U.S. Representative Nydia Velázquez (D-NY) is calling on lawmakers to address predatory lending to small businesses (SMBs), The Washington Post reported on Thursday (June 27). Velázquez spoke during a House Small Business Committee hearing in Washington, D.C., pointing specifically to the use of confessions of judgment — a controversial contractual agreement that requires small businesses to accept liability and damages without normal court proceedings.
“By ending confessions of judgment in commercial lending, we can stop some of the abuses that are crippling honest small business owners,” she said. “I find it appalling that New York state law has made our state a magnet for dishonest lenders.”
Velázquez chairs the committee, and has introduced a bill alongside Representative Roger Marshall (R-KS) to bank confessions of judgment in the commercial lending space. Similar bipartisan initiatives in the Senate have emerged from Sherrod Brown (D-OH) and Marco Rubio (R-FL), reports noted.
According to The Washington Post, the bills were drafted following reports about unregulated lenders, particularly merchant cash advance companies — charging as much as 400 percent on small business financing, while requiring SMBs to sign confessions of judgment. That agreement enables lenders to legally seize SMB assets without court proceedings.
White and Williams LLP Lawyer Shane Heskin, who is representing small business borrowers, said that these agreements are dangers to the SMB community.
“My clients are very good at what they do,” he said. “They know how to fix a boat. They know how to install a sink. But that doesn’t mean they know how to read a contract in eight-point font. It doesn’t mean they know the legal ramifications of signing a confession of judgment.”
Confessions of judgment have been banned in consumer lending contracts since 1985, reports noted. The House bill, the Small Business Lending Fairness Act, would extend that ban to small business financing.
New York lawmakers approved a similar bill prohibiting the use of confessions of judgment last week, while other states like California and Pennsylvania have also recently moved to introduce more protections for small business borrowers.
The Federal Trade Commission (FTC) is reportedly examining the issue of confessions of judgment in small business financing as well.