Small businesses are a critical part of the U.S. economy, providing opportunity and employment to consumers across the country. Unfortunately, the current health crisis has brought financial strain to small businesses and their ability to secure the financing they need to survive. So now more than ever, struggling businesses and their owners need protection from deceptive and unfair practices. And the Federal Trade Commission (FTC) is working swiftly to provide it.
Since the onset of the pandemic, the FTC have taken enforcement actions and used other tools to stop financing providers and their marketers from targeting businesses with unlawful conduct. For example, today the FTC announced a lawsuit against Yellowstone Capital, a merchant cash advance provider that allegedly took unauthorized withdrawals from consumers’ bank accounts and made false claims about collateral, personal guarantees, and the cash amounts it provides.
In recent months, the FTC also have filed actions against two other operations targeting small businesses with alleged FTC Act violations: RCG Advances and Ponte Investments LLC (doing business as “SBA Loan Program”). Additionally, the FTC and Small Business Administration sent joint warning letters to advertisers for potentially misleading claims about their purported affiliation with the federal government or emergency loan programs created to protect businesses during the pandemic.
The FTC’s enforcement efforts, as well as our 2019 Strictly Business forum on small business financing, offer some key takeaways for financing providers and the companies that work with them:
Like other consumers, small businesses are protected under the FTC Act. The FTC Act gives the agency broad authority to stop deceptive and unfair practices by companies involved in every step of the financing process, including lenders and finance providers, as well as marketers, independent sales organizations (ISOs), brokers, lead generators, servicers, and debt collectors.
Don’t deceive consumers about the features or obligations of your financing products. Our recent actions against Yellowstone and RCG allege that these merchant cash advance providers misrepresented key aspect of their products, including the funding amounts consumers would receive and requirements that small businesses provide collateral and personal guarantees. Similarly, you can’t make misleading claims about other important terms – like cost and payment amounts.
Don’t mislead consumers about who you are or your association with government relief programs. As is often the case when new government programs are rolled out, during the current crisis some marketers have deceptively touted their connection to these programs. Our pending action against the company doing business as SBA Loan Program alleges the defendants deceived small business consumers about their affiliation with the Small Business Administration and their authority to make Paycheck Protection Program (PPP) loans. Recent FTC-SBA warning letters raise similar concerns.
Police your marketers and other agents. Simply relying on intermediaries like ISOs, lead generators, brokers, servicers or debt collectors to market or service your products won’t shield you from liability. Instead, take steps to ensure your agents don’t engage in deception or other unlawful conduct. Vet them carefully, build compliance standards into your contracts, monitor their actions for warning signs of trouble (for example, consumer complaints), audit them, and enforce those contractual standards. The FTC’s action against CEC is a case in point. In an action against the operator of postsecondary schools, the FTC pursued not only the schools for their direct role in marketing, but also for their alleged violations of the FTC Act resulting from the illegal conduct of lead generators who – for example – falsely claimed to be affiliated with the U.S. military.
Ensure that you and your servicers avoid unlawful servicing practices. The FTC Act’s protections aren’t limited to marketing. They extend across the full life cycle of a financing product – including repayment and collections. So, for example, the law would prohibit a company from failing to honor its promises that customers can lower or cease payments as a result of reduced revenue or a health-related shutdown. Additionally, the FTC Act prohibits unfair practices, like taking unauthorized payments from consumers’ bank accounts – something they alleged happened in both Yellowstone and RCG.
Don’t initiate collection actions or seek harsh remedies – for example, confessions of judgment (COJs) – against small business owners who are honoring their obligations. For example, in RCG, the FTC allege that a finance provider filed COJs against consumers who didn’t breach their agreements or default. Given the severe consequences of COJs, the FTC is watching closely to ensure they are not used deceptively or unfairly.
When collecting outstanding payments or debts, never make false or egregious threats. You and your collectors should avoid the types of conduct the FTC has alleged to be unlawful in our many debt collection cases, like collecting amounts consumers don’t owe, making false threats of arrest or other severe consequences, harassing consumers with continuous calls, or using abusive language or threats of violence (as the FTC alleges occurred in RCG).
Report potentially unlawful conduct to the FTC. If you see finance providers, marketers, or others in the industry cross the lines the FTC has outlined, report it to the FTC. Similarly, if you have customers who say other providers have targeted them with deceptive or unfair conduct, encourage them to report their experience to us online or call us at 1-877-FTC-HELP.
Information provided by
Andrew Smith, Director, FTC Bureau of Consumer Protection