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The Green Sheet Online Edition

February 25, 2019 • Issue 19:02:02

MCA – collections and disclosure requirements

By Lauren Hanley-Brady
Global Legal Law Firm

Leaders in the merchant cash advance (MCA) industry take calculated risks to fund small businesses with the expectation of receiving future receivables. But, sometimes, even if a company works with a merchant to reduce daily, weekly or monthly payments to help ensure the company doesn't go bankrupt, the merchant defaults and appears to drop off the face of the earth.

Sometimes, the debt outstanding isn't worth pursuing with full-blown litigation, so payment process seizure is a strong avenue to take, assuming you know where the merchant banks (that is, the merchant hasn't moved banks in breach of the MCA agreement). However, learning the procedure for seizing payment processing and developing relationships and contacts with all associated processors and banks takes significant time and perseverance, as the information is typically not publicly available, and such entities often resist disclosure.

Other times, the debts are sizable enough to warrant suing merchants, but doing so would likely eat up significant time for in-house counsel, as the litigation process is expensive to maintain without templated procedures automating deadlines and case flow to keep track of numerous cases that will accumulate.

Each case will need a complaint filed, most likely in the county/state in which the merchants are located, although one can try to enforce a forum selection clause in an MCA agreement, but that carries the risk of wasted time in disputes regarding removal to courts deemed "more convenient" or "reasonable."

Merchants must be served after a case is filed. If they have purposefully fallen off the grid, it takes legwork to track them down or obtain court permission to serve by publication in a newspaper. Discovery, if reached, should be brief and tailored to maximize the ability to submit a motion for summary judgment (which would end the case), but general enough so only the defendants' names, dates and amounts need to be changed for each case. The same is true for drafting discovery motions and motions for judgment – default or otherwise.

Passage of Senate Bill 1235

On Jan. 1, 2019, California Senate Bill 1235 went into effect. The bill targets nonbank small business financers, specifically mandating that they disclose the total cost of financing expressed as an annualized rate (instead of APR). The bill states, in pertinent part:

"This bill would require a provider who facilitates commercial financing to a recipient, as defined, to disclose specified information relating to that transaction to the recipient at the time of extending a specific offer of commercial financing, and to obtain the recipient's signature on that disclosure before consummating the commercial financing transaction.

"The bill would require that disclosure to include specified information, including the total amount of funds provided, information related to the payments to be made, and the total dollar cost of the financing. "The bill would, until January 1, 2024, additionally require a provider to disclose the total cost of financing expressed as an annualized rate.

"The bill would authorize a provider who offers financing that is factoring or asset-based lending to, in lieu of those disclosure requirements, provide an alternative disclosure that meets specified requirements, including that the disclosure may be based on an example of a transaction that could occur under the general agreement for a given amount of accounts receivables.

"The bill would require the commissioner to adopt regulations governing these disclosure requirements, and would require those regulations to include specified information and determinations. The bill would provide that a provider is not subject to these provisions until those regulations become effective."

Concerns were stated by the opposition to the bill (http://src.bna.com/AUp), citing, among other issues, that:

"The Estimated Annualized Cost of Capital ("ACC") calculation is an untested metric that fails to recognize the difference between a loan, which is absolutely repayable, and an accounts receivable purchase transaction. Because this disclosure is not consistently used in any business finance transactions, it will confuse small business owners and increase the risk of litigation." While there are exceptions and exemptions listed in the bill's language, the above will likely require frequent checks to confirm continued compliance with the fast-changing landscape of legal compliance. end of article

Lauren Hanley-Brady is an attorney with Global Legal Law Firm, whose attorneys are well recognized as top payments industry experts. Contact her at brady@attorneygl.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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