The Federal Assignment of Claims Act, or “FACA” as it is often known, establishes the way lenders may arrange for payments under federal contracts to be irrevocably paid to them in support of loans made to the contractor. In short, if the borrower’s primary collateral is accounts receivable under a federal contract, this is the only way under the law for the lender to control the collateral. The Federal Assignment of Claims Act first became law in 1937 and established a road map for federal contractors to finance their activities under federal contracts.

In the commercial world (business-to-business rather than business-to-government) this kind of assignment process is established by the Uniform Commercial Code (UCC) as adopted by nearly all states. Under the Uniform Commercial Code a business buyer of goods or services must forward payments to a lender if that lender presents it with a notice that the accounts receivable have been sold and/or assigned to the lender. It seems odd to most of us that do not know about this obscure body of law but a business presented with a Notice of Sale and Assignment has no option in the matter even though they may have no relationship themselves with the lender. If they make the mistake of paying the bill to their service provider after they have received notice, the law holds them responsible for paying the lender anyway, which could mean they would have to pay twice. It doesn’t matter whether or not they agreed or signed any paperwork from the lender. If the lender can show that they delivered proper notice, the business is obligated after that point. 

The Uniform Commercial Code first became law fifteen years after the Federal Assignment of Claims Act and offers a much more streamlined approach to accomplish this “Notification”. Just a one-page notice with a couple of key phrases is all and it does not need to be accepted or approved. Proof of delivery is enough.

By contrast, the Federal Assignment of Claims Act proscribes four originals of a specifically worded, multi-page assignment. Notary and corporate seal are required of the borrower. The Federal Assignment of Claims Act defines what federal officials must receive an original and it establishes that the assignment is not fully complete until the government executes and returns a Notice of Assignment form, effectively authorizing the assignment in writing.

I will leave it to your own philosophical and political debate to help you conclude whether our government needs a special body of law and this formal structure to keep it safe in commerce or whether it is an antiquated bureaucracy that should be dismantled in favor of the simpler, cheaper and apparently also effective Uniform Commercial Code process.

In any case, it is the law of the land and not likely to change soon.