How the FTC Is Cracking Down on MCA Practices

The Federal Trade Commission does not regulate merchant cash advances directly. It does not need to. The FTC regulates deception, and deception is the common thread running through the practices it has begun to target.

The FTC’s authority comes from Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices in or affecting commerce. The statute does not distinguish between consumer transactions and commercial transactions. It does not distinguish between loans and purchases of future receivables. It covers conduct. When the conduct is deceptive, when a business is misled about the cost, the terms, or the nature of a financial product, the FTC has jurisdiction regardless of how the product is labeled.

For years, MCA funders operated in a regulatory gap. State banking regulators treated MCAs as outside their purview because the transactions were structured as purchases, not loans. Federal lending regulations did not apply for the same reason. The FTC was focused elsewhere. The gap allowed practices to develop and harden into industry norms, practices that, when examined under the light of consumer protection law, do not survive scrutiny.

What the FTC Is Targeting

The FTC’s interest in the MCA industry centers on several categories of conduct that fall within its deception and unfairness framework.

Misrepresentation of costs. When an MCA broker or funder presents the cost of an advance in terms that obscure the true annual percentage rate, quoting a factor rate without context, omitting the effect of daily repayment on the effective cost, or comparing the product favorably to traditional loans without disclosing the actual price differential, the presentation may constitute a deceptive act. The FTC does not require that the misrepresentation be intentional. It requires that the representation be likely to mislead a reasonable business owner, and that the misrepresentation be material to the decision to accept the advance.

Deceptive collection practices. Threats of criminal prosecution, misrepresentation of legal rights, unauthorized account debits, and harassment during collection are not merely aggressive. They are deceptive when they imply consequences that do not exist or rights that the funder does not have. The FTC’s authority to address deceptive collection practices overlaps with, but is not limited to, the Fair Debt Collection Practices Act.

Unfair acts causing substantial injury. The FTC can also pursue practices that are “unfair”, practices that cause substantial injury to businesses, that the businesses cannot reasonably avoid, and that are not outweighed by countervailing benefits. An MCA with a reconciliation clause that the funder systematically refuses to honor causes substantial injury. The business owner cannot avoid the injury because the refusal occurs after the contract is signed. The funder derives no legitimate benefit from refusing reconciliation, only the benefit of collecting more than the contract entitles it to collect.