This past week the Federal Trade Commission (FTC) Banned Former Merchant Cash Advance defendants accused of what many who have worked in the industry know too well – among other things… weaponizing Confessions of Judgement and using “deceptive and illegal means to seize assets from small businesses, non-profits, and religious organizations.” – Implications and thoughts.
Over the past several years, a relatively unregulated lending industry is becoming more and more regulated. Since the industry exponentially grew after the recession of 2008, Merchant Cash Advance companies have used a host of different tactics to recover funds if a borrower failed to pay back what they borrowed.
What sets apart MCAs from traditional loans is that MCAs are not loans. They are advances of future receivables based on a company’s previous receivables. Because MCAs are not loans, over time MCA lenders have skirted laws and protections that banks and loan providers are required to adhere to, including how lenders to about recovering funds from borrowers. Therefore, without many limits on how many MCA lenders recover funds, MCA lenders have instituted a bunch of different tactics to recover funds from borrowers.
Confessions of Judgement
One of the most significant tools that MCA lenders have used for years has been the utilization of a Confession of Judgement (or COJs).
The Cornell Law School defines a Confession of Judgement as, “a legal device – usually a clause within a contract – in which a debtor agrees to allow a creditor, upon the nonoccurrence of a payment, to obtain a judgement against the debtor, often without advanced notice or a hearing. These clauses may also require the debtor to waive their right to assert any defense against the entry of judgement or be represented by an attorney appointed by the creditor.
To the layperson, a COJ is predetermined guilt for when a small business stops making payments on advances (or in many cases misses a few payments). The borrower waives the right to defend themselves and gives the lender permission to seize personal assets, business assets, or other means to recover what they can. This can include liquidation of assets such as cars, homes, and other things that the borrower has as an asset.
Some States have certainly fought back against this concept. For instance, Indiana prohibits COJ clauses and in 2019 NY State stopped allowing companies to use COJs for out-of-state debtors.
More oversight and regulation are coming to the MCA industry.
For those companies who have brokered or directly provided Merchant Cash Advances, most involved have heard of PAR Funding, RAM Capital Funding and Yellowstone Capital.
For those unfamiliar with these companies, I have added some links to some background on each of the lenders that I mentioned below.
These companies have seen millions in profit and hosts of small business owners who have used these companies can tell you from experience that their experiences have not always been so great. For instance, I have spoken to clients who have suggested that they had been threatened by lenders if they did not pay back their advances, as well as heard countless stories of how the lenders just seized all of the funds in a client’s bank account.
Regardless of the lender, borrowers do agree to pay back their advances but when something goes wrong lenders seem to use any tactics they can to recover their funds.
COJs are just one tactic which has been Machiavellian to say the least.
MCA Lenders Be Aware – The FTC and Others Are Taking Aim
In the three examples that I have shared below, (PAR, Yellowstone, and RAM) clearly officials are making a statement that nonsense will not be tolerated.
For instance, in the complaint against RAM it was noted:
“The agency also alleged that the defendants made unauthorized withdrawals from consumers’ accounts and used unfair collection practices, including sometimes threatening physical violence. In addition, the FTC alleged that the defendants illegally weaponized “confessions of judgment,” contractual terms that allowed defendants to pursue customers’ personal assets in court and obtain uncontested judgments against them.”
From what has been done in these cases, officials are beginning to govern the tactics that MCA lenders use to recover funds. And while it should be noted that borrowers should repay MCAs and if not be held accountable, what tactics lenders should use are ambiguous because the industry is fairly unregulated.
What is clear is MCA borrowers are on notice from officials.
PAR Funding: https://finance.yahoo.com/news/why-par-funding-merchant-advance-114314171.html
Yellowstone Capital Complaint: https://www.ftc.gov/enforcement/cases-proceedings/182-3202/yellowstone-capital-llc-ftc-v RAM Funding Complaint: https://www.ftc.gov/news-events/press-releases/2022/01/merchant-cash-advance-providers-banned-industry-ordered-redress
Dr. Thomas W. Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.