The U.S. House Financial Services Committee has voted in favor of banning a controversial practice in small business lending, The Washington Post reported Friday (Nov .15).
In a 31-23 vote, the policymakers voted in favor of prohibiting the use of confessions of judgment in small business lending contracts. The confessions of judgment, sometimes used in merchant cash advance arrangements, forfeit a borrower’s right to legally defend themselves in a disagreement with the financier.
“These lenders have hijacked our courts by getting rubber-stamp judgments,” said Rep. Nydia Velazquez of New York, who co-introduced the legislation with Rep. Roger Marshall of Kansas. “We can stop some of the abuses that are crippling honest small business owners.”
As The Washington Post explained, these confessions of judgment are sometimes a requirement in contracts with small business borrowers, and they can lead to a lender legally seizing that borrower’s assets if they don’t repay the loan.
The tactic was first highlighted in Bloomberg reports last year that detailed allegations of merchant cash advances seizing borrowers’ assets on false accusations of missed payments. Reports said the confession of judgment has been used by small business lenders to secure 32,000 wins in New York courts in “recent years.”
The bill will now move to the House floor, reports explained, noting that there is no guarantee of the bill’s passage.
The House committee vote saw strong opposition from Republicans, two of whom had previously introduced amendments to the bill, which were ultimately shot down by Democrats, reports said. One Republican, Warren Davidson of Ohio, proposed an amendment that would allow for confessions of judgement but require more transparent arrangements with borrowers, requiring lenders to disclose information about what such a confession of judgement would actually mean for that small business.
Democrats, however, argued that this would not deter lenders’ use of the tactic.
“People are so desperate to get a loan that they are willing to sign any disclosure without understanding what they’re signing for,” Velazquez said.