Regulators at the federal and state levels are cracking down on lenders that have targeted small businesses with abusive, fraudulent and exploitative loans and collection tactics. As merchants saw revenues vanish as a result of COVID-19, these lenders continued collecting money and threatened to freeze the businesses’ assets, NBC News reports.
These lenders, known as merchant advance companies, operate by providing money to small businesses based on the businesses’ revenues. However, when shutdowns froze the economy, the lenders did not stop extracting money. NBC reports that some small business owners were forced to sell their businesses to escape these lenders.
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Late last month, the FBI raided Par Funding, a Philadelphia-based firm. The Securities and Exchange Commission (SEC) also sued the company. Additionally, the Federal Trade Commission (FTC) has sued two others: RCG Advances and Yellowstone Capital for allegedly misrepresenting their financing terms. The RCG also faces a suit filed by New York Attorney General Letitia James for allegedly threatening violence and kidnapping those unable to pay back their loans. RCG allegedly charged interest rates in the hundreds and thousands of percent, one nearing an annual interest rate of 4,000% according to the press release.
Yellowstone Capital, the subject of the FTC’s most recent suit, allegedly told borrowers they weren’t required to sign personal guarantees when in fact they were and extracted more money from borrowers’ bank accounts than had been agreed upon, continuing to withdraw funds even after they were repaid.
The SEC’s case against Par Funding revealed the crimes associated with them. Joseph W. LaForte, identified as the “de facto CEO of Par” is a twice-convicted felon who spent time in prison for grand larceny, money laundering and conspiracy to operate an illegal gambling business. This month, LaForte was arrested on a weapons charge.
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Par denies allegations related to its practices and said it even has a full-time compliance officer on staff.
Merchant cash advance companies benefit from the 2018 financial crisis, when major banks cut back on small business loans. Now, as critics indicate that Paycheck Protection Program (PPP) has largely failed to reach many small businesses and minority-owned businesses, merchants may be more likely to turn to merchant cash advance companies.
Because merchant cash advance companies are not banks, they have previously faced light regulations. Interest rates are typically astronomical, and as the New York State suit against RCG indicates, collection techniques are often rife with threats of physical violence.
Government officials investigating these merchant cash advance companies are examining whether they should be subject to usury caps which are regulations on how much interest can be charged on a loan.
“Small businesses are the backbone of our economy, so it is unconscionable that these modern-day loan sharks not only preyed on hardworking business owners with fake loans, but threatened violence and kidnapping,” Attorney General James said in a statement. “While small businesses may not always have the tools to protect themselves from unscrupulous actors, my office is determined to use every tool at its disposal to protect small businesses from these illegal fraudsters and will fight to get every penny back.”