Two U.S. senators are seeking to outlaw a legal tactic that predatory lenders have frequently used to seize money from small businesses.
Senators Sherrod Brown, the top Democrat on the Senate Banking Committee, and Marco Rubio, a Florida Republican, said they will submit a bill on Thursday that would ban the use confessions of judgment, a debt-collection practice that has devastated thousands of small businesses across the county.
Many financial firms that offer quick money require customers to sign their confessions to receive loans. By signing, debtors lose their right to defend themselves in court. Lenders armed with a confession may accuse debtors of not paying and legally taking over their assets before they know what it is.
”We started to get calls from small businesses that didn’t hit them from anywhere – it couldn’t be real, it looked so far away,“ says Brown in an interview, representing Ohio. “We think we should stop.“
Brown said he read a series of articles published by Bloomberg News on how lenders use confessions to squeeze small business owners. In dozens of interviews and court defenses, the debtors explained the lenders who wore the documents, lied about what their debts were or did not meet the fine weather conditions. Borrowers said the results were harsh and there was no way to fight.
“We are taking another step to protect America’s small businesses – the foundation of our economy – by preserving the right of a business to be heard in court before a potential credit default,” Rubio added.
Federal regulators have already banned the use of confessions for consumer loans in 1985. The Bidding Law called Small Enterprises Law would prohibit their use in commercial transactions. Brown said he would force the offer to pass on next year or as part of a larger bill.
”No one can justify that, Brown Brown said. ”But I also know that when you oppose the interests of the financial service in this body, it is hard to overrule this opposition.“
There is no Re Recourse Re
Brown compared confessions to arbitration agreements that some financial companies want their customers to sign. The Bureau of Consumer Financial Protection tried to ban this practice with Brown’s support, but this effort was defeated by the Senate Republicans.
”This is bad in many ways, because the debtor has no right of recourse, Brown Brown said. “At least there is an arbitrator who can play just as well as forced arbitration.”
Lenders using confessions call themselves merchant cash advance companies. Since the financial crisis, a sector that has emerged as banks withdrew from lending to small businesses. They made the contractors, truckers and restaurant owners attractive with fast cash and interest rates charged.
Confessions are usually made in New York State courts, regardless of where the debtor is located. According to data compiled by Bloomberg, cash advance companies have estimated more than 25,000 judgments since 2012. New York’s chief prosecutor launched an investigation into the cash advance industry on 3 December in response to Bloomberg News articles.
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