The Biggest News in Small Business Loans is Happening in New York
When most individuals think of predatory lending, payday loans often come to mind. However, the latest menace in New York small business loans is a predatory lending practice involving Confessions of Judgement. Bloomberg editor, Zachary Milder, has been covering this practice extensively for the past two years and his coverage highlights the lengths lenders will go to make money.
New York's Predatory Loan Machine
Judgements by confession have been steadily on the rise since reemerging in 2014 though they date back to colonial times. Analysis from Bloomberg News reveals that 14 cases involving confessions of judgement existed before 2014.
Companies like Yellowstone began offering loans marketed as "merchant cash advances” and have repackaged how they lend money to small businesses, too. Merchant cash advance companies note that the funds they provide small businesses is a discounted price on future money the businesses are projected to make. The courts recognize this treatment of merchant cash advances and do not consider them as loans. It's part of why merchant cash advance companies can charge up to 400 percent in interest.
But the cruel part about this predatory lending machine is that it's all made legal by a rarely-understood document: the Confession of Judgement. It's part of why the merchant cash advance industry has an estimated worth of $15 billion per year.
The Confession of Judgement
The Confession of Judgement is a legal arbitration document valid in the state of New York that gives creditors the right to prosecute borrowers for non-payment and even seize borrowers' assets without proving the borrowers missed any payments. This legal arbitration agreement is often signed by borrowers who get funds from predatory lenders. The issue is that most people who sign these documents often don't understand or are unaware of the consequences.
The Confession of Judgement is typically signed by a small business owner who needs funding during an application process. By signing this legal agreement, the business owners sign away their right to dispute any accusations the predatory lender may bring against them. The lender then gives the small business owner the money they need. However, the predatory lender often makes a claim that the small business owner missed payments---whether or not this is true---and sends the claim to the county clerk. The county clerk then stamps the claim for judgement. This gives a New York City marshal the right to demand money from the borrower and garnish their bank funds. The lender then gets back the money they lent with fees and interest.
The interesting finding about the impact of the county clerk's rubber stamp is that it can affect small businesses thousands of miles away. In fact, analysis from Bloomberg reveals that small businesses in Puerto Rico and across 38 states had a total of 176 judgements from one county clerk's office. Moreover, government officials stand to profit from this predatory lending machine as well with New York City marshals earning five percent of recovered funds. New York City marshal Vadim Barbarvoich made $1.7 million in 2017 and $1.9 million in 2018 for collecting debts from borrowers of predatory lenders.
While the confession of judgement has been in New York's court system for years, little has been done to change its existence until recently hitting reviews of small business loan practices from the city to federal levels. New York is one of the many states that recognize and enforce confessions of judgment. But government action on merchant cash advance companies is happening. New York's attorney general sued companies, such as Northern Leasing Systems, Inc. and investigated Yellowstone for their practices and use of the confession of judgments. Moreover, Republican Senator Marco Rubio and Democrat Senator Sherrod Brown pushed bills to outlaw confessions of judgments. Also, FTC Commissioner has also called for a review of these lending practices to small businesses. Some county clerk offices are even rejecting confessions of judgments that allow for filing in multiple counties. New York City Mayor Bill de Blasio is also moving to action by reviewing the city marshals' debt-collection practices. The city even probed Barbarvovich and even though this high-earning city marshal's term expired, he continues to collect debts.
What Business Owners Should Consider
Before business owners sign any contract, arbitration agreement or any other legal document, it's essential that they read the fine print. It's also important that business owners review these agreements with a reputable attorney. The language of many of these documents are complex and too often business owners avoid reading what they sign due to time constraints or simply because they need the money now.
The Future of Confession of Judgment and Predatory Lending in New York
While the business of merchant cash advance is still legal in New York, pending action to protect small and medium size businesses (SMBs) may reduce the prevalence of this practice. Moreover, a ban of the confession of judgment clause could stand to shake an entire industry.
With predatory lending on the rise and only recent moves to regulate it, outdated and unknown clauses like the confession of judgment put small business owners at risk of losing it all. Thus, it's critical that small business owners consider alternative means for getting cash and monitor the progress of legislation on the use of confessions of judgment.