A Bloomberg News series in November highlighted a method that predatory lenders use to seize assets from unsuspecting businesses using a legal tool called confessions of judgment. The series spotlighted the Erie County Clerk’s Office, which it said provided what amounted to a rubber stamp, processing more than 5,200 of them in 2017.
County Clerk Michael “Mickey” P. Kearns announced his office has changed its rules, and as of Jan. 1, no longer processes confessions of judgment in cases from outside Erie County.
Good for Kearns for taking action to prevent this practice that victimizes small businesses, even if it means the Clerk’s Office will lose some revenue from processing the documents.
After the financial crisis of 2007-08, a number of financiers popped up that lend money at rates that, in the words of Bloomberg News, rival those of loan sharks. Before dispensing the payment – called a merchant cash advance, to get around lending regulations – the lender makes the borrower sign a statement, the confession of judgment, giving up their right to defend themselves if the lender takes them to court.
With the signed “confession,” a lender can accuse borrowers of missing a payment and legally seize their assets, without a court hearing and often before the borrower knows what’s happened. Some businesses have been bankrupted after their assets were seized.
Federal regulators banned the use of confessions for consumer loans in 1985, but New York still allows them for business loans.
“This is a huge industry,” Kearns said last week.
Legislative relief may be on its way in New York. Gov. Andrew M. Cuomo, in his annual message to the State Legislature last week, said he would introduce a bill to cut back on the use of confessions of judgment.
Cuomo would prohibit confessions for small business loans smaller than $250,000, as well as ones that don’t have a connection to New York. The sooner that bill becomes law, the better.
Kearns denied his office had acted as a rubber stamp, but said it would hereafter reject confessions of judgment in which neither the borrower nor the lender has a connection to Erie County. Kearns said Erie County earned a $26 filing fee on each confession it processed.
The cash advance companies have won more than 25,000 judgments in New York since 2012, Bloomberg found. Erie, Orange and Ontario counties were the leading processors.
The clerks in Orange and Ontario counties have reportedly followed Kearns’ example and said they will curtail the use of confessions. The Niagara County Clerk’s Office told The News that the law requires it to process the confessions.
We look forward to Cuomo’s proposal passing in the Democratic majority Legislature. New York State needs to take away the welcome mat for predatory lending and debt collection.