The U.S. Federal Trade Commission should scrutinize potentially abusive terms in small-business lending contracts, including the use of a legal instrument known as a confession of judgment, Commissioner Rohit Chopra said.

Such terms “have led to a flood of questionable legal actions” against small-business borrowers, Chopra said at an agency forum in Washington on Wednesday. “We are accountable for cleaning up this market.”

The merchant cash-advance industry, which provides an unregulated form of financing for small businesses, has embraced the use of confessions of judgment in recent years. Small businesses sign them as a condition of getting loans, effectively agreeing in advance to lose a court dispute if one later arises. Cash-advance companies have won more than 25,000 judgments against small businesses across the country since 2012, Bloomberg News reported last year. The judgments allow lenders to legally seize borrowers’ bank accounts and other assets without a judge’s review.

“We are very concerned about reports of unfair and deceptive marketing, sales and collection practices in the small-business finance market,” said Andrew Smith, who heads the agency’s Bureau of Consumer Protection and who also spoke at the forum. He said the FTC has “broad authority” under the Federal Trade Commission Act to tackle such conduct.

Chopra holds a Democratic seat on the five-member commission, which is controlled by Republicans. He noted that the FTC banned the use of confessions of judgment in consumer contracts in the 1984 Credit Practices Rule, but that the rule didn’t apply to small businesses.

“The FTC is the sole federal regulator and enforcer in the non-bank small business financing marketplace,” Chopra said. “We will need to determine whether certain contract terms and business practices constitute a violation of the law.”

Members of the industry pushed back. Katherine Fisher, a lawyer at Hudson Cook LLP in Maryland who represents cash-advance companies, said the FTC got it right when it limited the ban on confessions of judgment to consumers. The agency concluded that consumers needed protection because they often had few other options apart from signing one, and because they often defaulted on loans for reasons outside of their control, such as illness or job loss, Fisher said.

Those factors don’t affect cash-advance borrowers, Fisher said, because businesses can more easily shop for multiple offers, and because cash advances allow them to change their repayment schedule if they run into trouble, she said.

The three spoke at an FTC forum examining small-business lending practices, including in the merchant cash-advance industry.

(Adds comments from Andrew Smith in fourth paragraph and Katherine Fisher starting in seventh paragraph.)

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editors responsible for this story: Robert Friedman at rfriedman5@bloomberg.net, Jeffrey D Grocott

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