Late last year, a series of Bloomberg News articles addressed the rise of the cash advance small business lending industry. Among the topics covered in the articles were the lenders’ use of New York’s confessed judgment procedures against out-of-state businesses. In response to these articles, state and federal lawmakers have sought to curb the use of confessed judgment provisions in credit agreements. Confessed judgment provisions allow lenders to obtain judgment expeditiously against obligors upon a default under the applicable credit agreement.
On August 30, 2019, New York Governor Andrew Cuomo signed a bill aimed at curbing confessions of judgment in New York state courts. Under the act, lenders are now prohibited from confessing judgment against obligors residing outside of New York. The act does not bar confessions of judgment entirely. Instead, lenders may still confess judgment against New York residents in their home counties.
Some federal lawmakers wish to go further and bar the use of confessed judgments entirely. In June of 2019, a bipartisan contingent of federal lawmakers introduced the “Small Business Lending Fairness Act” in both the Senate and the House (S.1961; H.R.3490). The bill seeks to prohibit the use of confessed judgments for all extensions of credit, regardless if the loan is for a commercial or consumer purpose. A similar bill was proposed in the Senate in late 2018. Currently, federal law prohibits the use of confessed judgment provisions in consumer loans only. The proposed federal legislation has been referred to committee and we will continue to monitor its progress.
Practice Pointer: We have not yet observed a similar groundswell in Maryland seeking to curb the use of confessed judgments in commercial loan instruments. Thus, unless the Small Business Lending Fairness Act gains traction in Congress and eventually gets signed into law, confessed judgment provisions should remain enforceable under Maryland law for the foreseeable future. However, commercial lenders should be aware of the rising opposition against these provisions among state and federal lawmakers and plan accordingly.
For questions concerning this topic, please contact Bryan Mull.