When I talk to small business owners, one of the first things they mention to me is that access to capital is the lifeblood of their business. Affordable capital fuels new startups and helps existing businesses expand into new markets and grow their customer bases. And we know that when capital is accessible and on fair terms, small businesses can do what they do best—strengthen our communities and fuel our economy.
Unfortunately, affordable capital can be hard to come by for many owners. Whether it’s a taxi cab driver in New York City pursuing the American dream or a small business owner trying to make payroll, predatory lenders have been targeting individuals and small businesses with loans that have excessively high interest rates, and unfair and abusive terms. This is an ongoing problem in many areas of lending and today’s hearing will highlight one aspect of this larger problem.
In recent years, cash-advance firms have been offering small businesses short-term loans that have the equivalent of a 400% or more annualized interest rate. Many of these firms then require borrowers to sign a confession of judgment just to get the money.
Because cash flow is so vital to a business’s survival, many owners feel they have no choice but to sign away their rights to save their businesses and provide for their employees. By signing, borrowers essentially waive their legal rights regarding any legal dispute that might arise. And if one does arise, the lender can unilaterally declare a default and take action against the small business owner.
In doing so, these lenders have hi-jacked our courts by getting rubber stamp judgements without notice or hearings. Many times, small business borrowers only find out about a judgement against them after the lender begins to seize bank accounts or other assets.
Over the past few years, lenders have used these instruments to win more than 32,000 judgements in state courts. While confessions of judgement have been prohibited under the Truth in Lending Act for consumer loans since 1985, these protections do not extend to certain types of commercial loans.
That is why I introduced the Small Business Lending Fairness Act, which would put an end to these predatory collection practices. By ending confessions of judgement in commercial lending, we can stop some of the abuses that are crippling honest small business owners.
I find it appalling that New York State law has made our state a magnet for dishonest lenders. And I’m encouraged by the news that New York State lawmakers are now taking steps to prevent these out-of-state lenders from using our court system to freeze and drain a borrower’s account. But this is not enough, which is why I’m working with Senator Brown to close this loophole nationally.
As predatory small business lenders continue to evolve and find creative ways around the law, Congress must similarly be proactive in addressing those predatory practices and rooting out abuses that are harming honest-hard working small business borrowers.
Closing this loophole ensures that predatory lenders cannot use abusive practices to seize the assets of small firms without due process and protects them when they are looking to obtain a loan.
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