Like so many things in life, if used well, lawfully, it made perfect sense. But if used malevolently, it was an easily abused bludgeon. It only depended on two variables, the integrity of the lender and the integrity of the borrower. It’s called a “confession of judgment.”
The lenders’ weapon of choice is an arcane legal document called a confession of judgment. Before borrowers get a loan, they have to sign a statement giving up their right to defend themselves if the lender takes them to court. It’s like an arbitration agreement, except the borrower always loses.
There are high risk borrowers, people who either may not be entirely inclined to repay loans or, for legitimate reasons, just can’t pay. They need money to run their business, pay for medical care or college, buy a car to get to work, but their credit is poor and no bank will give them a shake. What to do?
Then an opportunity with some lender offering loans to anyone, to you, comes along. The interest rates are high, usually usurious depending on how they spin it, but it’s money. You’re not going to get money from anywhere else, and you need it, so there’s no other game in town. You agree, sign the docs and, boom, there’s money in the back. One of those docs is captioned “confession of judgment.”
Armed with a confession, a lender can, without proof, accuse borrowers of not paying and legally seize their assets before they know what’s happened. Not surprisingly, some lenders have abused this power. 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.
A confession of judgment is nothing new, having been in use from the English common law forward. There are reasons for it, good reasons. It avoids the expense of a collection suit, which would increase the cost to the lender and make it less beneficial to give a high-risk loan. It avoids the problem of borrowers in the wind, the ones who take the money and disappear, such that they can’t be served with suit because no one knows where they are. Hard as it is to imagine, some borrowers aren’t particularly honest about their intention to repay a loan, and others, even with good intentions, tend to prefer not to face the consequences of their circumstances.
The mechanism is easy: file the confession of judgment along with an affidavit of default and you get a judgment against the borrowers, which can then be used to attach and seize assets. While the attach and seize part remains a problem, as many borrowers have nothing to attach or seize, and you can’t get blood from a rock, at least there will be a judgment on file in case they ever manage to accumulate assets.
But the mechanism is also too easily abused.
The man identified himself as a debt counselor. He described a bizarre legal proceeding that he said was targeting Duncan without her knowledge. A lender called ABC had filed a court judgment against her in the state of New York and was planning to seize her possessions. “I’m not sure if they already froze your bank accounts, but they are RIGHT NOW moving to do just that,” he’d written in an email earlier that day. He described the lender as “EXTREMLY AGGRESSIVE.” Her only hope, the man said, was to pull all her money out of the bank immediately.
His story sounded fishy to the Duncans. They had borrowed $36,762 from a company called ABC Merchant Solutions LLC, but as far as they knew they were paying the money back on schedule. Doug dialed his contact there and was assured all was well. They checked with a lawyer; he was skeptical, too. What kind of legal system would allow all that to happen 1,000 miles away without notice or a hearing? They shrugged off the warning as a scam.
It wasn’t a scam, and they were actually fortunate to have even this bit of belated and odd notice.
The following Monday, Doug logged in at the office to discover he no longer had access to his bank accounts. A few days on, $52,886.93 disappeared from one of them. The loss set off a chain of events that culminated a month later in financial ruin.
Before you shed a tear, consider how and why the Duncans found themselves in this situation.
The Duncans’ ordeal began in November 2017 with an unsolicited fax from a broker promising term loans of as much as $1 million at a cheap rate. The couple had owned their agency, a Re/Max franchise, for three years and now had 50 employees, but they still weren’t turning a profit. A planned entry into the mortgage business was proving more expensive than expected. Doing some quick math, Doug figured he could borrow $800,000 to fund the expansion, pay off some debt, and come out with a lower monthly payment. The spam fax felt like a gift from God.
We all get spam faxes offering loans, and most of us wonder who would be so foolish as to respond to them. That would be the Duncans. Why didn’t they go to a bank? Why were they in a position where they needed a large cash infusion, particularly since their business wasn’t profitable? There’s nothing wrong with having a real estate agency, or even trying to expand into the (ironically) mortgage business, but there’s a point where it’s improvident to throw good money after bad. That point is when you get your loan from spam faxes.
The lender here was bad in every respect, usurious rates and filing the confession of judgment despite the Duncans not being in default. By filing a false affidavit of default, they were committing a crime, as they were by collecting interest above that legally permitted.
Assuming one isn’t bothered by engaging in crime, it’s an easy trick to pull off and, given the impoverished state of the victim, hard for the borrower to address without the ability to retain counsel. Sure, they could go to the District Attorney about the false filing in court, but many don’t think to do it and it doesn’t put the stolen money back in their bank account.
On the one hand, without a confession of judgment, there would be few legitimate lenders willing to make high-risk loans to people who can’t qualify for bank loans, so there may be no possibility for a risky business to get the money it needs to survive. On the other hand, confessions of judgment are like handing the key to your front door to a burglar, if the lender is dishonest and inclined to abuse the law.
To complain that the fault is the confession of judgment is easy, provided the story you hear is the Duncan’s and not the business that stole from them. Then again, the alternative would have been Jim Duncan getting no “gift from God” at all. And as a general rule, if a lender’s business model is to spam fax you their offer, maybe there’s a reason.