[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


     CRUSHED BY CONFESSIONS OF JUDGEMENT: THE SMALL BUSINESS STORY

=======================================================================

                                 HEARING

                               BEFORE THE

                      COMMITTEE ON SMALL BUSINESS
                             UNITED STATES
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD
                             JUNE 26, 2019

                               __________

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            Small Business Committee Document Number 116-031
             Available via the GPO Website: www.govinfo.gov
                   
                               __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
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                   HOUSE COMMITTEE ON SMALL BUSINESS

                 NYDIA VELAZQUEZ, New York, Chairwoman
                         ABBY FINKENAUER, Iowa
                          JARED GOLDEN, Maine
                          ANDY KIM, New Jersey
                          JASON CROW, Colorado
                         SHARICE DAVIDS, Kansas
                          JUDY CHU, California
                           MARC VEASEY, Texas
                       DWIGHT EVANS, Pennsylvania
                        BRAD SCHNEIDER, Illinois
                      ADRIANO ESPAILLAT, New York
                       ANTONIO DELGADO, New York
                     CHRISSY HOULAHAN, Pennsylvania
                         ANGIE CRAIG, Minnesota
                   STEVE CHABOT, Ohio, Ranking Member
   AUMUA AMATA COLEMAN RADEWAGEN, American Samoa, Vice Ranking Member
                        TRENT KELLY, Mississippi
                          TROY BALDERSON, Ohio
                          KEVIN HERN, Oklahoma
                        JIM HAGEDORN, Minnesota
                        PETE STAUBER, Minnesota
                        TIM BURCHETT, Tennessee
                          ROSS SPANO, Florida
                        JOHN JOYCE, Pennsylvania

                Adam Minehardt, Majority Staff Director
     Melissa Jung, Majority Deputy Staff Director and Chief Counsel
                   Kevin Fitzpatrick, Staff Director
                            
                            
                            
                            C O N T E N T S

                           OPENING STATEMENTS

                                                                   Page
Hon. Nydia Velazquez.............................................     1
Hon. Steve Chabot................................................     2

                               WITNESSES

Mr. Hosea Harvey, Law Professor and Consumer Finance Law Expert, 
  Philadelphia, PA...............................................     5
Mr. Jerry Bush, Former Owner, JB Plumbing & Heating of Virginia, 
  Inc., Roanoke, VA..............................................     7
Mr. Shane Heskin, Partner, White and Williams, LLP, Philadelphia, 
  PA.............................................................     9
Mr. Benjamin R. Picker, Shareholder, McCausland Keen + Buckman, 
  Devon, PA......................................................    10

                                APPENDIX

Prepared Statements:
    Mr. Hosea Harvey, Law Professor and Consumer Finance Law 
      Expert, Philadelphia, PA...................................    25
    Mr. Jerry Bush, Former Owner, JB Plumbing & Heating of 
      Virginia, Inc., Roanoke, VA................................    33
    Mr. Shane Heskin, Partner, White and Williams, LLP, 
      Philadelphia, PA...........................................    38
    Mr. Benjamin R. Picker, Shareholder, McCausland Keen + 
      Buckman, Devon, PA.........................................   319
Questions for the Record:
    None.
Answers for the Record:
    None.
Additional Material for the Record:
    Anne Fleming, Professor of Law, Georgetown University Law 
      Center.....................................................   324

 
     CRUSHED BY CONFESSIONS OF JUDGEMENT: THE SMALL BUSINESS STORY

                              ----------                              


                        WEDNESDAY, JUNE 26, 2019

                  House of Representatives,
               Committee on Small Business,
                                                    Washington, DC.
    The committee met, pursuant to call, at 11:33 a.m., in Room 
2360, Rayburn House Office Building. Hon. Nydia Velazquez 
[chairwoman of the Committee] presiding.
    Present: Representatives Velazquez, Finkenauer, Golden, 
Kim, Davids, Veasey, Delgado, Houlahan, Craig, Chabot, 
Hagedorn, Stauber, Spano, and Joyce.
    Chairwoman VELAZQUEZ. Good morning. The committee will come 
to order.
    I thank everyone for joining us this morning, and I want to 
especially thank the witnesses who have traveled from across 
the country to be here with us today.
    When I talk to small business owners, one of the first 
things they mention to me is that access to capital is the 
lifeblood of their business. Affordable capital fuels new 
startups and helps existing businesses expand into new markets 
and grow their customer bases. And we know that when capital is 
accessible and on fair terms, small businesses can do what they 
do best, strengthen our communities and fuel our economy.
    Unfortunately, affordable capital can be hard to come by 
for many owners. Whether it is a taxicab driver in New York 
City pursuing the American dream or a small business owner 
trying to make payroll, predatory lenders have been targeting 
individuals and small businesses with loans that have 
excessively high interest rates, and unfair and abusive terms. 
This is an ongoing problem in many areas of lending and today's 
hearing will highlight one aspect of this larger issue.
    In recent years, cash-advance firms have been offering 
small businesses short-term loans that have the equivalent of a 
400 percent or more annualized interest rate. Many of these 
firms then require borrowers to sign a confession of judgment 
just to get the money.
    Because cash flow is so vital to a business's survival, 
many owners feel they have no choice but to sign away their 
rights to save their businesses and provide for their 
employees. By signing, borrowers essentially waive their legal 
rights regarding any legal dispute that might arise. And if one 
does arise, the lender can unilaterally declare a default and 
take actions against the small business owner.
    In doing so, these lenders have hijacked our courts by 
getting rubber stamp judgments without notice or hearings. Many 
times, small business borrowers only find out about a judgment 
against them after the lender begins to seize bank accounts or 
other assets.
    Over the past few years, lenders have used these 
instruments to win more than 32,000 judgments in state courts. 
While confessions of judgment have been prohibited under the 
Truth in Lending Act (TILA) for consumer loans since 1985, 
these protections do not extend to certain types of commercial 
loans.
    That is why I introduced the Small Business Lending 
Fairness Act, which will put an end to these predatory 
collection practices. By ending confessions of judgment in 
commercial lending, we can stop some of the abuses that are 
crippling honest small business owners.
    I find it appalling that New York State law has made our 
state a magnet for dishonest lenders. And I am encouraged by 
the news that New York State lawmakers are now taking steps to 
prevent these out-of-state lenders from using our court system 
to freeze and drain a borrower's account. But this is not 
enough, which is why I am working with Senator Brown to close 
this loophole nationally.
    As predatory small business lenders continue to evolve and 
find creative ways around the law, Congress must similarly be 
proactive in addressing those predatory practices and rooting 
out abuses that are harming honest, hard-working small business 
borrowers.
    Closing this loophole ensures that predatory lenders cannot 
use abusive practices to seize the assets of small firms 
without due process and protects them when they are looking to 
obtain a loan.
    Again, I want to thank the witnesses for being here, and I 
now yield to the Ranking Member, Mr. Chabot, for his opening 
statement.
    Mr. CHABOT. Thank you, Madam Chair.
    And before I get into the substance of my opening statement 
this morning, I just wanted to note the passing of a former 
Chairman of this Committee. When I was first elected in 1994 
and sworn in in 1995, the Democrats had controlled the house 
for 40 years at that time so all the Chairmen and Chairwomen of 
those Committees were Democrats, and so Republicans in 1995 
became the Chairs. And the Chairwoman of this Committee was Jan 
Meyers. And her portrait is up on the wall in red up there. Jan 
was a great member of Congress, great Chair of this Committee. 
She was 90 years old when she passed away. She represented 
Kansas and did a great job. And so we want to recognize her 
leadership and we wish the best to her family. And she is held 
in very high esteem.
    Chairwoman VELAZQUEZ. Would you yield for a second?
    Mr. CHABOT. I would be happy to yield.
    Chairwoman VELAZQUEZ. Thank you. And I issued a statement 
at press time yesterday, and she represented the spirit of 
bipartisanship of this Committee. We are here discussing issues 
that are important to the small business community and for her 
and for us they are not republican or democratic issues. She 
came here, she did her job, and was very fair, very smart, and 
committed to serve small businesses in our nation.
    I yield back.
    Mr. CHABOT. Thank you. Thank you. I reclaim my time.
    I just got a notice from the Former Members of Congress 
that I still am a member because I lost back in 2008. So I 
joined the Former Members of Congress, and I am still a member. 
I do not think they ever know I got reelected again. So, but 
anyway, it indicated that Jan had passed away. And so, she was 
a great member and I think we are both following in her 
footsteps, the current Chair and me as the former Chair. So 
rest in peace, Jan. She was a great lady.
    As our economy continues to roar ahead with record 
unemployment rates and near record small business optimism, our 
Nation's smallest firms still face obstacles when it comes to 
financing their projects and growth. With an onslaught of new 
technologies, leaders are reaching small businesses, 
entrepreneurs, and startups in novel ways. Despite new 
technological platforms, the contract between two parties is 
still where the rubber meets the road. Often these contracts 
contain a legal provision that we are discussing here today.
    Although confessions of judgment have been around for ages, 
the provision has received increased attention recently at the 
Federal and state level due to some abuses. Specifically, the 
provision allows a party to waive his or her due process 
rights, bypass litigation, and move immediately towards a 
monetary judgment.
    At the Federal level, the Federal Trade Commission, the 
FTC, is one of the Nation's agencies that overseas consumer 
protection laws. In 1984, the FTC determined that the use of 
confessions of judgments should be prohibited in all consumer 
contracts. Although the FTC through regulation banned 
confessions of judgment in consumer contracts, they elected not 
to include business contracts in that prohibition. States, on 
the other hand, have created a patchwork of rules on how to 
treat confessions of judgment from an outright ban in some 
states to allowing them in others. Many of the states that do 
allow them, such as my state, Ohio, and Pennsylvania, also 
require certain guardrails and safeguards to protect parties 
involved in these transactions.
    For example, in Ohio, warning language must appear on the 
contract in bold and ``distinctive'' lettering. These 
safeguards help reduce the chances of small business owners not 
being aware of the provision and/or not understanding the 
provision, which often leads towards abusive practices.
    Most recently, just last week, the state of New York, as 
was mentioned, voted to ban all out-of-state confessions of 
judgment.
    I look forward to hearing from all four of our witnesses 
here today about the history of this provision and how it has 
been utilized in recent years. Additionally, I am interested in 
hearing how states have regulated this legal tool. As we 
continue to work to create an environment that allows small 
businesses to grow, create jobs, and flourish, it is important 
to look at how states address various issues, including this 
one.
    So I want to thank the witnesses for joining us today, just 
as the Chairman did, and I yield back.
    Chairwoman VELAZQUEZ. Thank you, Mr. Chabot. The gentleman 
yields back.
    And now I recognize the gentlelady from Kansas, Ms. Davids, 
for the purpose of making a statement on Ms. Meyers's passing.
    Ms. DAVIDS. Thank you, Madam Chairwoman. I appreciate the 
opportunity to, one, just acknowledge the importance of Jan 
Meyers for the state of Kansas, and particularly for the 
district that I now represent. She was certainly a leader in 
our state and as a woman in elected leadership, I appreciated 
her ability to work in a bipartisan way and bring what I 
consider to be Midwestern values and pragmatism to not just 
politics but to our society in general.
    I appreciate the time. I just wanted to express that Jan 
Meyers was such an important figure in Kansas history. Thank 
you.
    Chairwoman VELAZQUEZ. The gentlelady yields back.
    And if committee members have an opening statement, we will 
ask they be submitted for the record.
    I would like to take a minute to explain the timing rules. 
Each witness gets 5 minutes to testify and the members get 5 
minutes for questioning. There is a lighting system to assist 
you. The green light comes on when you begin, and the yellow 
light means there is 1 minute remaining. The red light comes on 
when you are out of time, and we ask that you stay within that 
timeframe to the best of your ability.
    I would now like to introduce our witnesses.
    Our first witness is Professor Hosea Harvey, Ph.D. 
Professor Harvey has taught at Temple University's Law School 
since 2010 where he teaches contracts, banking and financial 
regulation, and consumer law matters, focusing on how our 
nation's banking laws influence and impact diverse communities. 
His work is particularly timely as we consider confessions of 
judgment in the context of small business lending and the role 
that Congress can play to ensure a fair marketplace. Professor 
Harvey earned his B.A. from Dartmouth College and then went on 
to Stanford University where he received his M.A., J.D., and 
Ph.D. in political science.
    Welcome, Professor Harvey. And you are recognized for 5--I 
am going to introduce all the members all at once and then we 
will start.
    Our second witness is Mr. Jerry Bush. Mr. Bush is a 28-year 
certified master plumber from Roanoke, Virginia. He owned JB 
Plumbing and Heating of Virginia with his father but was 
recently forced to shut down after 30 years of business due to 
abusive confessions of judgment associated with cash advances. 
Mr. Bush is also a dedicated public servant having served as a 
volunteer fire chief for 25 years. He currently lives in 
Roanoke with his wife of 19 years, who is a cancer survivor and 
their 18-year-old son. Welcome, Mr. Bush.
    Our third witness today is Mr. Shane Heskin. He is a 
partner in the Philadelphia office of White and Williams, LLP, 
a full service regional law firm with over 240 lawyers in 10 
offices. Mr. Heskin practices in the firm's commercial 
litigation department and has nearly 20 years of experience 
litigating complex matters. Mr. Heskin holds a J.D. from Albany 
Law School and a B.A. from Mayville State University where he 
graduated summa cum laude from both schools. Since 2016, Mr. 
Heskin has represented more than 50 small businesses and 
individuals in connection with high interest lending products 
located all over the country. Welcome.
    And now I would like to yield to our Ranking Member, Mr. 
Chabot, to introduce our final witness.
    Mr. CHABOT. Thank you, Madam Chair.
    Our next witness will be Benjamin Picker. Mr. Picker is a 
shareholder and attorney at the law firm of McCausland, Keen, 
and Buckman in Devon, Pennsylvania, which is outside 
Philadelphia. He is an experienced contract, securities, and 
consumer protection litigator and has tried cases in both state 
and Federal courts. Mr. Picker holds a bachelor of arts from 
the University of Maryland, and his law degree is from Temple 
University's Beasley School of Law. And we want to thank him 
for being here. And we want to thank all the witnesses for 
being here. I yield back.
    Chairwoman VELAZQUEZ. Thank you.
    Mr. Harvey, you are now recognized for 5 minutes.

STATEMENTS OF HOSEA HARVEY, LAW PROFESSOR AND CONSUMER FINANCE 
LAW EXPERT; JERRY BUSH, FORMER OWNER, JB PLUMBING & HEATING OF 
  VIRGINIA, INC.; SHANE HESKIN, PARTNER, WHITE AND WILLIAMS, 
   LLP.; BENJAMIN R. PICKER, SHAREHOLDER, MCCAUSLAND KEEN + 
                            BUCKMAN

                   STATEMENT OF HOSEA HARVEY

    Mr. HARVEY. Thank you, Chairwoman Velazquez, Ranking Member 
Chabot, and members of the Committee. My name is Hosea Harvey, 
and I am a law professor and consumer law aficionado. I 
appreciate the opportunity to appear before you today to 
discuss confessions of judgment and the proposed Small Business 
Lending Fairness Act. I am here today in my individual capacity 
and not as a representative of any institution.
    As you know, a confession of judgment, in its simplest 
form, is simply a contractual arrangement by which a borrower/
debtor agrees to forfeit the right to contest a declaration of 
default on a credit instrument. As you also know, the U.S. 
Supreme Court in 1972 held that with respect to business 
transactions, confessions of judgment are not per se 
unconstitutional. As a result of that Supreme Court decision, a 
patchwork of state laws has remained to this day.
    As you also know and we heard earlier, in 1984-85, the FTC 
banned confessions of judgment through the Credit Practices 
Rule for certain consumer credit contracts. But despite the 
FTC's action, Congress did not choose to extend this 
prohibition to business transactions at that time. Perhaps this 
choice was informed by a belief that business to business 
transactions take place between sophisticated parties on equal 
footing. However, the recent Bloomberg News investigation 
reminds us that that is not always true.
    By postulating that business-to-business transactions are 
often, if not always, on equal commercial footing, we ignore 
insights from consumer transactional research about how power 
dynamics and predatory behavior might influence contract terms. 
We would also falsely expect that businesses always knowingly 
engage in commercial transactions, and that the inattention to 
fine print that consumers often manifest is somehow different 
when that consumer is a small business.
    But in a world in which thousands of drivers for your app 
ride based shares have their own business and can finance their 
enterprise with a business loan, perhaps the theoretical line 
between consumer and business credit transactions has blurred 
over time.
    For example, 1099 filings have increased in recent years, 
roughly 25 percent in the past 2 decades. Almost 100 million 
1099s were filed in a recent tax year.
    In short, our conventional understanding of small 
businesses should evolve, just as our economy has evolved over 
time. Sometimes a singular consumer is also a small business. 
The law should reflect that.
    I do acknowledge that confessions of judgment in business 
transactions have a limited purpose if exercised with caution 
and restraint. However, the space is rife with abuse and open 
for substantial reform. There is also not compelling evidence 
that eliminating them in the commercial context will have a 
chilling effect on credit acquisition either, although that is 
a good talking point for advocates that oppose reform.
    The reason why reform is important right now is that the 
state level approach to commercial confessions of judgment is a 
fraying patchwork quilt and more procedure than substance. 
Here, Congress did play a role. Congress chose to somewhat 
artificially segregate the way we think about the regulation of 
consumer credit transactions from commercial credit 
transactions. That transactional Maginot Line reinforces the 
perception that businesses are on equal footing, are all 
equally sophisticated, and that market forces are the best to 
curb predatory behavior. I think the Small Business Lending 
Fairness Act appropriately eliminates this false dichotomy 
between consumer and small business transactions.
    We do not yet know the full scope of abuse in this space. 
The lack of research is what made the Bloomberg investigation 
so noteworthy and impressive. But this Committee can still ask 
whether Federal consumer law contract prohibitions that we find 
protect against unfair terms in one context can be extended to 
business transactions terms that might also be unfair.
    I think those prohibitions should be extended. Why? They 
will bring uniformity and consistency to a space that needs it. 
This could also reduce disparate outcomes, such as the ones we 
are here to discuss today. The business models of companies 
that are egregious offenders would suffer, which may be 
appropriate if you think they engage in unfair practices.
    Given what we know, the Small Business Lending Fairness Act 
rests on sound evidentiary footing. It codifies and extends the 
FTC's ban on consumer confessions of judgment to include small 
business owners as well.
    Chairwoman Velazquez, joined by Representative Marshall, 
Senators Rubio and Brown, and others, does recognize that 
contractual provisions that deny due process can punish small 
businesses and serve no compelling purpose. By amending TILA to 
include a general prohibition on confessions of judgment for 
businesses, Congress can act to prevent the abuses described 
here today. This proposed solution is neither partisan nor 
anti-business.
    In short, just hours before the 50th anniversary of the 
implementation of the Truth in Lending Act, this Committee's 
consideration of the Small Business Lending Fairness Act is an 
important, logical, and necessary extension of TILA's original 
principles and purpose.
    I thank the Committee for its efforts and for the 
opportunity to testify this morning.
    Chairwoman VELAZQUEZ. Thank you, Mr. Harvey.
    Mr. Bush, you are recognized for 5 minutes.

                    STATEMENT OF JERRY BUSH

    Mr. BUSH. Hello. My name is Jerry Bush. And I want to thank 
the Committee and the Chairwoman and everybody for this.
    I am the former owner of JB Plumbing and Heating of 
Virginia. My father built JB Plumbing and Heating of Virginia 
30 years ago so he could give a good life for his family. When 
I graduated from high school, I was given a work truck and 
tools so I could one day support my family like he did. My 
father served in the Army, and when his term was done, he came 
out and started to be a plumber. He had to do everything from 
scratch and he was never given anything. As I took interest in 
the company, we incorporated in 2008. We had a very strong 
company, and when the house market crashed it hurt us pretty 
bad but we had a good name and never had to look for work. We 
started to do more commercial work. We mainly did all new work 
and sometimes he would have to wait 60 days to get your money 
and a year after the job to completely receive your 10 percent 
retainage. When we done a large project in 2015 and was not 
paid around $350,000, this put is in a bad position as we tried 
to fight this contractor. We had personal guarantees that we 
had to pay suppliers and other subs in which this caused us to 
have judgments.
    I went to our bank, Wells Fargo, and they turned us down 
for a loan but the gentleman told me he knew some brokers, and 
within a week I received a call from a broker telling me they 
could help. I was at a point where I was hoping to win the 
lawsuit with the contractor who owed us money, plus I had to 
keep payroll going and jobs because of contracts. The broker 
said we can get you a better deal within 45 days that you have 
to earn their trust. So I said okay. They went me the contract 
and I have never seen a confession of judgment before and asked 
about it, and they said this is just in case you run away or 
change accounts where we cannot find you. And they never will 
use them. They will work with you and then they will do a 
funding company call from the lending and ask you if the broker 
told you everything and they will work with you if you run into 
problems. Nobody explained what all they can do if they want 
to. Thirty-five days go by and I was paying my dailies and the 
broker comes back and said, ``Hey, I have a sweet deal. I found 
another company will be there for the long haul,'' and I said, 
``My contract says if I take another funding I will go into 
default.'' They responded saying, ``No, you are good. We got 
you.''
    Then, when the time came around for the first one to end, 
the funding company would call and say, ``Hey, are you ready to 
renew?'' And when you tell them no, they go into your account 
and see you are working with somebody else and they force you 
to renew or default so then you got to start to have two daily 
payments and then you keep getting deeper, and the next thing 
you know they are taking $18,000 out daily. They know every day 
how much you b ring in and everything else. And mostly, all 
made hundreds of thousands off of us. And the amounts the 
judgments show they went back and started the advance again. 
For example, if you had $10,000 left and the advance was 
$50,000, but the contract amount was $70,000, they would take 
the $10,000 and add $70,000 because they said it is in the 
contract to restart then add legal fees up to $34,000 and more 
than the judgments shows $114,000 plus the $60,000 that you 
already had taken out. This is a good reason for them to pay 
people like the New York marshals because they can and will 
force to get it.
    When the time came where I needed help to get the payments 
reduced, I did not want to take any more funds and funds were 
tight because $18,000 daily added to $90,000 weekly. I asked 
for reduced payments from Yellowstone and they would only make 
you take a new funding contract with no money in return. They 
would still charge the 400 percent like Last Chance and Main 
Street. They will give reduced payments for 5oo days then come 
back in a week or so and say, with no warning, and take the 
money out.
    August 7, 2018, when I had to make a choice to keep getting 
deeper or close doors, I warned all of the funding companies it 
was going to happen. That Tuesday I had to tell employees and 
my father it was over. I had to tell the contractors as well. 
To my father's face and to watch 20 employees and everybody 
still haunts me.
    The chain reaction was awful. Personal guarantees, frozen 
accounts, certain people holding our equipment and tools for 
hostage. Our name was smeared. I was at the end. The funding 
companies even took my father's retirement and money that was 
from his social security around the end of August 2018. I had 
companies tell me two ways out: win the lottery or if you die 
we cannot come after you.
    When all this was going on, I closed doors, and after my 
wife was going through cancer, one day in January 2018, I did 
not want to renew a loan and the gentleman from one of the 
funding companies, Yellowstone, said if I did not, he would 
default me. I told him I was with my wife for her chemo 
treatment, and his words were, ``I will send flowers to make 
her feel better.''
    The day when I was at my dark place, I said I would win. I 
would not let them take my family no more. I sat on the bank 
and said to myself, I want to see my son grow up. I want to be 
there for my family, but I cannot take care of them if I never 
have anything. They were right, and if I was gone, they cannot 
come after me no more. I was not looking for a way out. I was 
looking for a way to fix it. And I did. It was my fault. I said 
my goodbyes on Facebook, begging people to make sure my family 
was okay, and did the hardest thing I ever had to do and took 
the pills. I did not want to do this and I really hid myself in 
the heavy woods and went to sleep, but as I look now, I was 
lucky and I was found.
    My second chance, after about a month, I started to fight 
again. Seeing my father at age 70 back to hard labor and not 
the best health and finding out how these companies were making 
millions. Pictures of them in sports cars, fancy trips, tables 
of cash they had taken from people all over the country. Every 
man, every woman, every race. I started to make calls, sending 
emails, nothing. No local news would hear me and nobody could 
understand, even local lawyers.
    Can I finish?
    Chairwoman VELAZQUEZ. How much more?
    Mr. BUSH. Less than a minute.
    Chairwoman VELAZQUEZ. Okay.
    Mr. BUSH. Thank you.
    I had one lawyer from New York connect me to Bloomberg News 
and the story came out but still missed a lot of details, but 
this was a good start. And when the story came out, the funding 
companies hit harder. They did all kinds of crazy stuff. They 
sent letters to a credit card which was Discover and asked and 
received any kind of bank account numbers and they used it to 
freeze my accounts. So, with this, I can never have a bank 
account and will have judgments on my record and personal 
guarantees.
    Basically, I would just like to say that I can never have 
an account, anything. They have judgments, and this has been 
hard on my whole family.
    Chairwoman VELAZQUEZ. Thank you, Mr. Bush.
    And now Mr. Heskin, you are recognized for 5 minutes.

                   STATEMENT OF SHANE HESKIN

    Mr. HESKIN. Thank you, Chairwoman Velazquez, Ranking Member 
Chabot, and the other distinguished members of the Committee.
    America's small businesses are under attack by predatory 
lenders that are the business equivalent of payday lending. As 
New York's highest court described it more than 50 years ago, 
it is the equivalent of sending someone into battle like a 
warrior of old by discarding their shield and breaking their 
sword. I second the testimony by Professor Harvey. Not every 
small business or every transaction that involves a business 
means that they are sophisticated parties. My clients are very 
good at what they do. They know how to fix a boat. They know 
how to install a sink. They know how to make a fine wine. All 
things I cannot do. But that does not mean they know how to 
read a contract in 8 point font. It does not mean they know the 
legal ramifications of signing a confession of judgment. It 
certainly does not mean that they understand that they could 
wake up one morning and have their bank accounts drained by a 
New York City marshal making over $1.8 million a year on small 
businesses when they need that money for payroll.
    Let me encourage the Committee to look at Exhibit 6 to my 
written testimony. It is a sample of 500 small businesses that 
have been victimized by the COJ. It is by one company. It 
contains victims: a winery from California, a craft brewery 
from Colorado, a nail salon from Ohio, a diner from Minnesota, 
a coffee shop from Texas. That is the definition of Main 
Street. They are under attack and they need help.
    And it is not just the unsophisticated. It preys on even 
the most sophisticated. I have here with me today Kara 
DiPietro. She was the Small Business Administration's Small 
Business Person of the Year in 2017. In 2018, she was listed as 
one of the fastest growing small businesses in the country. She 
got preyed upon just last month where she was fully complying 
with the terms of her contract with an MCA company and she woke 
up and found her business accounts frozen. Why? Because she had 
the audacity to question and MCA company and say, why are you 
taking out so much money? My revenues are declining and you are 
taking double and triple the money. Stop it. Their reaction? 
Freeze their bank accounts, send a COJ in, and here is the next 
point. It leads right into the next point. There is more work 
to do.
    New York banking the COJ is a great first step. Great first 
step. But guess what? Ms. DiPietro was victimized by 
Pennsylvania. A Pennsylvania COJ and a Pennsylvania sheriff 
froze her bank accounts before she even had notice. We need to 
do more. We need to stop it now. Not tomorrow, now. Otherwise, 
the rest of America, there will be more small business victims, 
just like sophisticated business and unsophisticated 
businesses.
    Now, the next weapon is already here. The next weapon of 
the MCA industry is the UCC. I do not know what can be done 
about it but it is just as lethal. For the cost of a stamp, 
they can send a letter to PayPal, to credit card processors, to 
your best company, and halt business in its tracks. Drain your 
credit card processors. Drain your PayPal account, and ruin 
your relationship that you have built with one of your best 
customers. That has to be addressed.
    Also, the next iteration of the MCA industry is also here. 
It is Rent-A-Bank. I respectfully submit that you look into 
that as well.
    Chairwoman VELAZQUEZ. Mr. Picker, you are now recognized 
for 5 minutes.

                STATEMENT OF BENJAMIN R. PICKER

    Mr. PICKER. Chairwoman Velazquez, Ranking Member Chabot, 
and members of the Committee. Thank you for the opportunity to 
be here today to testify and to discuss the history, law, uses, 
and important due process and fairness considerations relating 
to confessions of judgment.
    I want to start off by saying that I do not disagree with 
anything that other witnesses have said so far. Absolutely 
nothing. My experience is not specifically with the MCA 
industry. It is more generally with the use of confessions of 
judgment in commercial transactions and litigation.
    As has been testified to already, a confession of judgment 
clause is a contractual provision permitting the plaintiff to 
take a judgment against a purportedly defaulting defendant 
without prior notice and before commencement of a lawsuit, 
thereby skipping the entire normal litigation process. This 
concept of confession of judgment has been around and dates 
back to perhaps the 13th Century. So it has been around for a 
very long time as the Chairwoman mentioned.
    During my nearly 15 years of practicing law, a large part 
of which has been litigating business disputes, I have both 
utilized and defended against confessed judgments. When asked 
if I like confessions of judgment as a tool, my response is 
usually, ``Well, it depends on who is using it, me or the other 
guy.'' That is because it is a very powerful tool, but it can 
be abused in the wrong hands. However, when used in appropriate 
circumstances, it is often a far less expensive way to reach 
the same result that would have been reached after years of 
costly and needless litigation.
    In my home state, the Commonwealth of Pennsylvania, 
confessions of judgment are permitted, but only in connection 
with commercial transactions. They are prohibited in consumer 
contracts, such as residential leases, and of course, as we 
know, in consumer financing transactions. In most states, 
confession of judgment is generally prohibited.
    It should be noted that through the Credit Practices Rule, 
which was promulgated in 1985, the FTC outlaws the use of 
confession of judgment in consumer credit transactions. The 
primary reasons for doing so were: (1) consumers often suffer 
substantial economic and emotional injury from the use of 
confession of judgment in consumer credit transactions; (2) 
consumer credit transactions are often contracts of adhesion 
where individual consumers have little or no negotiating power; 
(3) consumers did not understand the provisions; and (4) 
default usually occurred because of issues beyond a consumer's 
control, such as unemployment or illness.
    I can see that many of those same concerns are present in 
the small business context, especially when you are talking 
about MCAs.
    As Mr. Heskin said in a different way, the Pennsylvania 
Supreme Court has described confessions of judgment as 
``perhaps the most powerful and dramatic document known to 
civil law.''
    As a result, states that permit confessions of judgment, 
including Pennsylvania, require that the provision be placed 
conspicuously within the contract, that certain formalities be 
strictly followed, and that there be a way for the defendant to 
challenge the judgment after the fact.
    A warrant of attorney or confession of judgment clause that 
is bolded or capitalized will ordinarily be sufficiently 
conspicuous. The Pennsylvania Supreme Court has compared a non-
conspicuous confession of judgment clause to actions of the 
Roman tyrant Caligula, who was said to have had the ``the laws 
inscribed upon pillars so high that the people could not read 
them.''
    Regarding formalities, for example, confessions of judgment 
in Pennsylvania must be accompanied by a complaint describing, 
paragraph by paragraph, the factual basis for the judgment, and 
must attach a copy of the instrument or contract permitting the 
confession of judgment. In addition, an affidavit must be 
included attesting to the fact that the defendant has income of 
more than $10,000. The confessed judgment is filed subject to 
the misdemeanor penalty relating to the criminal offense of 
unsworn falsification to authorities.
    In some counties like my home county of Montgomery County 
in Pennsylvania, the court clerk, known as the Prothonotary, 
has its legal counsel even review all confessions of judgment 
before they are accepted for filing to ensure that they comport 
with all legal requirements. This can serve to protect both the 
plaintiff and the Prothonotary from lawsuits.
    The confession of judgment procedure in Pennsylvania also 
comports with the constitutional guarantee of due process 
according to the Supreme Court. It requires knowing and 
voluntary relinquishment of predeprivation process and provides 
a procedure for challenging the confessed judgment. A confessed 
judgment can be challenged by filing a petition with the court 
within 30 days of receiving notice of the judgment. It can be 
stricken where there is a clear defect on the face of the 
papers and can be opened where the defendant shows that it has 
a meritorious defense.
    As I mentioned earlier, confessions of judgment can be 
abused in the wrong hands. But there are some common sense ways 
that Congress could act to protect small business borrowers 
against unscrupulous lenders while protecting the interests of 
lenders who act appropriately.
    I would get into that but it appears that I am out of time.
    Chairwoman VELAZQUEZ. Thank you. Thank you so much.
    And thank you to all the witnesses for all the information 
and compelling stories that you have shared with us today.
    I would like to start with you, Mr. Bush. I am really 
particularly concerned that victims of confession of judgment 
are denied due process and not given any notice before legal 
action is taken against them. So Mr. Bush, I would like to ask 
you, how do you find out your account has been seized and your 
money is gone?
    Mr. BUSH. A couple reasons.
    Chairwoman VELAZQUEZ. How do you find out?
    Mr. BUSH. Normally, I check my account. I normally check my 
accounts in the morning, online or I turn around and have 
employs that are supposed to check that has happened. Now, I 
might get a letter from a bank but that is 2 weeks after it 
happened.
    Chairwoman VELAZQUEZ. Did any entity give you notice or did 
you only find out once your account had been drained?
    Mr. BUSH. No notice.
    Chairwoman VELAZQUEZ. No notice.
    Mr. Heskin, you have fought numerous COJ battles in court 
on behalf of victims. How often are victims given notice that 
their assets, such as bank accounts, might be seized?
    Mr. HESKIN. Hardly ever. And in fact, it is the rare 
occasion that they do get notice. A lot of times they will 
threaten my clients and say with the push of a button I will 
drain your bank accounts.
    Chairwoman VELAZQUEZ. Mr. Heskin and Professor Harvey, do 
you think if a small business knew they could have their 
accounts drained as a result of signing a confession of 
judgment they would have agreed to the cash advance?
    Mr. Harvey?
    Mr. HARVEY. Almost always, no. I think they would be very 
wary of that, particularly if they are in a precarious 
financial condition as many folks who take these loans or 
advances are. Thank you.
    Chairwoman VELAZQUEZ. Does this mean that there is 
potentially no meetings of the mind here between the parties 
which as I understand is needed for a valid contract?
    Mr. HARVEY. Since I teach contracts, that is a great 
question. Thank you very much.
    Yes, there is often a certain gap in understanding about 
what the contractual instrument is and I think the law can 
change that. When we have particular provisions that we think 
are important or potentially unfair, we can highlight them, we 
can bold them, we can demand additional accountability.
    Chairwoman VELAZQUEZ. Thank you.
    And Mr. Heskin, have you seen the use of confessions of 
judgment in any other circumstances such as any instances where 
the borrower is not as vulnerable?
    Mr. HESKIN. I have never seen it in any of my commercial 
transactions. I represent primarily insurance companies and we 
certainly do not use the confession of judgment.
    Chairwoman VELAZQUEZ. Mr. Bush, I understand you eventually 
paid around $600,000 to obtain around $250,000 for your 
business. Were you ever made aware that you would have to pay 
back three times the amount you borrowed?
    Mr. BUSH. If I understand correctly, yes, I was aware as 
far as what I had to pay back that was on the contract but what 
I was not aware of, they can default or make their own rules as 
they went.
    Chairwoman VELAZQUEZ. How often, Mr. Heskin, do merchant 
cash advance companies fully and fairly disclose the true cost 
of capital associated with their cash products?
    Mr. HESKIN. I think it is fully disclosed as the cost. What 
I do not think is disclosed is the true nature of the 
transaction and the APR. If you were to put the APR on that 
contract, it would be 2,000 percent. No one in the right mind 
would sign that.
    Chairwoman VELAZQUEZ. Thank you.
    Mr. Harvey, Professor Harvey, by not disclosing the true 
cost of capital, such as the excessive interest rates, can it 
be said that these merchant cash advance companies are not 
dealing in good faith with small businesses?
    Mr. HARVEY. Yes, that can be said. It is something we would 
never tolerate in the consumer transactional environment.
    Chairwoman VELAZQUEZ. Mr. Heskin, many of the small 
businesses you represent do not have in-house general counsel 
or large legal departments. We have also heard that small 
businesses are entering into these agreements when they are 
most vulnerable. Basic contract law requires that parties have 
equal access to information and one party is not under duress. 
Does the relationship between the parties and the circumstances 
small businesses enter these transactions justify prohibiting 
confessions of judgment in commercial lending?
    Mr. HESKIN. Absolutely. The whole purpose of the usury laws 
is to protect the necessitous debtor against their own 
desperation. There is absolutely no bargaining power 
whatsoever. These are take-it-or-leave-it contracts. If you 
want the money, sign it.
    Chairwoman VELAZQUEZ. Thank you.
    Mr. Harvey, on that same question, any comments?
    Mr. HARVEY. I fully agree with Mr. Heskin.
    Chairwoman VELAZQUEZ. Thank you.
    Now my time has expired, and I recognize the Ranking Member 
for 5 minutes.
    Mr. CHABOT. Thank you, Madam Chair.
    I am going to start with Mr. Picker if I can.
    As members of Congress, we often look at how states are 
approaching and dealing with various issues. You mentioned this 
briefly during your testimony.
    Could you review with us again how confessions of judgment 
work in Pennsylvania at this time?
    Mr. PICKER. Yes. The process is, when there is a default, 
the plaintiff will file the confessed judgment, along with a 
complaint laying out the allegations that underlie the default 
and the basis for the default. Notice must be sent to the 
defendant and they are given 30 days to challenge that. I will 
submit though that sometimes that notice is only sent out along 
with a writ of execution whereby assets can be frozen or taken 
in the meantime. And the 30-day period begins to run at that 
point. Of course, the defendant does have the opportunity to go 
into court once they receive notice of that and obtain relief. 
The defendant during that 30-day period can file a petition 
with the court seeking to strike or open the judgment. It can 
be stricken if there is a defect on the face of the documents 
if it does not comply with Pennsylvania law in some way, or it 
can be opened and then litigated in due course like any other 
litigation matter if the defendant can show to the court that 
they have a meritorious defense.
    Mr. CHABOT. Professor Harvey, let me move to you.
    In your testimony, you stated that California has a 
different approach.
    Mr. HARVEY. Yes.
    Mr. CHABOT. When it comes to confessions of judgment. Could 
you share with us what the difference is, how it is 
administered in California?
    Mr. HARVEY. Thank you for the question.
    California takes a more thoughtful approach than many 
states that permit confessionsof judgment. They require 
essentially that an independent attorney advise the debtor 
before signing an instrument that has a confession of judgment. 
In addition, the confession must be under oath. Those two 
provisions heighten and call to attention to both parties what 
the provision is and how it works and serve as a safeguard to 
make sure that both sides who sign understand what the term 
means.
    Mr. CHABOT. Thank you.
    And I am going to start with Mr. Picker and then I will go 
down the line, anybody that would like to comment on this.
    How can we stop the abuses that we have heard about here 
today? And you have a particularly sympathetic case, Mr. Bush, 
and we are certainly sorry to hear about what you and your 
family had to go through.
    How can we stop the abuses but at the same time keep 
whatever positive aspects there are here? And I guess my 
thinking would be the situation would be (a) you are trying to 
save a lot of attorney fees by keeping out of court to begin 
with. You have a business that needs a loan but for whatever 
reason is having challenges getting a more standard type of 
loan so they use this as a mechanism. And I would assume that 
there are businesses, I would assume it is the majority, 
although that may not be the case, that ultimately do not fall 
behind and do not have a terrible experience and get out of 
whatever their challenge was without the devastating thing that 
happened to Mr. Bush, for example. So how do we get rid of the 
abuses but keep whatever positive aspects?
    And I will go with you, Mr. Picker.
    Mr. PICKER. I believe there are a couple of options. One 
would be to completely outlaw them in the MCA small business 
situation. Another would be to do a better job of ensuring that 
the small business is aware of the provision and what it means. 
Ways that that could be accomplished would be making sure that 
the provisions are capitalized and bolded. Making sure that 
there is a plain language disclosure, perhaps on the first page 
of the contract and immediately above the signature line that 
in plain language explains what this means to the small 
business owner. Another option which New York has undertaken is 
maybe the New York model where confessions of model can only be 
filed in the state where the small business is located.
    Mr. CHABOT. Okay. Thank you.
    Mr. Heskin?
    Mr. HESKIN. These transactions involve----
    Mr. CHABOT. I think your mic might be off there.
    Mr. HESKIN. These transactions involve interstate commerce. 
They are wires from state to state. Regulation and licensing. 
If someone has to worry about their license being revoked or 
reporting to a regulator, then they will be a little bit more 
cognizant about abusing it.
    Mr. CHABOT. Thank you.
    Mr. Bush?
    Mr. BUSH. The biggest thing I would say would be for is, 
again, would be stopping as far as where they can do anything 
they want to, have some kind of a law or something there that 
basically says they just cannot go in and take your account or 
change a contract as they want to.
    Mr. CHABOT. Okay. Thank you.
    And professor?
    Mr. HARVEY. I think the California approach is one way but 
I also think the FTC with its substantial ability to have fines 
for transactions that violate its rules is another way, the 
same way it works enforcing COPPA, for example.
    Mr. CHABOT. Thank you very much. My time has expired, Madam 
Chair.
    Chairwoman VELAZQUEZ. The gentleman's time has expired. And 
now we recognize the gentlelady from Kansas, Ms. Davids.
    Ms. DAVIDS. Thank you, Madam Chair.
    I would also like to thank you for calling this hearing 
today. First off, Mr. Bush, thank you for sharing your story. 
It is exactly the kind of thing that members of Congress need 
to hear, the real life impacts of the policy that we are going 
to be voting on in legislation that we are passing. So I 
appreciate you being so candid with your story.
    I represent the Kansas City metro area on the Kansas side, 
and unfortunately, we know a lot in our area about the wide 
ranging effects of predatory lending. We have seen Payday 
lenders prey on financially vulnerable people in the district I 
represent and it hurts a lot of individuals and businesses 
alike.
    The issue that I would like to address or hear more about, 
Mr. Harvey, you have spoken, or at least you have given 
testimony, and as a law professor I think you can probably 
speak pretty clearly to the due process issues that come up, 
and then what the Chairwoman referenced earlier about a meeting 
of the minds when it comes to contracts, and when we think 
about the small business owner who is an expert certainly in 
plumbing or other areas, we know that those folks are often 
depending on others to help with the legal expertise. So when 
we talk about sophistication, there is sophistication in a lot 
of areas. It just might not be around what they have a right to 
in a contract.
    So could you talk a little bit about what that means and 
what we need to be thinking about as we go forward and the 
expectation for small business owners?
    Mr. HARVEY. Thank you for the question.
    I think where we begin is acknowledging that TILA was 
designed for consumers. And so because Congress chose to 
largely exempt business transactions from that framework, 
courts have therefore had a particular focus in evaluating 
fairness in consumer credit transactions and thus, by default, 
a lesser emphasis on evaluating principles of fairness, 
unconscionability, and due process in commercial transactions.
    You know, I think the proposed legislation is one way to 
bridge that gap. By treating small businesses the same as 
consumers for this purpose, it would be the beginning of courts 
perhaps evaluating businesses under the same standards that 
consumer law has applied for the last 50 years. So I think that 
is one step.
    You know, an additional step might be, for example, having 
dollar thresholds for regulated transactions. That would be 
another way you might accomplish the same goal. Yes, large 
banks having leases with large companies for hundreds of 
millions of dollars might not need the protections that smaller 
businesses might have. And so there could be a gating mechanism 
in a regulation or law that would help to achieve that goal as 
well.
    And finally, on due process, yes, the Supreme Court, and 
many courts, and members of Congress, have defaulted to the 
view that all businesses are sophisticated and that they are 
aware of contract terms and read their contracts. And as has 
been said earlier, that is simply not the correct view. And I 
think changing the law is one great step towards changing that 
view and changing courts' evaluation of such provisions. Thank 
you.
    Ms. DAVIDS. To follow up on the comment you just made about 
the thresholds, can you tell me a couple other, and this is 
open to all the folks giving testimony today, what other 
factors might be beneficial for us to think about as far as 
when a court is evaluating whether or not there as a meeting of 
the minds and whether or not there is due process, dollar 
thresholds is one interesting point. Are there others that you 
all might recommend?
    Mr. HARVEY. Sure. I think we could focus on the size of the 
business. We could evaluate bargaining power after the fact, 
much like we would do an unconscionability analysis in consumer 
law.
    To be fair, I think the danger with that is we do not want 
everyone, particularly regulators, evaluating all transactions 
after the fact. And so I think there would need to be some 
objective criteria that specified when a transaction like this 
was too unconscionable in the business sense.
    So for me, I think the safest default would either be to 
outlaw them entirely, to have a financial gating mechanism with 
a money threshold, or to establish some basic due process for 
transactions with confessions of judgment that might involve 
review by an independent attorney, which again would be one 
additional way in which courts could be confident that the 
parties had a chance to evaluate the terms.
    Ms. DAVIDS. Mr. Heskin?
    Mr. HESKIN. One last comment. One of the other things that 
would be helpful is to combat the collection practices against 
small businesses. And so whatever threshold the Congress 
believes should apply, it would be helpful if the Fair Debt 
Collection Practices Act applied to those small businesses.
    Ms. DAVIDS. Thank you.
    I yield back.
    Chairwoman VELAZQUEZ. The gentlelady yields back.
    And now we recognize, oh, I am sorry, the gentlelady's time 
has expired. She just yielded back.
    Now we recognize Mr. Golden from Maine for 5 minutes.
    Mr. GOLDEN. Thank you, Madam Chair. And I want to thank you 
as well for holding this hearing.
    Just following up on Congresswoman David's testimony--I 
think it is on. I am sorry.
    I do just want to point out so much in policymaking, I 
think in instances like this there is always this question of 
who can afford legal counsel and who cannot. And I think that 
is particularly true when you are talking about businesses and 
the size of their assets or even whether they have counsel on 
staff or not. So I will just throw that out there. I hope it is 
helpful.
    Mr. Bush, you know, I wanted to thank you for your 
testimony and say that this is something that is fairly, I 
think, common in other areas, too. As a veteran, I can tell you 
I have seen no shortage of predatory lending off of military 
bases and others in the ways that people get backed into 
corners, and it can really have a massive impact on their 
lives, on their families' lives, on their ability to do their 
job, to be focused on their job, to deploy down range and 
defend our country without worrying about what is going on back 
home in their back accounts and in their families' lives. And I 
think it is important for people to understand the context of 
what is worst about these types of practices.
    So I wanted to ask you if you would perhaps share with us a 
little bit more some of the consequences for you and your 
family in particular. How has this ordeal impacted your family 
beyond what you have already shared with us?
    Mr. BUSH. Well, basically, what it done was when our 
accounts got frozen and everything I could not pay health 
insurance. At the time my wife was still getting treated for 
cancer. They was taking every account they could do. We had, 
like I said, basically, back work for other people and it just, 
it hurts your name. I mean, and then the threats never stopped. 
And I still have threats today. I actually had threats the past 
3 or 4 days about just coming up here. And like these two 
gentlemen, like they said, all they have to do is push that 
button and they have you.
    Mr. GOLDEN. That is right.
    Just a follow up. I understand that you have an 18-year-old 
son planning on continuing his education. I imagine that this 
is going to be a potential problem as well.
    Mr. BUSH. It is. Again, like I mentioned earlier, I cannot 
have a bank account. I can have nothing in my name, a check 
card, anything, because every time I try to do something, even 
have a cosigner, they come after me. It never stops. And like I 
said, this business was for him, too, and for him to grow his 
family and all this we lost just by the push of a button.
    Mr. GOLDEN. Well, you are doing the right thing by getting 
behind the microphone to talk about this and spread the word. I 
have seen a lot of other veterans do this type of thing to help 
people understand why this is not right and how it is taking 
advantage of people. So I want to thank you for that. It takes 
a lot of courage. But it is important. And the threat aspect of 
it is really I think what is most disturbing. I have seen 
people overseas picking up side phones and spending their time 
instead of calling their families, trying to deal with these 
types of things and the threats that are coming in against 
their families. And that is when you know someone is really 
predatory is when they are willing to look past all those types 
of factors and just resort to threats. You know that their 
intent was always not good.
    I think just to pivot in a different direction, Mr. Picker, 
as an attorney, just from a practical perspective, what 
alternatives exist for a client who wants the security of a 
confession of judgment?
    Mr. PICKER. Well, one thing that was mentioned by Mr. 
Heskin is the ability to obtain a security interest through the 
Uniform Commercial Code against assets. That could include bank 
accounts. It could include other assets of the business like 
cash flow. And as Mr. Heskin said, there can be some of the 
same impacts and dangers associated with that as there is with 
confession of judgment because it is fairly easy to execute on 
that UCC process.
    Other than that, you really have the same remedies once you 
obtain the judgment through the ordinary course of litigation 
that you would after a confession of judgment. You are just 
given the opportunity to contest the matter beforehand. So once 
you obtain a judgment you can do a lot of really all the same 
things. You can have a writ of execution issued to obtain 
access to a bank account, seize assets, so on and so forth.
    Mr. GOLDEN. So in other words, for those lenders and people 
that actually want to help small business owners while also 
having some protections for themselves, there are other means 
that are not as bad and potentially ripe for abuse than this?
    Mr. PICKER. There are, although I would say they are 
certainly not as expedient, and certainly, likely to be much 
more expensive to the lender. But yes, they exist.
    Mr. GOLDEN. Well, thank you. I mean, clearly this has been 
very expensive to Mr. Bush and his small business and family.
    Thank you, Madam Chair.
    Chairwoman VELAZQUEZ. The gentleman yields back.
    And we are going to go into a second round. I just need to 
ask two questions and then we will recognize the Ranking 
Member.
    Mr. Picker, the terms of many merchant cash advance 
agreements require daily repayment. That means one missed daily 
payment can result in default, thereby triggering the 
confession of judgment clause. Does this not potentially set up 
for eventual default the many small businesses in our economy 
with less steady or predictable cash flow?
    Mr. PICKER. I cannot say that I am an expert on the small 
business loan or MCA industry, but having a provision that 
requires daily repayment certainly increases the risk of 
default. If you miss just one payment on a daily basis, that is 
certainly a danger.
    Chairwoman VELAZQUEZ. Thank you.
    Mr. Heskin, do you have an estimate of how much small 
business capital has been lost nationwide as a result of these 
confessions of judgment? If not, can you give an estimate of 
how much money your clients have lost?
    Mr. HESKIN. I cannot give an estimate nationwide, but I can 
give an estimate as to my clients. When these COJs are entered 
against them, they lose everything. They risk their home, their 
family, their retirement funds. When they get trapped in the 
cycle of debt, by the time they come to me there is no money to 
even hire an attorney.
    Chairwoman VELAZQUEZ. Thank you.
    I now recognize the Ranking Member.
    Mr. CHABOT. Thank you, Madam Chair. I will not take the 
full 5 minutes.
    I just had a question. And I guess this is kind of for our 
staff as well, not necessarily for the panelists here, unless 
they would know what I am going to ask offhand. And that is 
that I would be interested to know just how common confessions 
of judgment are in the commercial world nowadays, particularly 
with respect to small business? In other words, how many are 
there out there nationwide in a typical year's time? Do you 
know, Mr. Heskin?
    Mr. HESKIN. I can answer it this way.
    Mr. CHABOT. Okay.
    Mr. HESKIN. Our firm represents big businesses. They 
represent real estate transactions and legitimate transactions, 
legitimate commercial transactions involving millions of 
dollars where there is sophisticated business attorneys on the 
other side. Big dollar money. It is used all the time and it is 
used effectively. But it is when you do not have the 
representation of counsel, when you do not have the bargaining 
power, you do not have the ability to negotiate, that is where 
it gets abused.
    Mr. CHABOT. Okay. Thank you.
    Professor, did you----
    Mr. HARVEY. Thank you, yes. I think this would be a great 
opportunity for the Congressional Research Service to get 
involved in further research in this space.
    The truth is that for the Bloomberg study, for example, you 
have to go do research at the county level. You have to do 
ground level research in many cases for this data. And so that 
is simply too exhausting and expensive for any, let's say, 
academics or other interested parties to do certainly 
nationwide. It would take a massive amount of resources to go 
to each county courthouse, run through all the records and 
evaluate them, and so I think that is one reason why we cannot 
speak with any certainty about the scope of the problem.
    Mr. CHABOT. Okay. Well, the reason for asking the question 
is that, you know, how many are there out there? How common is 
it? What are the benefits of it? In other words, I think this 
is probably done not just to rip off small businesses or the 
public. I am assuming that there is a positive aspect to this 
out there that has enabled this practice to go for quite some 
time since the 1400s I think we heard or something like that. 
And how common to the extent I am talking percentage-wise, are 
we talking 1 percent of these? Are we talking 10 percent of 
these? Are we talking 0.something percentage of these that 
really ultimately do end up in something that is very 
detrimental to a person like Mr. Bush here. And in how many of 
them is it a situation where this business literally would not 
have been able to get the loan to continue or to expand or grow 
or whatever and so they actually serve a purpose? And I do not 
know, I mean, we certainly know that Mr. Bush is evidence of 
that, that somebody can really be hurt by this. What is the 
benefit of these things? And then is there a reasonable way 
that we can modify this, either that the states educate 
themselves more and do it at the state level or we decide at 
the Federal level that we need to take this over for whatever 
reason. So that is really what I am asking. And I do not know 
if I necessarily want--well, I guess I do.
    Mr. Heskin, go ahead. Sure, go ahead.
    Mr. HESKIN. I think it is less than 1 percent. If I had to 
estimate it, I think it is less than 1 percent of the 
transactions. And where it would be useful if at all is in the 
context where someone has actually already defaulted and they 
are giving separate consideration. So I have already breached 
the contract and I have got a judgment against you already and 
I say I am going to forebear on my enforcement activities. And 
if I do, I am going to be able to enter this COJ and exercise 
my rights. That is Overmeyer.
    Mr. CHABOT. Thank you.
    Mr. Picker, would you want to comment on that or----
    Mr. PICKER. I would agree it is probably less than 1 
percent. But that being said, in my practice----
    Mr. CHABOT. Just to be clear, are we saying the 1 percent 
is where it has been abused and it is a problem or are we 
saying in the number of commercial transactions that we have a 
confession of judgment?
    Mr. PICKER. No, the number of commercial transactions where 
I see confessions of judgment being utilized. Although I must 
say I do use them. We represent a lot of commercial landlords 
and we do generally use confession of judgment in those 
contexts without abuse. And I would agree though that certainly 
a situation where a, for instance, a tenant has defaulted or 
someone under a promissory note has defaulted already and as 
part of a forbearance agreement, if there is not a confession 
of judgment already, I think it is an appropriate use of one in 
that situation because you are helping them out and you should 
have a little bit more security if they do default again under 
the forbearance.
    Mr. CHABOT. Thank you.
    Mr. Bush, I think you were trying to get something in there 
a minute ago. I do not want to----
    Mr. BUSH. That is fine. I was going to say something real 
quick.
    Mr. CHABOT. Sure.
    Mr. BUSH. As far as the contractors, we have to have a 
license. We take classes, stuff like that. I think these loan 
companies or funding companies ought to be able to turn around 
and have certain types of classes, certain rules, or certain, 
you know, things they do, because these companies are growing 
like crazy. I average 20 calls a day from different companies 
trying to fund me after we have already been closed for a year.
    Mr. CHABOT. Yeah. Thank you. Thank you very much.
    Madam Chair, I said I was not going to take up the 5 
minutes and I took 5-1/2 minutes. I apologize and yield back.
    Chairwoman VELAZQUEZ. The gentleman's time has expired.
    And now we recognize the gentleman from Maine, Mr. Golden. 
Do you have any other questions?
    Mr. GOLDEN. Sorry. I thought Dr. Joyce was up.
    Just a couple of quick ones, too.
    Mr. Heskin, you have seen a lot of this. Obviously, you 
fought these in court on numerous occasions. Can you tell us 
just a little bit more just to help us see the bigger picture, 
how MCAs are marketing to small business owners? What is their 
point of contact? Are they using salespeople? Are they working 
with other people? Are they on the internet? You know, how are 
they finding small business owners to sell their product to and 
under what context?
    Mr. HESKIN. All of the above. They use third-party brokers, 
which are called ISOs, independent sales offices. And you do 
not need a license. You do not need any financial experience. 
In fact, in my experience, many of the people that are doing 
this have absolutely no financial experience whatsoever. They 
call you up. They say, I am a small business expert. Take these 
funds. It is going to help grow your business. They fund you 
and the next thing you know they ghost you. You are gone. And 
they collect a 10 percent premium on the money they fund you. 
And then what happens is after--and this is how they get the 
leads is UCCs. Once they see that one MCA company has issued a 
loan to them, they can go and find through a UCC search who is 
in need of money, and so they cold call them. And my clients 
get calls 50 times a day. It is nonstop. It is emails. It is 
cold calls. They even cold called my clients after I have sued 
them offering to give them more money, saying you have been 
such a great client, take out more money. And meanwhile, I am 
in lawsuits with them. It is crazy.
    Mr. GOLDEN. And they are calling people who are under a lot 
of financial stress, obviously, so.
    Mr. HESKIN. Absolutely.
    Mr. GOLDEN. Last question and then I am done.
    Mr. Harvey, merchant cash advance companies are marketing 
products as business loans. I am not aware of any bank that can 
make a loan that has a 400 percent interest rate. Other than 
limiting confessions of judgment and these kinds of commercial 
transactions, should Congress be looking at regulating the 
conduct of MCAs in general, and should there be some kind of 
rules around interest rates and what they are able to sell?
    Mr. HARVEY. Well, as you know, there are substantial 
barriers to regulating interest rates at this level. 
Nonetheless, I think there is good evidence that businesses in 
states that have unlimited more or less interest rates are 
allowed to port those rates into other states that do not have 
them, exacerbating this problem. That is certainly true. I 
think Merchant Cash Advance (or "MCA") companies can be 
regulated as quasi-financial institutions in certain ways that 
we regulate large national banks. And I certainly think that 
one effective way to do so is more transparency. You know, I 
think part of what is happening here is that people are 
learning that one MCA company might have 12 different DBAs, and 
shining a light on who they are would certainly help consumers 
be more aware of what they are doing. Thank you.
    Mr. GOLDEN. Thank you. I yield back.
    Chairwoman VELAZQUEZ. The gentleman yields back.
    And now we recognize Dr. Joyce of Pennsylvania 13, Ranking 
Member of the Subcommittee on Rural Development, Agriculture, 
Entrepreneurship, and Trade for 5 minutes.
    Mr. JOYCE. Thank you, Madam Chairwoman. And thank you, 
Ranking Member Steven Chabot.
    First of all, I am proud to see Pennsylvania so represented 
here on this hearing today, and I know that our insights are 
important.
    Mr. Picker, I would like to address these questions with 
you if I may, please. Does the Federal Trade Commission 
currently have any tools to police some of these incredibly 
unfair and deceptive acts and practices?
    Mr. PICKER. Unfortunately, that is not within the area of 
my expertise. Perhaps, Mr. Harvey could speak better to that.
    Mr. JOYCE. Mr. Harvey, would you please comment?
    Mr. HARVEY. I would say that the short answer is very 
limited tools.
    Mr. JOYCE. Okay. And for all of you to please answer, you 
have mentioned that some of the states have instituted 
safeguards that the guardrails to protect against the bad 
actors are in place. How effective have these safeguards been?
    Mr. Harvey, I will ask you to answer first, please.
    Mr. HARVEY. Thank you. I think the short answer there is we 
do not fully know because so much research has not been done. 
We can say that when the Bloomberg article came out we paid 
more attention to New York because that was one of the few 
times which we had ample evidence and a deep dive into 
research. I would suggest that by default all guardrails are 
somewhat designed to be useful safeguards. And so as states 
have more guardrails, you would expect to see confessions of 
judgment being abused less, but I do not think we can be 
certain. I think it is an area in which we need more research 
to be certain.
    Mr. JOYCE. So implementing additional guardrails might not 
solve the problem without researching or studying further?
    Mr. HARVEY. I think it would be fair to say that we do know 
that some things reduce transactional error. We know that fully 
reading and acknowledging agreements makes it more likely that 
consumers and businesses will pay more attention and make 
better choices. I think forcing bigger disclosure calls more 
attention to terms. I think those things always work to some 
degree and they would work here as well. But I also think it is 
true that we do not have a science for proving how effectively 
it would work in this case and so, yes, more research is 
definitely needed.
    Mr. JOYCE. Mr. Bush, in your experience, would you like to 
comment on that on additional safeguards? And in the states 
that have implemented them, do you see impact?
    Mr. BUSH. I will see impact if we had more guards but I 
guess the big thing to do right now is just more education as 
far as, you know, let everybody know, say, hey, you know, these 
loans are out here. Double check. Not all funding companies are 
bad but just more education to watch out for the ones that are.
    Mr. JOYCE. So is my take-home message to this Committee 
hearing today that there are not all bad actors; that education 
might be a bigger role than I came in here understanding?
    Mr. Bush?
    Mr. BUSH. Well, what I am saying is, I am not saying that 
all funding companies are bad. What I am saying is that we need 
certain more education. And this is just for my part.
    Mr. JOYCE. Right.
    Mr. BUSH. As far as being a contractor or a person who 
takes these loans is, you know, more education as far as, you 
know, let people know that if you do have a judgment, you know, 
they can do more. Do not go by what the broker says. You know, 
you cannot go by exactly what he or she says.
    Mr. JOYCE. I understand.
    Mr. Heskin, would you like to weigh in on this, please?
    Mr. HESKIN. Sure. States do put in safeguards. They ban 
COJs. But there is one problem, the full faith and credit 
clause. They can enter a judgment in New York even though it is 
illegal to do it. It is void the minute the ink hits the paper 
in Massachusetts. It does not matter. They get the judgment in 
New York. They can domesticate it to Massachusetts. And even 
though it is against, abhorrent to their strong public policy, 
they have to honor it. So there are safeguards. States do not 
want these but they are forced upon.
    Mr. JOYCE. Mr. Picker, would you like to weigh in on these 
safeguards?
    Mr. PICKER. Yes. And just to clarify, the reason that they 
can go ahead and file in New York where everybody is in 
Massachusetts is these contracts oftentimes will have a choice 
of venue or jurisdiction provision which allows them to do 
that.
    That being said, I do not know that I agree or disagree 
with Mr. Heskin's full faith and credit position there. Many 
states have statutes, or courts have held, that confessions are 
against public policy. And I do believe that where a judgment 
such as confession of judgment would be against the public 
policy of the state where it is being transferred to, and maybe 
Mr. Harvey can speak better to that, I do believe that they do 
have an option to not recognize that judgment.
    Mr. JOYCE. Mr. Harvey, would you like to weigh in on that?
    Mr. HARVEY. Yes, briefly. I think the Civil Procedure issue 
is alive and well and states have not agreed.
    I also would like to add one final thing if I may. I 
recognize that it has been hotly disputed but the CFPB's 
Consumer Complaint Database did shed a lot of light on consumer 
practices. There could in theory be a large database of 
complaints by business that had experience with large MCAs 
companies. That transparency might help to reduce bad actors in 
that industry as well.
    Mr. JOYCE. Gentlemen, thank you. Thank you for traveling 
here from Pennsylvania.
    Madam Chair, I yield.
    Chairwoman VELAZQUEZ. The gentleman yields back.
    Well, let me take this opportunity to thank all of you for 
being here today and shedding light into an issue that I 
believe the federal government should play a role to make sure 
that businesses, particularly small businesses, are protected. 
And it means that we have a lot of work to do. I am pleased 
this committee took the time to shine much-needed light on this 
practice, especially as Congress looks to act quickly to 
prohibit confessions of judgment and extend protections to 
small business owners in commercial transactions.
    I will ask unanimous consent that members have 5 
legislative days to submit statements and supporting materials 
for the record.
    Without objection, so ordered.
    And if there is no further business to come before the 
committee, we are adjourned. Thank you.
    [Whereupon, at 12:49 p.m., the committee was adjourned.]
                           
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