The Small Business Lending Fairness Act would protect small businesses by codifying the 1985 ban by the Federal Trade Commission (FTC) on confessions of judgment in consumer loan contracts and extend the ban to include small business borrowers. The bill is sponsored by Sen. Sherrod Brown (D.-Ohio), ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, and Sen. Marco Rubio (R.-Fla.).
Confessions of judgment require a borrower to give up rights in court before obtaining a loan and allow the lender to seize the borrower’s assets without warning in order to satisfy the debt. Although many states have banned this practice for small business loans as well as individual loans, borrowers are still exposed because the FTC left open a loophole. “That loophole has allowed predators to devastate small businesses across the country,” the two senators said in a press release.
“This is a bad practice that must be eliminated,” noted Jeremy Brown, chairman of the Small Business Finance Association. “Unfortunately, certain small business financing providers are misusing ‘confessions of judgment.’ We firmly support any legislation that will provide small businesses protection from the misuse of this practice.”
The number of confession-of-judgment verdicts in New York State since 2012, enabling merchant cash advance companies to seize an estimated $1.5 billion from small businesses. Source: Bloomberg, December 6, 2018, https://bloom.bg/2Ek8ZaS.