Lawmakers Seek to End Predatory Small Business Loans
Washington, D.C. – Two Members of the U.S. House of Representatives have introduced legislation aimed at ending a predatory commercial lending practice that, according to media reports, has harmed many small businesses in recent years.
Reps. Nydia M. Velázquez (D-NY) and Rep. Roger Marshall (R-KS) introduced the “Small Business Lending Fairness Act.” Their legislation would put an end to the practice of small business borrowers signing an obscure legal document known as a “confession of judgement,” which essentially requires the borrower to waive their legal rights. Confessions of judgement have been linked to unfair lending terms, onerous interest rates and unjust seizure of assets.
“I was appalled to find out that New York State has become an epicenter for dishonest lenders seeking to swindle small businesses around the country,” said Velázquez who is the Chairwoman of the House Small Business Committee. “That’s why I’m proud to introduce this legislation and will be leading a hearing this week to further expose these abusive practices.”
“Access to capital remains a significant hurdle for many entrepreneurs looking to start and grow a business,” Rep. Marshall said. “Shady lenders are using confessions of judgment as a weapon to take advantage of these hardworking Americans, and closing this loophole ensures that predatory lenders are unable to seize the assets of small firms without due process. I am proud to work with Rep. Velazquez to end this practice.”
Since 1985, confessions of judgement 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 during 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.
“Some uses of confessions of judgement in small business lending amount to little more than legalized loansharking,” Velázquez added. “We’ve heard of entrepreneurs swindled out of their lifesavings, their businesses bankrupted, and their dreams shattered. Our legislation will put an end to these heartbreaking stories once and for all.”
The Velázquez-Marshall bill would extend protections in current law that apply to consumer loans, prohibiting the use of confessions of judgement, to commercial loans, including merchant cash advances. It mirrors a measure introduced in the Senate by U.S. Senators Sherrod Brown (D-OH) and Marco Rubio (R-FL).
Introduction of the federal legislation follows the New York State legislature passing legislation to crack down on dishonest lenders using the state’s court system to seize small businesses through confessions of judgement. The bills also come the day before the House Small Business Committee holds a Wednesday hearing on Confessions of Judgement in small business lending.