The Federal Trade Commission has opened an investigation into potentially unfair or deceptive practices in the merchant cash-advance industry, which offers unregulated, high-interest loans to small businesses and has exploded in size over the past decade.
The inquiry, which also includes companies offering other types of small-business financing, is at least the third by government authorities to target the cash-advance industry. The Manhattan district attorney is pursuing a criminal investigation of a group of cash-advance executives, people with knowledge of that effort said. And the New York State attorney general’s office is conducting a civil probe that was first disclosed last year.
It’s an unprecedented level of government attention for an industry accustomed to operating in the shadows. Cash-advance firms occupy a regulatory hinterland, claiming they’re exempt from lending laws as well as those that protect individual consumers. According to one estimate, the industry extended $17 billion of credit in 2017, the most recent year available.
“One of the reasons we’re so interested in this market is that there seems to have been so little scrutiny given to it,” Andrew Smith, the director of the FTC’s Bureau of Consumer Protection, said in an interview. Representatives for Cyrus Vance, the Manhattan district attorney, and Letitia James, the New York attorney general, declined to comment.
Bloomberg News reported last year that cash-advance companies have co-opted the New York State court system through a legal instrument known as a confession of judgment, in which borrowers across the country sign away their rights to defend themselves if a dispute arises later. The documents give lenders the power to unilaterally seize bank accounts and other assets from borrowers they accuse of default, without court review. Lenders got more than 11,000 such judgments from New York courts last year.
Smith said the FTC’s probe is at an early stage, and that either civil actions or new regulations may result. “Let’s say confessions of judgment are an unfair practice,” he said. “We could make a rule, or we could bring an enforcement action against a company that’s using them in an unfair way.”
Smith declined to identify any lenders under investigation. An FTC rule currently prohibits the use of confessions in loans to individuals, but not to small businesses.
The criminal investigation is being conducted by the Manhattan district attorney’s Rackets Bureau and the New York Police Department, the people with knowledge of the matter said. It began prior to the Bloomberg News reports, the people said.
The New York attorney general is examining, among other things, whether cash-advance lenders are abusing the state’s court system. The office last year subpoenaed records from Yellowstone Capital LLC, the largest user of confessions among cash-advance companies. Yellowstone, based in Jersey City, New Jersey, didn’t respond to requests for comment.
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