In a multi-part investigation, Bloomberg News is exploring how an obscure legal document turned “New York’s court system into a debt-collection machine that’s chewing up small businesses across America.” The small business loan practice enables a loan company to sue a small business and take its money whenever it wants, with no proof, warning or legal recourse. The tactics being used by aggressive lenders is called a “confession of judgment” and it is being used to terrorize — and often bankrupt — small businesses across the country, according to Bloomberg.

“Rather than breaking legs, these lenders have co-opted New York’s court system and turned it into a high-speed debt-collection machine.”

Bloomberg BusinessWeek

Bloomberg Quote

“Tens of thousands of contractors, florists, and other small-business owners nationwide (are) being chewed up by the same legal process. Behind it all was a group of financiers who lend money at interest rates higher than those once demanded by Mafia loan sharks. Rather than breaking legs, these lenders have co-opted New York’s court system and turned it into a high-speed debt-collection machine. Government officials enable the whole scheme. A few are even getting rich doing it. This form of predation has found a lucrative base in New York, where state law is uniquely amenable to confessions of judgment. In a matter of days, a lender can get a county clerk to sign a judgment and a New York City marshal to confiscate cash from any bank with an office in the city — all before the borrower has a clue what’s going on. In this way, cash-advance companies have extracted hundreds of millions of dollars from thousands of small businesses over the past several years, afflicting the likes of car washes, real-estate agencies and pizzerias nationwide. Even if documents are forged or defaults fabricated, fighting back can be useless: The judgments are extremely difficult to overturn, and businesses can be destroyed before their owners even get a chance to try.”

Bloomberg Editorial

In an editorial accompanying the report, Bloomberg’s editorial board issued a call for the end of the predatory small business loan practice:

“Most business owners would never sign such an agreement if they were aware of the potential consequences. All too often they aren’t: Small business lending remains largely unregulated in the U.S., with no consistent requirements for clear disclosure of terms and interest rates.

“The best solution would be for Congress to pass a truth-in-lending law for small business, along the lines of the rules that already exist for consumer loans. This should include federal constraints on confessions of judgment — outlawing their use for new loans, or at least requiring that the borrower get a written recommendation from a lawyer before entering any such agreement (as California already does). It should also designate a federal regulator to apply the law to all lenders, no matter what they call themselves.”

Read more | Bloomberg BusinessNews: “I Hearby Confess Judgement: How an obscure legal document turned New York’s court system into a debt-collection machine that’s chewing up small businesses across America.”