For some time, the merchant cash advance segment of lending has been receiving bad press over exorbitant contract terms to micro-business owners.
So recently, the Federal Trade Commission launched a crackdown on the merchant cash advance sector only days after its Commissioner Rohit Chopra requested the supervisor to probe unfair lending practices harming small merchants.
According to The Washington Post, the FTC has launched an interrogation on lenders to weed out potentially extortionate players whose cash advance terms rip off microbusinesses.
FTC is not the only watchdog showing concerns about unfair MCA lending terms. The district attorney of Manhattan also opened a criminal investigation into the sector. And word also has it that the New York State AG’s office is preparing a civil investigation into the situation.
The Washington Post also disclosed that “the industry has continued its unfair practices because the government has failed to implement enforcement laws. Plus, the classification of MCAs as non-loans has helped them evade regulations and excluded them from personal loan protections under federal, and of course, state laws.
“We’re particularly interested in this sector because it is receiving little attention than it should because small business owners are suffering,” said FTC Bureau of Consumer Protection Director Andrew Smith.
According to Andrew, the watchdog’s investigation is in its infant stages, but it may soon escalate to a civil situation that may even lead to changes in laws and regulations.
“For instance, if confessions of judgment are a dirty practice,” he said. “Regulations should be laid down, or an enforcement action could be taken against an MCA lender using them unfairly.”
The executive, however, did not list any names or specified whether any particular MCA providers were under scrutiny.
Speaking at a forum Early last month, FTC Commissioner Chopra expressed concerns about unjust contract terms in the Micro-business funding sector that “have led to many controversial legal actions against small and medium business borrowers.
“The Federal Trade Commission is America’s only federal regulator and watchdog for the Microbusiness funding market,” he added. “We will now have to measure whether some contract terms and practices are in breach of the law.”
MCAs were a perfect way for small businesses to raise quick money during needy times until some phony market players began using the opportunity to rip off small merchants. Hopefully, the FTC will catch up with them and weed out dirty practices in the sector.
Author bio: As the FAM account executive, Michael Hollis has funded millions by using merchant cash advance brokers solutions. His experience and extensive knowledge of the industry has made him finance expert at First American Merchant.