New York’s Ban on Out-of-State Confessions of Judgment Will Help Protect Small Businesses

New York lawmakers took an important step toward protecting small firms from a predatory practice commonly found in small business lending products by voting to ban confessions of judgment in loans made to out-of-state firms. This step was essential in light of the fact that more than 32,000 confessions of judgment filed since 2012 reportedly resulted in the seizure of more than $1.5 billion in assets. In some cases lenders fraudulently used confessions of judgment to seize assets from small business owners who were not in default, resulting in the loss not only of a borrower’s business, but their life savings as well.

Confessions of judgment are a legal instrument dating to the Middle Ages. They are intended to help creditors collect on debts without going through a lengthy legal process. In modern times, however, this particularly nefarious tool is being tucked into some small business loans, requiring borrowers to agree in advance to lose any dispute with a lender. Small business owners often agree to these extremely unfavorable terms because they either do not understand them, or are desperate for funding at a time when traditional bank lending to small businesses is increasingly scarce.

The use of confessions of judgment is particularly prevalent in New York, where they remain legal despite being banned in many states and throughout the United States for consumer loans. Clerks rubber stamp these filings and only a handful of victims have the ability to fight back in court. Even businesses that take out a loan in states besides New York are being preyed upon because New York judges have said the creditor only needs a presence in the state to file and it doesn't matter where the business is located. Indeed, one New York county court issued almost 200 confessions of judgment to business owners in 38 states plus Puerto Rico in just one month.

We are glad New York lawmakers are working to protect small businesses from harmful financial products, and we hope Gov. Cuomo signs this legislation. It is also important to note, however, that this legislation does not fix all concerns related to confessions of judgment.  We look forward to participating in discussions about how best to protect small firms from predatory lending, including a New York ban on confessions of judgment for in-state loans.