The news website Bloomberg Newsweek is blowing the whistle on predatory lenders it says have nailed thousands of contractors, florists, and other small-business owners nationwide with an obscure legal document known as a “confession of judgment.”

To get a loan, borrowers have to sign a statement giving up their right to defend themselves if the lender takes them to court, according to Bloomberg.  That allows a lender to accuse borrowers of not paying and legally seize their assets before they know what’s happened.

“Not surprisingly, some lenders have abused this power,” the investigative article states. “In dozens of interviews and court pleadings, borrowers describe lenders who’ve forged documents, lied about how much they were owed, or fabricated defaults out of thin air.”

Confessions of judgment are banned under federal law and some U.S. states. They are viewed with ‘judicial distaste’ in New Jersey, but are not banned. In any event, if a confession of judgment is entered into in another state by a New Jersey borrower, it may be enforced under the Full Faith and Credit Clause of the U.S. Constitution.

Bloomberg says New York’s courts are especially friendly to confessions and will accept them from anywhere, so lenders require customers to sign documents allowing them to file there.

“That’s turned the state into the industry’s collections department,” Bloomberg states. “Cash-advance companies have secured more than 25,000 judgments in New York since 2012, mostly in the past two years, according to data on more than 350 lenders compiled by Bloomberg Businessweek.”

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