the funding arrangements should be subject to so-called usury caps and federal and state protections. Investigations and lawsuits are being filed.

The merchant cash advance business has been in growth mode since the 2007-2008 financial crisis when major banks began cutting back on small business loans. Stepping in to fill the void, merchant cash advance companies provided an estimated $19 billion in funding to small businesses last year, up from eight billion dollars five years ago. "Feds crack down on lenders targeting small businesses with high-interest loans, abusive collection tactics" (Aug. 11 2020).


Like other consumers, small businesses are protected under the FTC Act, which gives the commission broad authority to stop deceptive and unfair practices by companies involved in every step of the financing process, including lenders and finance providers, marketers, independent sales organizations (ISOs), brokers, lead generators, servicers, and debt collectors.

The FTC has published some reminders regarding collection efforts:

Do not deceive consumers about the features or obligations of financing products, such as information regarding the funding amounts borrowers would receive, requirements that small businesses provide collateral, personal guarantees, costs, and payment amounts.

Do not mislead consumers about association with government relief programs. COVID-19 has resulted in the creation of new government programs, to which some marketers are deceptively claiming a connection. The FTC is especially targeting lenders who mislead about their affiliation with the Small Business Administration and their authority to make Paycheck Protection Program (PPP) loans.

Reliance on ISOs, lead generators, brokers, servicers, or debt collectors to market or service your products will not create a liability shield. Leadership should take proactive steps to ensure employees and agents do not engage in deception or other unlawful conduct. Vet them carefully; build compliance standards into your contracts; monitor their actions for warning signs of trouble such as consumer complaints; audit them; and enforce those contractual standards.

When collecting outstanding payments or debts, never make false or egregious threats. Unlawful actions include collecting amounts consumers do not owe; making false threats of arrest or other severe consequences; harassing consumers with continuous calls; or using abusive language or threats of violence.

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