Usury is Usury, Class Tells Lenders

VISTA, Calif. (CN) - A class action claims three businesses not authorized to make loans in California dodged the law, and charged as much as 90 percent interest, by calling its loans "merchant cash advances ... secured by future credit card sales."

Borrowers sued Business Financial Services, a North Carolina corporation, and two Florida-based finance companies, Business Cash Advance and Faton Inc. They seek class damages for usury, money had and received and unfair trade practices.

A quick fix to cash-flow problems, a merchant cash advance is a business equivalent of a payday loan. Cash-strapped businesses borrow money, agreeing to pay back the principal plus a fee, which often comes to more than 25 percent of the amount advanced. This type of short-term lending, also called receivables financing, allows businesses to gradually pay back the debt from future credit card sales.

The class claims that the defendants, who were not licensed lenders in California, made illegal loans, charging effective annual interest rates of 70 to 90 percent - more than permitted by California law.

The class challenges the defendants' claim that "the merchant cash advances they made to plaintiffs and other California borrowers are not subject to California's usury law because they are sales of future receivables instead of loans."

The class says that the defendants' claim that they are in the business of buying receivables, not making loans, is an attempt to dodge state usury laws, which regulate interest rates on non-consumer loans.

Several factors qualify the defendants' cash advances as loans, including that borrowers had to submit credit applications, financing statements and personal guarantees, the complaint states.

Moreover, the defendants have the option to accelerate a borrower's payments in case of default, and "unlike a sale, which is consummated when the money is paid and the property is delivered, the merchant cash advance is not complete until the money advanced by the defendants is repaid in full," the complaint states.

The class seeks compensatory and punitive damages and an order canceling the debt owed to the defendants.

It is represented by James Clapp with Dostart, Clapp & Coveney of San Diego.

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