Predatory Lending Tactic Curbed by Three New York County Clerks

(Bloomberg) -- At least three New York State county clerks have taken actions to curtail the use of an aggressive loan-collection tactic known as a confession of judgment, disrupting a system that ensnares thousands of small businesses across the country.

Clerks in Erie, Orange and Richmond counties stopped processing most confessions in recent weeks, after Bloomberg News reported on abuses by companies that advance money to businesses and as state and federal legislators called for an end to the practice. Together, the three counties had been handling almost half of the industry’s caseload.

“These predatory practices are going above and beyond usury -- they are criminal,” said Michael Kearns, the clerk in Erie County, which includes Buffalo. “I don’t want to become a sanctuary county of abusive creditors.”

The clerks’ actions have diverted filings to other counties that still tolerate the practice, court records show.

Kearns and Stephen Fiala, the Richmond clerk, said they have begun rejecting confessions that authorize filing the paperwork in more than one county, citing a state law that requires the document specify “the county” where it is valid. To maximize their options, lenders typically require borrowers to approve multiple New York counties, sometimes all 62 of them.

Orange County Clerk Annie Rabbitt said in a statement she will reject all cash-advance confessions until the New York attorney general’s office has completed an investigation of the industry. The state probe, opened in November, is examining whether lenders are abusing the court system, among other things.

Stamping Confessions

New York county clerks have played a key role in the nationwide merchant cash-advance industry that lends money to small businesses, sometimes at interest rates exceeding 400 percent annualized. Many lenders require borrowers to sign confessions to get loans. By signing, borrowers waive their legal rights and agree in advance to lose any dispute over the debt. If the lender declares a default, a county clerk merely enters judgment against the borrower without notice or hearing. That gives the lender the authority to seize the borrower’s bank account.

Some borrowers say they first learn of the judgment when they try to take money out of their bank account and see that it’s locked up. They’ve accused lenders of forging confessions, fabricating defaults or lying in court about how much is due.

Because New York law is so friendly to them, most cash-advance lenders use the state’s court system to collect against borrowers from Florida to California. These companies won more than 11,000 judgments in New York last year.

Kearns, the Erie clerk, said his office has been fielding calls from cash-advance lawyers asking why their cases were being rejected. One by one, they were told about the new rules. He says one of them remarked: “It was fun while it lasted.”

New York State lawmakers have called for changes in the confession of judgment rules, and two U.S. senators introduced a bill calling for a nationwide ban on the tactic.

Westchester Surge

The recent actions by Erie, Orange and Richmond counties led to a surge in filings in Westchester, just north of New York City. Timothy Idoni, the Westchester clerk, said companies have filed 140 confessions with his office since Jan. 1, double the usual pace. He said he’s advocating for state lawmakers to ban the practice but that his office will continue to process cases until then.

Par Funding, a Philadelphia lender that used to send a bodybuilder ex-con to “negotiate” with deadbeat borrowers, relied on Richmond County on Staten Island for most of its confessions of judgment filings last year. When Richmond started rejecting Par’s cases in December, Par shifted to Westchester.

“It hasn’t been a problem so far,” said Norman Valz, a lawyer for Par.

Par and other cash-advance companies have slowed the pace of filing, and some are considering phasing out the use of confessions altogether, Valz said. “The COJ thing is kind of ridiculous,” he said.

At least one lender, Brooklyn’s Premier Capital Funding LLC, requires that borrowers authorize filing in just one county -- Richmond. Fiala’s office is continuing to process Premier’s confessions because they comply with the single-county rule.

Matthew Hoose, the clerk in upstate Ontario County, the biggest hub for cash-advance filings last year, said in November he might start rejecting cases from outside the county. So far, he hasn’t followed through. He didn’t respond to requests for comment.

To contact the reporters on this story: Zachary R. Mider in New York at zmider1@bloomberg.net;Zeke Faux in New York at zfaux@bloomberg.net

To contact the editors responsible for this story: Robert Friedman at rfriedman5@bloomberg.net, David Scheer

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