Federal Ban on Confessions of Judgment Would Help Small Businesses
For immediate release: June 25, 2019
Simon Brown | Media Relations Manager, Small Business Majority
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Statement on behalf of the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, investors, and small business advocates, in response to the reintroduction of federal legislation that would protect small businesses from predatory loans
Congress took an important step toward protecting small businesses from predatory lending by re-introducing the Small Business Lending Fairness Act. This legislation, which is sponsored by Sens. Sherrod Brown (D-OH) and Marco Rubio (R-FL) in the Senate and Reps. Nydia Velazquez (D-NY) and Roger Marshall (R-KS) in the House, would ban a clause commonly found in small business lending products called confessions of judgment that requires borrowers to agree in advance to lose any dispute with a lender. This action is essential in light of media reports highlighting a troubling rise in small business borrowers falling prey to this legal action with little recourse—resulting in the loss of not only a borrower’s business, but their life savings as well.
Confessions of judgment are already banned in the United States for consumer loans, but they remain legal at the federal level for business loans, and are legal in many states. A federal prohibition is needed because even states like New York that recently moved to outlaw confessions of judgment are only looking to do so for out-of-state loans; the practice would remain legal in the state and would not protect New York small businesses.
This legislation would be a significant step forward to protect small businesses from predatory forms of lending, and we hope it is passed swiftly as part of a broader congressional agenda to shield small firms from harmful financial products. For example, following a 2018 Bloomberg Businessweek investigation that spurred lawmakers to action on confessions of judgment in the last Congress, the Bloomberg Businessweek editorial board called for policymakers to pass small business truth-in-lending protections as “the best solution” to protect small businesses from harmful lending practices, citing the Responsible Business Lending Coalition’s policy proposal.
Additionally, individual representatives of RBLC member organizations made the following statements:
“Confessions of judgment have devastated countless entrepreneurs that simply needed funds to start or grow their businesses,” said Small Business Majority Founder & CEO John Arensmeyer. “In some cases, confessions of judgment cost faultless borrowers more than their businesses–they also lost their entire life savings. This predatory practice must end now, and we hope Congress moves quickly to ban confessions of judgment.”
“We applaud these bipartisan efforts to protect small businesses from being taken advantage of in collections,” said Richard Neiman, Head of Public Policy at Lending Club and former superintendent of the New York Banking Department. “And we look forward to more good work from legislators to address the need for disclosure of the annual percentage rates on small business loans, to help business owners make informed decisions about what financing they get into in the first place.”
“Transparency is vital for borrowers to make informed decisions. This action to ban confessions of judgment duly removes arcane legal language meant to mislead business owners into signing away their rights. These confessions are egregious, but there are many more unfair terms hiding in unregulated financing documents that we must continue to root out. We see firsthand borrowers who sign onto loans that are more than twice what they can afford, lured into a debt trap by pricing that is neither simple nor honest," said Opportunity Fund CEO Luz Urrutia.
Responsible Business Lending Coalition
The Responsible Business Lending Coalition (RBLC) is a network of non-profit and for-profit lenders, investors, and small business advocates that share a commitment to innovation in small business lending and serious concerns about the rise of irresponsible small business lending. The coalition created the Small Business Borrowers' Bill of Rights, the first cross-sector consensus on the rights that small business owners deserve and what financing providers, brokers and lead generators can do to uphold those rights. Since the creation of the Small Business Borrowers' Bill of Rights, nearly 60 small business lenders and brokers have committed to uphold these rights, and nearly 50 advocacy and support organizations have endorsed them. For more information, visit www.borrowersbillofrights.org