New York's two MCA reforms: confessions of judgment and disclosure

New York changed the merchant cash advance business twice in four years, and neither change is only a New York problem. Open your agreement and look for the governing law clause. If it names New York, both reforms are part of your file no matter where your shop is.

Reform one: the confession of judgment, closed off in 2019

What a confession of judgment did

A confession of judgment is a document you sign at funding in which you agree, in advance, that if the funder says you defaulted, a judgment can be entered against you without a lawsuit, without a hearing, and without notice. The first you learn of it is usually a frozen bank account.

Between 2014 and 2018, merchant cash advance funders filed more than 25,000 confessions of judgment in New York courts against business owners in Texas, Florida, California, and dozens of other states, covering an estimated $1.5 billion in claimed obligations. Reporting by Bloomberg Businessweek put the practice in front of legislators, and New York moved.

What changed

On August 30, 2019, New York enacted Senate Bill S6395, amending Section 3218 of the Civil Practice Law and Rules. The amendment bars filing a confession of judgment in New York against a defendant who does not reside in the state.

CPLR 3218 also carries formal requirements that predate the amendment and still apply. The affidavit must be signed by the defendant and notarized, it must state the county where the defendant lived when it was signed or where the defendant lives at filing, and it must be filed within three years of execution.

The practical effect was immediate. The instant judgment route into New York courts closed for out of state merchants, and funders shifted to filing ordinary lawsuits. That is a real improvement for you. An ordinary lawsuit means service, a deadline, and a chance to appear and raise defenses before anything is entered.

What it does not do

The amendment did not vacate judgments already entered. It did not make the underlying debt disappear. It did not stop funders from suing in other states or from using the other collection tools in their contracts, including UCC-1 liens and personal guaranties.

If a judgment from that era is sitting on your business, that is a matter for licensed MCA defense counsel to evaluate against the specific filing. Some are challengeable on procedural grounds. Many are not.

Reform two: showing the price at the offer

Who has to disclose

New York's Commercial Finance Disclosure Law lives in Article 8 of the New York Financial Services Law, sections 801 through 812. The Department of Financial Services adopted final regulations on February 1, 2023, codified at Part 600 of Title 23 of the New York Codes, Rules and Regulations, and set August 1, 2023 as the date providers had to begin delivering disclosures.

It applies to nonbank providers of commercial financing where the amount available to the recipient is $2.5 million or less. Sales-based financing, which is where merchant cash advances sit, is covered explicitly by Financial Services Law section 803. Sections 804 through 806 do the same for closed end loans, open end credit plans, and factoring, each with its own disclosure format.

Timing is the important part. The disclosure is due when a specific offer is extended, not at closing. New York wanted the numbers in front of you while you still had the option to walk.

What the offer summary has to show

The regulation requires a standardized offer summary. For sales-based financing that includes:

• The total amount of the financing and the amount actually disbursed to you
• The finance charge, built on the definition federal Regulation Z uses, plus additional specified charges
• The annual percentage rate, or an estimated APR where the term is not fixed
• The estimated term of the financing
• The payment amounts, which for a revenue based product are stated as estimates tied to your sales
• Prepayment terms, including whether paying early leaves finance charges on the bill
• A description of collateral requirements

Providers must obtain the recipient's signed acknowledgment of the disclosure before proceeding with the transaction.

The two ways the estimated APR gets built

A merchant cash advance has no fixed term. If sales rise, it pays off faster. If sales fall, it stretches. That makes a true APR impossible to state at signing, so Part 600 defines two methods for estimating it. Which one your provider used changes the number printed on your page.

The historical method, at 23 NYCRR 600.8. The provider builds an estimated monthly sales projection out of your own average receipts over a fixed window it selects. The window has to run at least four months and no more than twelve. It is either the months immediately before the offer, or the same number of your highest volume months from the past year.

Whichever it picks, it has to apply that same window across all of its sales-based offers rather than choosing per deal. A business open less than a year is averaged over the months it has actually traded. The provider may drop a below average month caused by something unlikely to recur, such as a natural disaster, or a month it cannot document.

The opt-in method, at 23 NYCRR 600.9. Here the provider substitutes its own internal projection of your future receipts through the payment channel named in the contract, calculated with the best information reasonably available to it.

That freedom comes with an audit loop. Every year the provider has to audit the sales-based financings that paid off in the prior twelve months, measure the spread between the estimated APR it disclosed and the rate the deal actually ran at, and track weighted averages across three, five, and seven audit periods. Run past the thresholds the regulation sets and the provider loses the opt-in method for 24 months, and has to show improved projections before using it again.

Two consequences follow for you. Ask which method built your number, because a rate estimated from your four strongest months is a friendlier projection than one built from the last twelve. And remember it is an estimate either way. A slow quarter makes your actual cost higher than the paper said.

Why New York reaches your file anyway

A large share of the merchant cash advance industry is headquartered in or around New York, and the standard agreements say so. Choice of law clauses naming New York, venue clauses selecting a New York county, and arbitration provisions seated in New York are all common in contracts signed by businesses that have never operated there.

That cuts both ways. It means a funder can pull you into a distant forum. It also means New York's reforms, and New York's courts, are part of the analysis of your agreement.

Enforcement of the disclosure law sits with the Department of Financial Services, with civil penalties the statute sets at up to $2,000 per violation and up to $10,000 for a willful violation. As with Florida, this is a disclosure regime, not a rate cap.

What to check in your own file

Pull each agreement and mark four things:

1. The governing law and venue clauses. Write down which state each one names.
2. Whether a confession of judgment was part of the signing package, and its date.
3. Whether an offer summary or disclosure page exists for anything funded after August 1, 2023, and what estimated APR it shows.
4. Whether the agreement contains an arbitration clause, which can override the venue clause entirely.

A reasonable next step

If you find a confession of judgment in a package signed after August 2019 and your business is not in New York, flag that document specifically when you talk to someone about your options. Its presence in the file is worth a closer read than the rest of the paperwork.