How Predatory Lenders Are Using a New York Loophole to Seize Borrowers' Assets

For small businesses like bodegas or plumbing companies, so-called "merchant cash advances" can be a crucial way to get money when a bank deems them too small to receive a loan. 

But a new report from Bloomberg Businessweek found that predatory lenders often use an arcane legal document, called a confession of judgment, that forces small-time borrowers to forfeit their right to defend themselves if the lender decides to sue.

"It's a little bit like pleading guilty in a criminal case, but this is a civil case where you just owe money," explains Bloomberg's Zach Mider, who co-wrote the story. "Borrowers, who borrow from these lenders, are required to sign one prior to any legal dispute. So, if at any point later on the lender decides to take action against the small business owner ... they can go to court and essentially win by default."

The main practitioner of this is David Glass, the former stock market scammer who inspired the Vin Diesel movie, Boiler Room. "While he was still on probation from a federal case, [Glass] founded Yellowstone with a friend of his," Mider said.

And these lenders have determined that the New York state court system has an ideal loophole for abusing confessions of judgment.

"They typically go to upstate county clerk’s offices, where people are sitting there rubber stamping these judgments, no judge involved," Mider explained. "And once they’re entered, they’re almost impossible to overturn. It allows the lender to go into the bank account of the borrower and seize their assets without any notice."

Mider spoke with WNYC's Richard Hake.