Legislation to Protect Small Businesses From Predatory Lenders

December 12, 2018

Sens. Sherrod Brown (D-Ohio), Ranking Member of the Senate Banking Committee and Marco Rubio (R-Fl.) are teaming up on legislation aimed at protecting small-business borrowers from predatory lenders. On Dec. 6, the two lawmakers introduced the Small Business Lending Fairness Act, which would extend certain Federal Trade Commission (FTC) protections for consumer loans to small-business borrowers, as well.

The bill, would ban the use of “confessions of judgment,” a debt-collection practice that has devastated small-businesses. Many financial firms offering quick money require customers to sign confessions to get loans. By signing, the borrowers forfeit their right to defend themselves in court before obtaining a loan. Armed with a confession, lenders can accuse borrowers of not paying and legally seize their assets to satisfy the debt, before the business owner know what has happened.

Although many states have banned this practice for small business loans as well as individuals, borrowers are still exposed because the FTC left open a loophole. That loophole has allowed predators to devastate small businesses across the country. The Small Business Lending Fairness Act closes the loophole, and provides small businesses with the same protections consumers already have.

Last month, Bloomberg published an in-depth investigative report on this small business lending tactic which has allowed creditors to wipe out tens of thousands borrowers with no notice or opportunity for defense. The lenders that use the confessions call themselves merchant cash-advance companies. It is an industry that has been booming since the financial crisis as banks have pulled back from lending to small businesses. They lure contractors, truckers and restaurant owners with offers of fast cash and charge interest rates that can top 400 percent annualized. The confessions are generally filed in New York State courts, no matter where the borrower is located. Cash-advance companies have secured more than 25,000 judgments in the state since 2012, worth an estimated $1.5 billion, according to data compiled by Bloomberg. On Dec. 3, New York’s attorney general opened an investigation into the cash-advance industry in response to the Bloomberg News articles.

The Small Business Lending Fairness Act:

  • Codifies the FTC’s 1985 ban on confessions of judgment in law in consumer loan contracts, and
  • Expands the ban to provide these protections to business borrowers as well.

Sen. Brown plans to push for the proposal to be passed next year, either on its own or as part of a larger bill.

More information on the bill can be found here.