Protecting Small Businesses from Shady Lenders

We hear a lot about the importance of protecting consumers from shady lenders, but many people may not realize small businesses often fall victim to these predators as well. That’s why last week, I joined my Republican colleague Senator Marco Rubio to crack down on one of the most common ways these lenders go after small businesses – a clause in loan contracts known as “confessions of judgment.” 

These clauses require the business to give up its rights in court before obtaining a loan, and allow the lender to seize the business’s assets, without warning, in order to pay back the debt. The practice is even used to go after some businesses who are current on their loans. 

Business owners can lose everything, without a chance to defend themselves. 

Many states have banned this practice for small business loans as well as for individuals, but borrowers are still exposed because the Federal Trade Commission (FTC) left open a loophole that has allowed predators to devastate small businesses across the country.

Last month, Bloomberg published an exposé on the company Yellowstone Capital that preyed on small businesses, including a small business owner from Central Ohio. The company would call up small family businesses like corner stores and pizzerias that were desperate for credit after the financial crisis, and pitch them loans at 400 percent interest or more.

And when borrowers couldn’t meet these outlandish terms, the company 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 last year, the industry had grown to extending $15 billion in credit. 

This has to stop – it’s cost thousands of families their livelihoods and their life savings, and it’s hurting the small businesses that are the engine behind economic growth. 

That’s why last week, Senator Rubio and I introduced legislation to close this loophole once and for all. 

Our bipartisan Small Business Lending Fairness Act would codify the FTC’s 1985 ban on confessions of judgment in law in consumer loan contracts, and also expand the ban to protect to small business borrowers. 

When we let financial predators scam workers and entrepreneurs out of their hard-earned money, we undermine the dignity of work that makes this country great. 

We have more work to do to protect small business borrowers, but this is an important opportunity to put partisanship aside, and pass commonsense legislation to support our small businesses.