Two U.S. senators are seeking to outlaw a legal tactic that predatory lenders have frequently used to seize money from small businesses.
Senators Sherrod Brown, the top Democrat on the Senate Banking Committee, and Marco Rubio, a Florida Republican, said they will submit a bill on Thursday that would ban the use confessions of judgment, a debt-collection practice that has devastated thousands of small businesses across the county.
Many financial firms offering quick money require customers to sign confessions to get loans. By signing, the borrowers forfeit their right to defend themselves in court. Armed with a confession, lenders can accuse borrowers of not paying and legally seize their assets before they know what’s happened.
“We started getting calls from small businesses that this just hit them from nowhere — it couldn’t be real, it seemed so far-fetched,” Brown, who represents Ohio, said in an interview. “We think it should stop.”
Brown said he read a series of articles published by Bloomberg News about how lenders are using confessions to squeeze small-business owners. In dozens of interviews and court pleadings, borrowers described lenders who forged documents, lied about how much they were owed or fabricated defaults out of thin air. The borrowers said the consequences were drastic and they had no way to fight back.
“We are taking another step in protecting America’s small businesses — the foundation of our economy — by preserving the right of a business to be heard in the court of law before a potential credit default,” Rubio said in an emailed statement.
Federal regulators already banned the use of confessions for consumer loans in 1985. The proposed bill, called the Small Business Lending Fairness Act, would ban their use in commercial transactions. Brown said he’d push for the proposal to be passed next year, either on its own or as part of a larger bill.
“Nobody can really justify this,” Brown said. “But I also know anytime you go up against financial-services interests in this body, it’s awfully hard to override that opposition.”
Brown compared the confessions to the arbitration agreements that some financial firms require their customers to sign. The Consumer Financial Protection Bureau attempted to ban that practice, with Brown’s support, but the effort was defeated by Senate Republicans.
“This is in many ways worse, because the borrower has no recourse,” Brown said. “At least forced arbitration has an arbitrator that might play fair.”
The lenders that use the confessions call themselves merchant cash-advance companies. It’s an industry that’s been booming since the financial crisis as banks have pulled back from lending to small businesses. They lure contractors, truckers and restaurant owners with offers of fast cash and charge interest rates that can top 400 percent annualized, more than mafia loan sharks once demanded.
The confessions are generally filed in New York State courts, no matter where the borrower is located. Cash-advance companies have secured more than 25,000 judgments in the state since 2012, worth an estimated $1.5 billion, according to data compiled by Bloomberg. On Dec. 3, New York’s attorney general opened an investigation into the cash-advance industry in response to the Bloomberg News articles.