Sudden closures, supply chain issues, agonizing decisions about layoffs and worker safety — we all know how hard this pandemic has hit small businesses in Ohio and across the country. While corporate profits soared and Wall Street made record gains, Main Street suffered — just like they did after the 2008 financial crisis. That’s left many small business owners desperate for loans to keep their doors open and their workers on payroll. And there’s a major problem — fine print in some shady business loans could cost them everything.
“Confessions of judgment” clauses in loan contracts require a small business to give up its rights in court before obtaining a loan. That means the lender can seize the business’s assets to pay back the debt, plus interest, without giving the business a chance to defend itself in court. And it doesn’t actually matter if the business is in good standing with its loan payments. These out-of-state lenders can devastate perfectly healthy small businesses without a warning — just by showing a county clerk the “confession of judgment” paperwork.
It’s time to put a stop to this scam.
We knew this was a problem before the pandemic. In 2018, Bloomberg published an exposé on Yellowstone Capital, a company that has devastated small businesses in Ohio and across the country. Yellowstone’s business model was built on calling up small family businesses like corner stores and pizzerias that were desperate for credit, and pitching them loans at 400 percent interest or more. When borrowers couldn’t meet these outlandish terms, Yellowstone would come in and seize the small business’s assets, based on the confessions of judgment they signed. The lender then used that leverage to harass and abuse its victims.
By 2017, the cash-advance industry had grown to a $15 billion business — or more accurately, a $15 billion scam. While some states have banned this practice for small business loans as well as for individuals, small businesses across the country are still at risk. New York will accept confessions of judgment from any state in the country, so small business owners are often forced to sign documents allowing the lender to file in that state, no matter where their business is actually located. Since 2012, the Bloomberg investigation found that cash-advance companies have secured more than 25,000 judgments in New York.
And now, with small businesses around the country strapped for cash and desperate to keep their dreams alive, we can only expect these numbers to grow.
That’s why my Republican colleague Sen. Marco Rubio (Fla.) and I introduced the bipartisan Small Business Lending Fairness Act, to close this loophole once and for all. Our bill would codify in law the Federal Trade Commission’s 1985 ban on confessions of judgment for consumer loan contracts, and expand the ban to protect business borrowers. It would put an end to this dangerous practice, and make sure small business owners don’t wake up one morning having lost everything.
We know who gets hurt the most by these predatory loans — it’s not big companies, it’s family businesses, and it’s disproportionately small shops and restaurants owned by Black and brown Americans, and women. The biggest banks ignore these business owners, leaving them with nowhere else to turn.
Our plan would end this scam everywhere — it’s already cost thousands of families their livelihoods and life savings, and it’s hurting the small businesses that are creating jobs and driving our nation’s pandemic recovery.
You can’t say you support small businesses, while allowing financial predators to con them out of their hard-earned money. I urge my colleagues of both parties to support the Small Business Lending Fairness Act to make this commonsense fix and help unleash the potential of American entrepreneurs across the country.
Brown is chairman of the Senate Banking Committee.