Below is an excerpt from an opinion piece written by the Bloomberg Editorial Board regarding predatory lending to small business customers.
If you knew what you were doing, would you sign a contract allowing a company to sue you and take your money whenever it wanted, with no proof, warning or legal recourse? Bizarre as it may seem, aggressive lenders are using precisely such agreements to terrorize and often bankrupt small businesses across the country.
It’s a practice that the government, and New York state in particular, should curb.
In a series of articles, Bloomberg News details how the revival of an obscure legal document has rearranged business lenders’ incentives to disastrous effect. Known as a confession of judgment, it’s supposed to act as a form of security on a loan, giving the lender the right to unilaterally drain a borrower’s bank account if the latter fails to pay. But for a particular group of unscrupulous lenders — who use the term “merchant cash advance” to skirt usury rules — it also creates an opportunity to profit by prematurely collecting debts.
Small-business lending remains largely unregulated in the U.S., with no consistent requirements for clear disclosure of terms and interest rates. This gives predators the leeway they need to entrap unsophisticated borrowers, often with a promise of a larger loan that never materializes.
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.
Read more in Bloomberg.