Committee Advances Velazquez Bill to Stop Predatory Small Business Loans
Small Business Lending Fairness Act Would End “Confessions of Judgment” in Commercial Lending
Unfair Loan Terms Have Been Linked to Taxi Medallion Crisis
Washington, DC –The House Financial Services Committee has approved legislation authored by Rep. Nydia M. Velázquez (D-NY) that would end a predatory commercial lending practice. The bill, H.R. 3490, the “Small Business Lending Fairness Act,” would amend the Truth in Lending Act (TILA) to restrict the use of predatory contract clauses called “confessions of judgment,” which are often used in small business loans.
A confession of judgment is a contract between a lender and a borrower in which the lender can easily seize a borrower’s assets without a lawsuit. To this end, Velazquez’s legislation would extend protections in current law that apply to consumer loans, prohibiting the use of confessions of judgment, to commercial loans.
“Whether it’s a taxi cab driver in New York City pursuing the American Dream or a small business owner trying to make payroll, every hardworking American deserves better than to be chewed up and spit out by predatory lenders,” said Velázquez. “Today, we took a critical step toward protecting small businesses across America.”
Since 1985, confessions of judgment have been prohibited under the “Truth in Lending Act” for consumer loans, but the protections do not extend to certain types of commercial loans. By billing business loans as “merchant cash advances”, unscrupulous lenders began using confessions of judgement following the financial crisis to lure small firms into taking on unsustainable and costly debt, sometimes with interest rates of as much as 400 percent annualized. In some cases, lenders have been allowed to freeze and drain borrowers’ bank accounts, even when the small business borrowers have met their loan obligations. In New York City, confessions of judgment have been linked to the taxicab medallion crisis with hundreds of cab drivers locked into loans they could not afford.
Due to a recently corrected loophole in state law, New York State has previously served as a clearinghouse for confessions of judgment. Until recently, dishonest lenders often filed documents in New York Courts when seizing the assets of small business borrowers around the country.
“New York became a breeding ground for con artists whose operations depend on confessions of judgement, preying on mom-and-pop businesses,” said Velázquez. “Thousands of lives have been ruined by these abusive contracts. Now that the state legislature has stopped New York from serving as a magnet for these practices, my bill would go further and end this practice nationally.”
Velázquez introduced the Small Business Lending Fairness Act in June. The bill cleared the Committee today on a vote of 31-23. It will now need to be considered by the full House of Representatives.
Many advocates and other organizations voiced support for Velázquez’s bill.
"Confessions of Judgment can be a pernicious form of predatory lending, targeting unsuspecting small business owners who are in need of operating capital and may not realize they are signing away their business and assets in the process,” said Linda Jun, senior policy counsel at Americans for Financial Reform. “Americans for Financial Reform commends Chairwoman Nydia Velázquez (D-NY) of the House Small Business Committee for introducing this important piece of legislation that will save small business owners from falling victim to this abusive practice."
“Confessions of judgment are egregious, and there are many more unfair terms hiding in unregulated financing documents that we must continue to confront. Many members of our coalition have seen borrowers who sign onto loans that are more than twice what they can afford, lured into a debt trap by pricing that is neither simple nor honest,” said Gina Harman, founding member of the Responsible Business Lending Coalition (RBLC) Executive Committee and CEO of U.S. Network at Accion. “We applaud Representative Velázquez for introducing the Small Business Lending Fairness Act, which is a significant step forward to protect small businesses from predatory forms of lending.”