Public Advocate Jumaane D. Williams spoke about the need to protect small businesses from predatory lending practices today at a remote New York City Council hearing by the Committees on Consumer Affairs and Business Licensing and Small Business. He highlighted the dire economic crisis created by the COVID-19 pandemic, which has a disproportionate impact on small business and could require them to seek expansive loans, and asked that the Council pass his resolution, Res. 1049, calling on the United States Congress and the New York State Legislature to pass legislation that prohibits the use of a confession of judgment in business loans. There is currently bipartisan federal legislation to this effect.
Confessions of judgement, the Public Advocate argued, have led to predatory practices by relinquishing the borrower's "right to due process if the debt is unpaid and there is a dispute." He further emphasized that amid the COVID-19 crisis, "Whether a local restaurant or a retail store, the reality is that small business owners are vulnerable to this predatory practice. This is especially true in our current environment, as most businesses are closed, effectively stopping a steady stream of income. Businesses already have to make tough choices because of closures not foreseen months ago. Businesses that have signed loans with high interest rates cannot afford to go under because of a missed payment." The Public Advocate's full statement is below and can be downloaded here.
Video of the hearing can be viewed online.
TESTIMONY OF PUBLIC ADVOCATE JUMAANE D. WILLIAMS
TO THE NEW YORK CITY COUNCIL COMMITTEES ON CONSUMER AFFAIRS AND BUSINESS LICENSING AND SMALL BUSINESSES
APRIL 29, 2020 Good morning,
My name is Jumaane D. Williams, Public Advocate for the City of New York. I would like to thank Chairmen Andrew Cohen and Mark Gjonaj, and the Committee members of Consumer Affairs and Business Licensing and Small Businesses for holding an oversight hearing on the impact of COVID-19 on small businesses in New York City. Today the Committees are hearing several bills that would support our restaurants and food delivery workers. I support my Council colleagues' efforts and thank them for introducing these bills.
I would also like to thank our first responders and frontline workers for helping our City battle Coronavirus as well as keeping this City running. And to the residents of New York City, I want to stress how important it is that we continue to practice social distancing and stay home as much as possible. With that said, as this crisis continues, the financial pressure on New Yorkers will increase. My resolution, Resolution 1049, aims to address a major root cause of one of the financial issues that many New Yorkers face: confession of judgment in business loans.
A confession of judgment is a written agreement, which once signed by the borrower of a monetary loan, relinquishes the borrower's right to dispute legal claims made by the lender. In other words, a person is giving up their right to due process if the debt is unpaid and there is a dispute. While confessions of judgment allow lenders to resolve and receive recompense for loan defaults in a timely manner, these agreements have also led to predatory practices. Lenders can use these agreements to accuse borrowers of defaulting on their loans and seize their assets without proof and prior notification.
Resolution 1049 calls on the U.S. Congress and the New York State legislature to pass legislation to prohibit the use of confession of judgment in business loans. Current federal law prohibits the use of confessions of judgment in consumer loans, but not in commercial loans. At the federal level, there is the Small Business Lending Fairness Act, which has been introduced but has not yet been passed. The Act is made up of two bipartisan bills, Senate bill S. 1961 and House bill H.R. 3490, which aim to extend the confession of judgment ban to commercial loans by amending the Truth in Lending Act. At the state level, the legislature passed S. 6395, which prohibits individuals from filing a confession of judgment against a party that does not reside in New York State. While this bill is a step in the right direction, it does not prohibit confessions of judgment from being filed against an in-state debtor, which leaves many New Yorkers vulnerable to predatory lending practices.
One group of New Yorkers who make up this vulnerable population are taxi medallion owners. There are 11,938 taxi medallions in New York City and obtaining a taxi medallion is not a cheap endeavor, with many taking out a business loan to afford it. Between 2002 and 2014, the price of a medallion rose from $200,000 to more than $1 million, even though City records show that taxi driver incomes barely changed. The following year the cost of the medallions began to fall. As the value of taxi medallions fell, lenders denied borrowers' appeals to refinance, and instead issued confessions of judgments, allowing the lender to seize the borrowers' assets as recompense. In fact, several banks used confession of judgment in their lending activity, where the borrowers admitted defaulting on a loan, even before borrowing any funds.
The ripple effect of the predatory lending practices, much of which were based on confessions of judgment, has left taxi drivers who own medallions in a lot of debt. And cruelly, a number of medallion holders have taken their lives due to the overwhelming stress from their debt. Now, the City has the opportunity to address this unfortunate outcome in a number of ways. The City should look to offering debt forgiveness for taxi drivers. Earlier this year, the Mayor and the Council appointed a panel to propose a bailout for thousands of drivers who are trapped in loans. Although much of our City's funds will be designated to addressing COVID-19 related issues, we need to look at how to make that proposed bailout a reality for taxi drivers. Not only are they among the frontline workers who are going outside every day to make sure people can get around safely, they are also among those who are financially struggling during this pandemic.
Small businesses are also at risk of confessions of judgment being used against them. Whether a local restaurant or a retail store, the reality is that small business owners are vulnerable to this predatory practice. This is especially true in our current environment, as most businesses are closed, effectively stopping a steady stream of income. Businesses already have to make tough choices because of closures not foreseen months ago. Businesses that have signed loans with high interest rates cannot afford to go under because of a missed payment. The situation for these small businesses that empower and strengthen our communities is precarious. Losing any of these small businesses would be catastrophic. But it does not have to be this way, and the legislation on the federal level is the best recourse for these small businesses.
New Yorkers in distress cannot wait any longer as long as debt collectors continue to misuse confessions of judgment. I call on the Council to pass Resolution 1049 to send a clear message to our leaders in Washington that legislation to help New Yorkers needs to pass for immediate relief. I would like to again thank the Council for holding this hearing today.