(Bloomberg) -- New York Governor Andrew Cuomo signed a bill aimed at preventing predatory lenders from using the state’s court system to seize the assets of small businesses nationwide.
The new law prohibits the use of confessions of judgment against individuals and businesses located outside of the state. A series of Bloomberg News articles over the past year about abuses of these legal documents revealed more than 32,000 filed in New York courts by unregulated lenders, mostly against borrowers outside of the state.
“New York courts exist to uphold the rule of law, not to give unscrupulous creditors a means to prey on consumers,” Cuomo said in a statement.
Cash-advance firms offer small businesses such as pizza parlors and nail salons unregulated, short-term loans that can cost the equivalent of 400% or more in annualized interest. Some firms require borrowers to sign a confession of judgment just to get the money.
By signing, borrowers waive their legal rights and agree in advance to lose any dispute that might arise. If the lender declares a default, a county clerk in New York simply rubber-stamps the judgment without notice or a hearing. Often, borrowers learn about a judgment only after the lender begins to seize their bank accounts or other assets.
The legislation doesn’t help New York borrowers, but existing law already gave them some protection, requiring confessions of judgment to be filed against them in their home counties, where it may be easier to mount a defense. Debtors in other states targeted by a New York judgment didn’t have that protection.
The measure passed the state Assembly and Senate in June, but cash-advance companies continued to file them while the bill awaited the governor’s signature. Even after he took action on Friday, lenders continued to seek judgments from county clerks’ offices.
In upstate Niagara County, a favorite of the industry, County Clerk Joseph Jastrzemski’s office entered at least two judgments against out-of-state debtors Friday afternoon. The judgments targeted a sign-making shop in Houston and a beauty salon in Garden Grove, California.
Stephen Denis, executive director of the Small Business Finance Association, a group representing alternative lenders, said his group is pushing for a federal restriction on confessions of judgment and is working to stop other predatory practices in the industry.
“This is a great first step, but this is just the tip of the iceberg,” Denis said in a statement. “Bad actors have hijacked an industry that is mostly composed of companies who provide fair and responsible lending.”
A bill that would ban the use of confessions of judgment has been submitted in both houses of U.S. Congress but hasn’t emerged from committee.
(Adds comment from trade group in ninth paragraph.)
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