Factoring, the process by which a business sells its accounts receivable or other monetary claims to a third party (a factor) at a discount in exchange for immediate cash, is a widely used financing tool globally. In Japan, while factoring itself is a common commercial practice, its intersection with the regulated debt collection industry, specifically under the Act on Special Measures Concerning Business of Management and Collection of Claims (the "Servicer Law"), has specific nuances. Not all factored claims automatically fall within the scope of "Specified Monetary Claims" (特定金銭債権 - tokutei kinsen saiken) that licensed servicer companies (債権回収会社 - saiken kaishū kaisha) are authorized to manage and collect.

Article 2, Paragraph 1, Item 15 of the Servicer Law carves out a particular category of factored claims that do qualify, but this qualification is heavily dependent on the nature of the entity performing the factoring.

The Specific Provision: Article 2, Paragraph 1, Item 15

The Servicer Law brings certain factored claims into the fold of "Specified Monetary Claims" through Item 15 (often referred to as 号建て債権 - gōdate saiken, meaning a claim specified by item number). This provision defines these qualifying claims as:

"Monetary claims held by a person listed in Item 1 (of Article 2, Paragraph 1) who engages in the business of purchasing monetary claims from persons conducting commercial, industrial, service, or other businesses (limited to those claims purchased in the course of such [factoring] business)."
(「第十五号　第一号に掲げる者であつて、商業、工業、サービス業その他の事業を行う者から金銭債権を買い取ることを業として行うものが有する金銭債権（その業として買い取つたものに限る。）」)

To understand what this means, we need to break down the key conditions:

1. The Nature of the Holder (The Factoring Company): This is the most critical condition. The entity that has purchased and currently holds the factored claims must itself be a type of institution already listed in Item 1 of Article 2, Paragraph 1 of the Servicer Law. Item 1 entities primarily include:Essentially, the factoring company must also be a recognized financial institution or a registered moneylender for the claims it factors to qualify under Item 15.
   • Financial institutions as defined in the Deposit Insurance Act (e.g., banks, credit unions, shinkin banks).
   • The Norinchukin Bank.
   • Government-affiliated financial institutions.
   • Certain independent administrative institutions with lending functions (like SMRJ for SMEs or JHF for housing).
   • Agricultural, fishery, and forestry cooperatives engaged in credit businesses.
   • Insurance companies.
   • Registered Moneylenders (under the Money Lending Business Act).
   • Other specific entities designated by Cabinet Order (such as branches of foreign banks, the Development Bank of Japan Inc., etc.).
2. Engaged in the Business of Factoring: The Item 1 entity must be actively "engaged in the business of purchasing monetary claims" (金銭債権を買い取ることを業として行うもの - kinsen saiken o kaitoru koto o gyō toshiteokonau mono). This implies that factoring is a regular part of their business operations, not an isolated or one-off transaction.
3. Originator of the Claim: The monetary claims must have been purchased from "persons conducting commercial, industrial, service, or other businesses." This typically means the underlying claims are trade receivables, invoices, or other monetary rights generated in the ordinary course of business by commercial enterprises.
4. Acquired in the Course of Factoring Business: The claims must have been "purchased in the course of such [factoring] business." This links the acquisition directly to the factoring entity's established factoring operations.

The Rationale: Focusing on the Financing Function

The primary reason why the Servicer Law extends "Specified Monetary Claim" status to this particular category of factored claims lies in the financing or credit-providing function inherent in such transactions when conducted by Item 1 entities.

When a bank, a registered moneylender, or another Item 1 financial institution purchases receivables from a business, this action is economically similar to providing a loan or advance to that business, with the receivables acting as a form of security or the primary source of repayment. The factoring entity provides immediate liquidity to the business in exchange for the future value of the claims.

Because the factoring entity is already a type of institution whose own directly originated loan claims would generally qualify as Specified Monetary Claims under Item 1, the law recognizes that claims acquired by them through this closely related financing activity (i.e., factoring) should also fall within the scope of servicer handling if those claims subsequently become non-performing. This ensures that NPLs arising from such factoring activities by regulated financial players can be efficiently managed and resolved by licensed servicers. This, in turn, supports the health of the factoring market as a business financing tool.

Legal commentary often notes that at the time this provision was solidified (around the 2001 amendments to the Servicer Law), a significant portion of factoring business in Japan was conducted by banks themselves or by non-bank financial companies affiliated with banks (which would often be registered moneylenders or otherwise fall under Item 1 categories). This historical context helps explain the close linkage in the law between the factoring entity's status as an Item 1 institution and the "specified" nature of the factored claims they hold.

Distinguishing Qualifying Factoring from Non-Qualifying Factoring

It is crucial to understand that not all factored claims automatically become Specified Monetary Claims under Japanese law. The determining factor under Item 15 is the regulatory status of the entity performing the factoring and holding the claim.

• If a factoring company is not an Item 1 entity (for example, a standalone factoring company that is not a bank, a registered moneylender, or another institution listed in Item 1), then the monetary claims it purchases and holds generally do not become Specified Monetary Claims by virtue of Item 15.
• Such claims held by non-Item 1 factoring companies might become "specified" through other routes – for example, if those claims are subsequently sold to an Item 1 entity (then becoming specified under Item 2 as "claims formerly held by an Item 1 entity"), or if they are included in an asset securitization pool held by a qualifying TMK or SPV (falling under Items 8-14). However, their initial acquisition by a non-Item 1 factor does not, by itself, grant them specified status under Item 15.

This distinction is vital for participants in the Japanese receivables market. The involvement of a licensed servicer in the collection of defaulted factored claims often hinges on whether the entity that undertook the factoring and holds the claim meets the specific criteria of being an Item 1 institution.

Types of Underlying Claims Covered

Item 15 refers broadly to "monetary claims" purchased from "persons conducting commercial, industrial, service, or other businesses." This typically covers a wide range of business-to-business receivables, including:

• Accounts Receivable (売掛債権 - urikake saiken): Amounts due from customers for goods sold or services rendered.
• Other Trade Receivables: Various types of payment obligations arising from commercial transactions.
• Contractual Payment Rights: Monetary entitlements stemming from business contracts.

It's worth noting a distinction made in legal commentaries regarding the nature of factoring services. Item 15 is primarily concerned with factoring as a purchase of receivables, which directly involves a financing component (the factor provides funds by buying the claim). Some factoring companies also offer "guarantee services" for receivables, where they guarantee payment to the original business if its customer defaults, but do not necessarily purchase the claim outright unless a default occurs. Guarantee claims held by a factor that arise from such services are generally not considered Specified Monetary Claims under Item 15 if the underlying receivable itself was not already specified. Item 15 focuses on the purchased receivable itself becoming a Specified Monetary Claim due to the financing function and the regulated status of the Item 1 entity that bought it.

The "Formerly Held" Consideration – A Key Difference

An important nuance distinguishes Item 15 claims from some other categories of Specified Monetary Claims (like those under Item 2). Item 2 of Article 2(1) states that loan claims formerly held by an Item 1 entity remain "specified" even if later transferred to a non-Item 1 entity.

However, legal interpretation suggests this "formerly held" principle does not automatically apply in the same way to claims specified under Item 15. If an Item 1 factoring company acquires receivables (making them specified under Item 15 while it holds them) and then sells these factored receivables to a non-Item 1 entity, those claims generally lose their Item 15 specified status in the hands of the new, non-Item 1 holder.

The rationale appears to be that the "specified" status under Item 15 is intrinsically linked to the financing function being performed by the Item 1 entity that is conducting the factoring. Once that Item 1 entity disposes of the claim to an entity not covered by Item 1, the specific justification for Item 15 status (i.e., an Item 1 entity providing finance through receivable purchase) may no longer be present. (Of course, if the claim were sold to another Item 1 entity, it might then requalify under that new holder's Item 1 status or under Item 15 if the new holder is also an Item 1 factoring entity).

Implications for U.S. Businesses

Understanding the specific conditions of Item 15 is important for U.S. businesses in several scenarios:

• Investors in Japanese Debt or NPL Portfolios: When evaluating portfolios that include factored receivables, it's crucial to conduct due diligence on the nature of the entity that originally performed the factoring and currently holds the claims. Only if that entity meets the "Item 1 financial institution/moneylender" criteria will the claims likely be considered Specified Monetary Claims that can be readily handled by a licensed Japanese servicer under the authority of Item 15. This impacts the valuation of the portfolio and the available servicing options.
• U.S. Companies Selling Receivables in Japan (Factoring Clients): If a U.S. company's Japanese subsidiary is selling its receivables to a Japanese factoring company, understanding whether that factoring company is an Item 1 entity can provide insight into how those receivables might be treated or serviced down the line if they become non-performing and are subsequently handled by the broader NPL resolution ecosystem involving servicers.
• U.S. Factoring Companies with Japanese Operations: If a U.S.-based factoring company operates in Japan through a subsidiary that is itself licensed as an Item 1 entity (for example, as a registered moneylender in Japan), then the receivables it factors in Japan could potentially qualify as Specified Monetary Claims under Item 15. This would allow these claims, if they default, to be managed or collected by licensed servicers.

Conclusion

Article 2, Paragraph 1, Item 15 of Japan's Servicer Law carves out a specific and conditional pathway for certain types of factored claims to be recognized as "Specified Monetary Claims." The defining characteristic is not the act of factoring itself, but rather the regulatory status of the entity conducting the factoring business and holding the purchased claims. By requiring the factor to be an entity already recognized under Item 1 of the law (such as a bank, registered moneylender, or other designated financial institution), the provision acknowledges the inherent financing function of such factoring activities. This integrates these types of claims into the broader framework for NPL resolution and specialized debt management provided by Japan's licensed servicer industry, ensuring that when such factored claims become distressed, they can be handled by entities equipped and authorized to do so under the Servicer Law.