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Cash advances from traders in the hot seat | Manatt, Phelps & Phillips, srl

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Cash advances from traders in the hot seat |  Manatt, Phelps & Phillips, srl

Could the investigative reports of merchant cash advance lead to coercive action against the companies making these advances, or potential legislation to ban certain practices inherent in this industry?

According to reports in the press, New York Attorney General Barbara Underwood has opened an investigation into possible abuses by companies that advance cash to traders and has already issued at least one subpoena. In addition, a bipartisan effort led to the introduction of a bill at the federal level that would prohibit the practice of “admissions of judgment,” a preferred remedy for lenders seeking a remedy against cash advance borrowing. traders.

What happened

Over the past few months, Bloomberg News has published several articles on the merchant cash advance industry. Merchant cash advances typically come with a high fee, often higher than what state usury laws allow lenders to charge. However, these companies allege that they are not subject to usury limits or state licensing laws arguing that the arrangement with the borrowers is not a loan but an advance of funds on monies. of the credit card settlement receivable in the future. There is a subtle but significant difference between a purchase of future revenue and a loan guaranteed to be repaid by that revenue. And while the contracts of the lenders are all different, the contracts that were drafted with this distinction in mind have succeeded in defeating the legal claims of the borrowers.

Another essential element of cash advances to merchants is that the companies that make them often require borrowers to sign an “admission of judgment”. This means that the borrower loses the right to defend themselves in court, which makes it easier for the lender to collect the debt and seize the assets of the borrower.

Although this practice has been banned in consumer contracts since 2014, it is permitted in trade agreements, and admission of judgment is a powerful remedy. The Bloomberg exposure also alleged that some companies offering cash advances to merchants were relying on false documents, lying about the amount owed by the borrower, or making foreclosures even when the borrower had not missed any. payment.

Not all cash advances to merchants are made to New York or to New York borrowers. However, New York has become the preferred location for these contracts due to the ease of obtaining an admission of judgment in New York courts. Bloomberg reports that since 2012, lenders of cash advances to merchants have obtained more than 25,000 judgments in New York against companies, worth an estimated $ 1.5 billion. Many of these judgments were obtained in a handful of courts in upstate New York. With the spotlight on merchant cash advances, these practices can be stopped. According to Bloomberg, Underwood’s office has subpoenaed one of the nation’s largest merchant cash advance companies and inquiries of other lenders will likely follow.

“It is wrong to defraud, deceive and harass small business owners through predatory debt collection practices and the abuse of our court system,” she told Bloomberg in a statement. “If a business engages in fraudulent and deceptive behavior, we want to know it. New York lawmakers are also reportedly reviewing New York laws that allow abusive lending practices.

The Bloomberg articles also sparked a backlash at the federal level. On December 6, 2018, Senator Sherrod Brown (D-OH), a leading member of the Senate Committee on Banking, Housing and Urban Affairs, and Senator Marco Rubio (R-FL) introduced a law titled Small Business Lending Fairness Act. The law would protect small business by extending the Federal Trade Commission’s ban on confession of judgment in consumer loan agreements to small business borrowers.

Why is this important

The recent publicity has drawn attention to a segment of the financial services industry that had previously remained in the shadows. Although for many years, cash advances from traders fell through the cracks of existing laws and escaped regulatory oversight, despite practices deemed unfair, deceptive and usurious by borrowers, the New York investigation AG and potential New York and federal legislation could be reversed. this trend.

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