The State of Merchant Cash Advance During the Coronavirus Pandemic
Historical article — originally published October 9, 2020. This article documents merchant cash advance issues during the COVID-19 pandemic. It is retained for historical context, not as current legal guidance.
About this historical article: References below to pending cases, proposed legislation, industry conditions, and payment accommodations reflect developments discussed in 2020. They do not describe the current status of those matters.
For help with an existing MCA obligation, explore our MCA Legal Resources or request a complimentary initial review of your MCA agreements and related account records. The scope depends on the documents and facts provided; no particular result is promised.
In 2020, the economic disruption caused by COVID-19 brought additional attention to merchant cash advance agreements, collection practices, and payment difficulties. The following sections preserve the article’s account of enforcement developments and proposals from that period.
MCA Enforcement Developments Reported in 2020
Regulators have begun to focus their attention on the MCA alternative finance industry that has, for years, targeted small business operations for volatile high-cost loans. This new government attention has raised substantial concern for the entire merchant cash advance industry.
One such merchant cash advance lender, Par Funding, based out of Philadelphia, was raided by the FBI on July 28, 2020. Par Funding, who also operates under the name, Complete Business Solutions Group (CBSG), has been sued by the Securities and Exchange Commission, with the FBI performing the raid and records seizure of the Par Funding corporate headquarters.
The SEC’s case against Par Funding and others alleges that approximately $600 million was raised from investors through unregistered securities and that Par Funding then loaned/advanced to small businesses at extremely high repayments rates.
The SEC suit identified Joseph W. LaForte as “the de facto CEO of Par Funding”. LaForte was arrested August 7th, 2020, on a weapons charge in Pennsylvania. Investigators had found seven loaded guns in his possession, a criminal violation considering his prior felony convictions.
Critics point out that Par Funding’s loans are designed to fail, thereby allowing Par to profit more from defaulting clients than those who repay their loans in accordance with their contractual payment schedule.
In fact, the SEC alleges in its suit that the default rate of Par Funding loans exceeded fifty (50%) percent and court records demonstrate clearly that since 2013, Par Funding has filed no fewer than 2,500 lawsuits against merchant debtors in New York and Pennsylvania.
In defense of their enormous default rate of 50%, Par Funding has, in court, blamed coronavirus on a recent increase in defaults. However, court records show that Par Funding filed nearly 1,500 collection lawsuits in 2019 alone, before the onset of the Covid 19 pandemic.
FTC Allegations Against Yellowstone Capital in 2020
A leading merchant cash advance lender, Yellowstone Capital, has been accused by the Federal Trade Commission (FTC) of using deceptive practices to bait small business borrowers, then withdrew money from their accounts without their consent, even in situations where the customers had already repaid the money that they owed.
According to the FTC’s complaint, Yellowstone Capital withdrew hundreds or thousands of dollars from small businesses’ accounts after the customers had repaid the entire amounts owed in their contracts.
Additionally, the FTC complaint alleges that Yellowstone engaged in a practice to deceive potential customers regarding the amount of money they would be funded by Yellowstone, with the contract not disclosing additional fees that would be charged by the lender.
The FTC complaint goes on to further allege that Yellowstone employed deceptive marketing to promote their services.
Regulatory officials in furtherance of their investigations of MCA companies, state they are examining whether the funding arrangements should be subject to usury laws and federal and state lending protections.
“We’re looking hard to make sure that those lenders aren’t adding to the misery and setting small businesses up to fail,” said Rohit Chopra, a commissioner of the FTC, in an interview with NBC News. “We’ve started suing some of them and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
FTC and New York Attorney General Actions Reported in 2020
On June 10, 2020, the Federal Trade Commission and the New York Office of the Attorney General filed actions against two merchant cash advance (MCA) companies known as RCG Advances and Ram Capital Funding.
Both the FTC and New York Attorney General bring forth several claims against these merchant cash advance companies concerning their marketing practices, the offering of their financial products, and their overly aggressive and abusive collection practices.
These lawsuits present a real threat to the merchant cash advance industry and moreover, provide the beginnings of a roadmap as to the types of claims regulators may bring against MCA companies in the future.
Along with similar claims brought by the FTC, the New York Attorney General asserts that defendants “disguise each loan as a ‘Purchase and Sale of Future Receivables,’ but in reality…the transactions are loans.”
The New York Attorney General points to a number of examples as to why the so-called cash advances are, in fact, loans.
These examples include marketing their advances as loans; using underwriting policies that consider a merchant debtor’s credit rating and bank balances, as opposed to their receivables; and not reconciling or recharacterizing a debtor’s repayment of the advances if that debtor’s business suffers a downturn in revenue.
Although the Federal Trade Commission and the New York Attorney General complaints do not disavow the future of merchant cash advances as an alternative financial product available to small businesses going forward, the complaints do provide a window into what MCA lenders might be expecting in the form of future industry regulation.
Specifically, the New York Attorney General’s complaint related to the recharacterization of merchant cash advances as loans, provides substantial guidance for not only the proper drafting of an MCA contractual agreement, but also the underwriting of the financial products and the marketing of said products.
For the MCA companies, it should now be clear that state and federal regulatory agencies have taken a significant interest in their MCA industry and that those agencies intend to file legal actions against the bad actors in that industry.
Proposed CFPB Oversight Discussed in 2020
Applicable in her home state and on a federal level, U.S. Representative Nydia M. Velázquez of New York introduced H.R. 7889 in 2020, the Small Business Lending Disclosure and Broker Regulation Act.
This Bill is designed to extend some of the protections available to consumer borrowers to small business borrowers as well.
Under Representative Velázquez’s bill, the Consumer Financial Protection Bureau (CFPB) would be granted the same regulatory authority over small business financing as the CFPB maintains regarding consumer financial services and products.
The Article’s 2020 Enforcement Takeaways
In 2020, the pandemic greatly affected small businesses across the country. The original article discussed their financial pressure and the enforcement concerns raised during that period.
The FTC’s enforcement efforts offer some key insights into the problems with the merchant cash advance industry.
The FTC points out that, like other consumers, small businesses are protected under the FTC Act. The FTC Act provides the federal agency with the requisite authority to stop deceptive and unfair practices by companies, including lenders and finance providers, as well as marketers, lead generators, brokers, and debt collection agencies.
Two of the FTC key points of enforcement are:
1) Do not misrepresent the true nature and obligations of their alternative financing products.
The FTC’s 2020 legal actions against Yellowstone and RCG Advances alleged that these merchant cash advance providers misrepresented critical terms of their financial products, including the amounts that will actually be funded to the debtor, and that small business owners were required pledge collateral and sign personal guarantees to obtain subject cash advances.
2) When seeking to collect, do not make false or unlawful threats.
MCA companies must be wary of their historical tactics of over-collecting on amounts not contractually owed or making false threats of arrest, threats of violence and harassing consumers with constant phone calls and using abusive language.
The Regulatory Outlook Discussed in 2020
At its original publication, this article anticipated further scrutiny of MCA disclosures, pricing, and collection practices. Those expectations describe the author’s outlook in 2020; they are not a statement of current law or the present status of any proposal.
For related background, see our MCA regulation resource. Questions about an existing agreement require review of the documents, facts, and applicable law.
Payment Accommodations Observed During the 2020 Pandemic
In the original 2020 article, the author reported observing greater willingness by some MCA providers to discuss temporary payment accommodations during the pandemic. Those observations concerned particular circumstances at that time.
They should not be read as a prediction that a provider will reduce payments, offer forbearance, or agree to a particular discount today. Any accommodation depends on the agreement and the circumstances of the individual matter.
Reading the Pandemic-Era Payment Advice in Context
The original article discussed hardship requests and communication with funders, creditors, and vendors during the 2020 disruption. Its suggestions reflected that period and should not be treated as a standard sequence of steps for every business facing payment problems now.
If you are dealing with MCA payment difficulties or a possible default, an attorney can review your agreements, payment history, notices, and any court papers before you decide how to respond. The appropriate approach depends on the circumstances; this historical article does not promise payment relief or a litigation outcome.
Help With a Current MCA Matter
Business Debt Law Group offers a complimentary initial review of MCA agreements and related account records. An MCA attorney can discuss the legal issues raised by your documents and circumstances, including a pending MCA lawsuit.
Request My Free MCA Loan Review. The scope depends on the documents and facts provided; no particular result is promised. This article is general information, not legal advice, and submitting an inquiry does not create an attorney-client relationship.
Free MCA Loan Review or Case Evaluation
Have questions about your MCA agreements, payment pressure, or court papers? You do not need a lawsuit to request a free review.
Request My Free MCA Loan Review
Consultations are free; retained legal-service fees are separate. Contacting the firm does not create an attorney-client relationship or extend a deadline. No outcome is guaranteed.