news

Washington, D.C.— Today, Rep. Nydia M. Velázquez (D-NY), Chairwoman of the House Small Business Committee, convened a panel of business owners and experts to examine “confessions of judgment” and how they are being used to victimize small firms. A “confession of judgment” is an arcane legal device, whereby a borrower accepts an eventual judgment of liability against them. By signing a confession of judgment, a borrower forfeits standard due process protections such as notice, a hearing, and judicial review.

“As predatory small business lenders continue to evolve and find creative ways around the law, Congress must similarly be proactive in addressing those predatory practices and rooting out abuses that are harming honest-hard working small business borrowers,” said Chairwoman Velázquez. “Because cash flow is so vital to a business’s survival, many owners feel they have no choice but to sign away their rights to save their businesses and provide for their employees. By signing, borrowers essentially waive their legal rights regarding any legal dispute that might arise”

These confessions have become a favorite tool of the merchant cash advance industry, which often targets businesses in desperate need of capital. These cash advances can end up costing the equivalent of 400 percent in annualized interest. Once a borrower misses a payment or has some other type of dispute with the lender, their bank accounts can be frozen, and their assets seized purely based on the signed confession.

The FTC banned confessions for consumer loans in 1985, and various states outlawed them during the middle part of the 20th century. Despite this, numerous states recognize them for commercial loans. New York, in particular, has become a hub for processing these claims. In the first five months of 2019 alone, merchant cash advance companies obtained more than 5,500 judgments against borrowers through New York courts. During the hearing, experts and a victim of the practice testified on the devastating impact such predatory lending is having on small businesses.

“The chain reaction was awful, personal guarantees, frozen accounts, certain people holding our equipment and tools for hostage,” said Jerry Bush, Former Owner of JB Plumbing and Heating of Virginia, Inc. “Our name was smeared, I was at my end. The funding companies even took my father’s retirement money from social security.”

“The entire confession process is seamless and swift,” said Shane Heskin, Partner at White and Williams LLP. “Within hours, MCA companies can file confessions, obtain judgments and, freeze bank accounts without any prior notice to the small business or its owners. Indeed, in my experience, often the first time a merchant learns that a judgment has been entered against it is when its bank accounts are frozen.”

“By amending the Truth and Lending Act to include a general prohibition on confessions of judgment provisions for business loans as well,” said Hosea Harvey PhD, Law Professor and Consumer Finance Law Expert. “Congress can act to prevent the abuses described here today and begin to engage a larger dialogue recognizing that many commercial transactions are to businesses that are owned and operated by a single individual. This proposed solution is neither partisan nor anti-business.”

“While almost every state has banned confessions of judgment in commercial lending, there is still much work that needs to be done – and that includes banning them federally,” said Chairwoman Velázquez. “I’m pleased this Committee took the time to shine a much-needed light on this practice, especially as Congress looks to act quickly to prohibit confessions of judgment and extend protections to small business owners in commercial transactions.”

###