Senate legislation will help protect small businesses from predatory lenders
Sudden closures, supply chain issues, agonizing decisions about layoffs and worker safety – we all know how hard this pandemic has hit small businesses in Ohio and across the country. As corporate profits soared and Wall Street posted record gains, Main Street suffered, just as it did after the 2008 financial crisis. This left many small business owners desperate for loans to keep their open house and their employees on the payroll. And there’s a major problem – the fine print in some shady business loans could cost them all.
“Confession of judgment” clauses in loan agreements require a small business to waive its rights in court before obtaining a loan. This means the lender can seize the assets of the business to pay off the debt, plus interest, without giving the business the chance to defend itself in court. And it doesn’t matter if the company is in good standing with its loan repayments. These out-of-state lenders can devastate perfectly healthy small businesses without warning – simply by showing a county clerk the “confession of judgment” paperwork.
It’s time to put an end to this scam.
We knew this was a problem before the pandemic. In 2018, Bloomberg published a presentation on Yellowstone Capital, a company that has devastated small businesses in Ohio and across the country. Yellowstone’s business model relied on calling small, family-owned businesses such as convenience stores and pizza places in desperate need of credit, and offering them loans at 400% interest or more. When borrowers could not meet these outlandish conditions, Yellowstone would step in and seize small business assets, based on the admissions of judgment they had signed. The lender then used this leverage to harass and abuse its victims.
By 2017, the cash advance industry had become a $15 billion business – or more accurately, a $15 billion scam. While some states have banned this practice for small business loans as well as individuals, small businesses across the country are still at risk. New York will accept admissions of judgment from any state in the country, so small business owners are often required to sign paperwork allowing the lender to file in that state, regardless of where their business is actually located. Since 2012, the Bloomberg survey found that cash advance companies have won more than 25,000 judgments in New York.
And now, with small businesses across the country strapped for cash and desperate to keep their dreams alive, we can only expect those numbers to rise.
That’s why my fellow Republican, Senator Marco Rubio (Florida) and I introduced the Bipartisan Small Business Lending Equity Act, to close this loophole once and for all. Our bill would codify into law the Federal Trade Commission’s 1985 ban on admissions of judgment for consumer loan contracts, and expand the ban to protect commercial borrowers. This would put an end to this dangerous practice and prevent small business owners from waking up one morning having lost everything.
We know who is most affected by these predatory loans — it’s not big business, it’s family businesses, and it’s disproportionately small stores and restaurants owned by black and brown Americans and women. The biggest banks ignore these business owners, leaving them with no recourse.
Our plan would end this scam everywhere – it has already cost thousands of families their livelihoods and savings, and it is hurting the small businesses that are creating jobs and driving our country’s pandemic recovery.
You can’t say you support small businesses, while allowing financial predators to cheat them out of their hard-earned money. I urge my colleagues on both sides to support the Small Business Lending Fairness Act to provide this common sense solution and help unlock the potential of American entrepreneurs across the country.
Brown is chairman of the Senate Banking Committee.
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