New York moves to ban confessions of judgment for out-of-state loans

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New York lawmakers took steps to prevent predatory lenders from using the state's court system to seize the assets of small businesses nationwide.

The state Assembly approved a bill late Thursday prohibiting the use of confessions of judgment against individuals and businesses located outside of the state. The Senate passed the measure earlier this week.

The bill was drafted in response to Bloomberg News articles last year about abuses of these legal instruments by unregulated companies offering a form of financing called a merchant cash advance. In the past few years, lenders have used such confessions to win more than 32,000 judgments in state courts, mostly against small businesses outside of the state.

"It's a win for small businesses across the country who have been exploited by the merchant cash-advance industry," said Brad Hoylman, who heads the Senate Judiciary Committee.

The measure heads to Gov. Andrew Cuomo's desk for his signature. The governor has signaled his support for changes to the law governing confessions.

Cash-advance firms offer small businesses such as auto shops and insurance agencies 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 find out about a judgment only after the lender begins to seize their bank accounts or other assets.

Current law gives New York residents some protection, requiring confessions of judgment to be filed against them in their home counties, where it may be easier to mount a legal defense. Debtors in other states targeted by a New York judgment didn't have that protection.

Among the lenders' most powerful weapons are the New York City marshals — government officials, appointed by the mayor, who serve as private debt collectors and pocket a percentage of the money they seize. Bloomberg News reported that the cash-advance industry's favorite marshal, Vadim Barbarovich, earned more than $1 million in both 2017 and 2018, much of it by seizing cash from the bank accounts of cash-advance borrowers across the country.

Hoylman said that arrangement is up for review. Marshals' authority to enforce state court judgments was due to expire at the end of June. But rather than extend the law for another five years, as lawmakers have in the past, they opted this month to extend it only through June 2020.

In the meantime, Hoylman said he plans to hold hearings on the marshals' activities. "No public official should have a financial incentive, as these marshals do, to facilitate predatory lending," he said.

Bloomberg News
Law and regulation Subprime lending New York
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