Now that the pandemic changed how small-business owners borrow money, they continue to be a major target for predatory lending practices. Small-business owners who are borrowing for the first time need to be equipped with all the right information and access to all the support they can get, to know they got the best deal. As the economic crisis continues to reveal more needs for small-business owners, borrowers who took advantage of the Paycheck Protection Program now fear that the federal requirements are too complicated and confusing, according to a recent article by the The New York Times.
On April 29, 2020, the New York City Council took a bold step in an effort to protect small businesses during the COVID-19 pandemic by prohibiting a clause used in business lending contracts called a “confession of judgment.” A confession of judgment is basically a clause in which a borrower waives the right of notice and gives a lender what they need to sue the borrower when a loan is not paid in accordance to the contract and enforce judgments. This puts the borrower at a severe disadvantage in any claims disputes because this legally arms the lender to work through the courts to seize any property or assets of the borrower via judgments. This results in more loss of wealth in entrepreneurial communities and worsens the financial crisis of borrowers seeking financing. Arizona is a state that allows this clause to be used in financial contracts.
The New York City bill to prohibit the confession of judgment clause is laid over in committee, but when it moves to vote, it could set the stage for major reform that could benefit small-business owners around the country. The dire economic crisis created by the COVID-19 pandemic has a disproportionate impact on small business and could require them to seek expansive loans.
Every business owner deserves to understand what they are signing. Below is a borrower bill of rights created by the Responsible Business Lending Coalition (RBLC) to help small-business owners understand their rights as a borrower.
The Small Business Borrowers’ Bill of Rights identifies six fundamental rights that all small-business owners seeking financing deserve:
- The Right to Transparent Pricing and Terms: A borrower has the right to have the cost and terms of any financing being offered presented in writing and in a form that is clear, complete and easy to compare with other financing options, so he/she can make the best decision for his/her business.
- The Right to Non-Abusive Products: A borrower has the right to expect that the financing products offered by a lender will not trap his/her business in an expensive cycle of re-borrowing.
- The Right to Responsible Underwriting: A borrower has the right to expect a lender is offering financing based on underwriting practices that assess the ability of the borrower’s business to succeed and repay.
- The Right to Fair Treatment from Brokers: A borrower has the right to honest, transparent and impartial communications with a broker regarding loan options, conflicts of interest, fees, and the financing options available.
- The Right to Inclusive Credit Access: A borrower has the right to fair and equal treatment when seeking a loan, including protections guaranteed under the Equal Credit Opportunity Act.
- The Right to Fair Collections Practices: A borrower has the right to be treated fairly and respectfully throughout a collections process and the right to protections like those guaranteed under the Fair Debt Collection Practices Act.
The reality is that small-business owners are vulnerable to predatory lending practices as they struggle to make ends meet and hope to not have to close their business for good during the pandemic. They are already making tough choices daily, and losing any more businesses would be catastrophic to the economic health of any community. It does not have to be this way and our political leaders can act to create protections for small-business borrowers at the state and federal level as the next best recourse to prevent more loss of wealth in our country.
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