NY At Key Point In SMB Borrower Protection Fight

The New York state legislature will rule this week whether to move forward with a borrower protections bill for small businesses (SMBs), as allegations of predatory practices by merchant cash advance firms raise new concerns about mistreatment of small business borrowers, The Washington Post.

The legislative proposal would limit lenders’ ability to include confessions of judgment to out-of-state debtors in their contracts, a controversial legal instrument that requires borrowers to agree to bypass traditional court proceedings and accept liability to damages. It has already passed two assembly committees, with some expecting the bill to be moved to a vote before the end of the state legislative session on June 19.

“I’m hopeful that Albany will act on this issue,” said New York Senator Brad Hoylman in a statement last week.

Despite New York’s public condemnation of unfair contracts with SMB debtors, reports noted that court judgments against borrowers have continued along a steady growth trajectory. Bloomberg News data cited by The Washington Post found that more than 5,500 court judgments have been obtained by merchant cash advance firms against SMBs in New York in the first five months of 2019.

The publication noted that the merchant cash advance industry has also been known to charge 400 percent interest on short-term loans, requiring SMBs to agree to confessions of judgement to receive the capital.

The New York Attorney General’s Office launched an investigation into the use of confessions of judgment last year after Bloomberg News ran a series of articles on abuses in the small business financing sector. Three county clerks agreed to stop processing the majority of judgments by confession as a result of the articles. However, The Washington Post noted that lawyers simply began sending cases to different counties.

“The filing of COJs is just as rampant as ever,” said Second Wind Consultants President Aaron Todrin in an interview with the publication. “These guys are ruthless and relentless.”

The broader cash advance sector has secured more than 32,000 wins in New York courts via confessions of judgement since 2012, reports said.

Earlier this year, the U.S. Federal Trade Commission (FTC) announced plans to examine the small business financing industry, and potential mistreatment of debtors. In May, the FTC acknowledged that it has the authority to address a range of issues, including the use of confessions of judgement by merchant cash advance firms.