On March 5, the New York Attorney General filed a lawsuit against a network of over 30 lending companies and their officers alleging their involvement in a predatory “merchant cash advance” lending scheme that exploited New York businesses through fraudulent loans at “sky-high interest rates.” 

Merchant cash advances are a type of alternative small business financing where lenders advance funds to businesses in exchange for a percentage of the businesses’ revenue. Typically, a merchant cash advance company will make daily withdrawals from the business’s bank account until the repayment obligation has been met.

Here, however, the lenders collected payments at a fixed daily amount, which they debited directly from the merchants’ bank accounts over a short 60 or 90 day repayment period. While the lenders promised to “reconcile” these daily payments to make sure they did not exceed the agreed-upon percentage of the borrowers’ receipts, they allegedly used fraudulent measures to ensure borrowers never qualified for those refunds. Accordingly, the transactions were not merchant cash advances, according to the AG, but short-term loans with interest rates as high as 820% per year. In addition, the lenders allegedly obtained court judgments against the merchants, collecting on unpaid debts. The AG requests injunctive relief and at least $1.4 billion in damages and restitution, including the return of interest and fraudulent fees to impacted small businesses.

Putting It Into Practice: As previously discussed here, the New York AG and the New York Department of Financial Services are laser focused on consumer protection issues. Nonbank lenders should exercise extra caution in ensuring that their practices (e.g., pricing and fees, disclosures, advertising materials, and collection practices) are not viewed as “predatory” by regulators and compliant with state and federal law.