Bank Regulation

Lawmakers Want To Outlaw SMB ‘Confession Loans’

Rubio, Brown to Outlaw SMB Confession Loans

U.S. Senators Sherrod Brown and Marco Rubio have called for a ban on confessions of judgement, a tactic predatory lenders use to make borrowers forfeit the right to defend themselves in court, according to a report from Bloomberg.

Brown, a Democrat on the Senate Banking Committee from Ohio, and Rubio, a Republican from Florida, said they will submit the bill on Thursday. The practice has crippled small businesses across the country.

The practice involves financial firms offering small businesses loans, but making them sign confessions that will let lenders legally take assets from the businesses after they accuse them of non-payment.

“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 said in an interview. “We think it should stop.”

Brown said he read articles in Bloomberg that outlined the practice, where borrowers said lenders lied and forged documents about how much money they were owed. Because they signed the confessions, businesses had no legal recourse.

“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 a statement.

The companies that force the use of confessions are called merchant cash advance companies. Since the financial crisis, banks have not been giving small businesses as many loans. The companies offer fast cash to smaller businesses, like restaurants and truck drivers. However, they charge exorbitant interest rates, sometimes topping 400 percent annualized.

The confessions are usually filed in New York State, regardless of the origin of the loan. The cash advance outfits have won 25,000 judgements since 2012, a number that equals about $1.5 billion.

New York’s attorney general started investigating the practice on Dec. 3.

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