So-called “confession loans,” a predatory but legal debt-collecting practice ravaging thousands of small businesses, is under fire from two U.S. senators who want it banned, according to a Bloomberg report.
The lenders that have unearthed the arcane “confession of judgement” law call themselves merchant cash-advance companies. They prey on unwitting small businesses lured by instant cash, charging usurious interest rates up to 400 percent annually, the report said. Before securing financing, borrowers must waive their right to defend themselves if the lender takes them to court. With no legal recourse, small businesses can lose their assets in the snap of a finger based merely on a lender’s accusation without proof.
Any cash strapped business, including channel partners, can be victimized. Congress banned these types of loans for consumers more than 30 years ago but a recent, similar effort for businesses initiated by the Consumer Financial Protection Bureau was blocked in the Senate.
To arrest the wolfish money-lending practice, Senators Sherrod Brown (D-OH) and Marco Rubio (R-FL) have proposed the Small Business Lending Fairness Act to prohibit their use in commercial transactions. The Small Business Finance Association has already declared its support of the bill, which would provide the Federal Trade Commission more leverage to protect small business owners from seeing their assets seized and their businesses devastated by exploitative lenders.
“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 told Bloomberg. “Nobody can really justify this,” he said. “But I also know anytime you go up against financial services interests in this body, it’s awfully hard to override that opposition.”
An earlier Bloomberg report in which small business borrowers in court filings and interviews revealed they had been victimized by lenders that forged documents, lied about the size of the debt or made up delinquent accounts without repercussions, apparently sparked Brown and Rubio into action. “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 told Bloomberg in an email.
The two senators weren’t the only ones to heed the call. New York’s attorney general has reportedly begun investigating the cash-advance industry. It's a good thing: Bloomberg data compiled from more than 350 lenders revealed some 25,000 judgments in New York in the last six years collectively valued at $1.5 billion. Most of the confession judgments are filed in New York, the report said.
The opportunistic practice, which some states outlawed in the mid-1950s, picked up steam in the wake of the financial crisis when banks stopped lending as small businesses felt a cash crunch. Last year, the money lending industry extended about $15 billion in credit, according to an estimate by investment bank Bryant Park Capital, Bloomberg reported.
