Updated: Feb 15, 2022
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.
By Thomas W. Tramaglini, Managing Director at BRP Onesta
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 de