COLUMBUS, Ohio—A bill in the Ohio legislature intended to protect borrowers in a commercial transaction could affect the ability of financial institutions in this state to recoup losses when a deal goes bad, fear some Ohio lenders.
House Bill 291, sponsored by Reps. Ron Young (R-Leroy Twp.) and Jonathan Dever (R-Cincinnati), is designed to alter state law allowing “confession of judgment provisions” clauses — otherwise known as cognovits — that currently are embedded in every commercial loan made in Ohio.
The clauses warn borrowers in bold, all-caps language that if they sign the loan the lender can seize assets through a court judgment “without your prior knowledge” should the borrowing party fail to make timely payments.
Those clauses only apply to commercial loans and are inserted automatically. It’s illegal to insert cognovits into consumer loan contracts today, reported Crain’s Cleveland Business.
HB 291 would not eliminate cognovits entirely, but would add a stipulation requiring that a hearing be held within 30 days of the borrower being notified of the lender’s intent to file a declaratory judgment.
“In the commercial banking area, this would be a big change on the way lenders make judgment on loans,” Steven Shandor, chair of Akron law firm Day Ketterer’s banking law practice group, told the newspaper.
Shandor said the change would drive up legal fees for lenders in addition to drawing out the timeline for an FI to recoup losses. In a scenario involving commercial real estate, for example, it would draw out the timeline of a foreclosure, he explained.
While lenders rarely act on cognovits, which generally are considered a last-ditch effort to recover losses, banks argue this proposed change puts them at a disadvantage, the newspaper said.
But the bill’s primary sponsors argue the change helps protect borrowers by ensuring cognovits are only filed “for legitimate reasons.”
Specifically, the proposed reforms would require a lender to notify a borrower 30 days in advance that they plan to confess judgment, and allow the debtor the opportunity to request a hearing to respond, Crain’s Cleveland Business explained.
It also would ban the use of a cognovit note when a lender alleges non-monetary default, such as a failure to file a report on time—something that’s been upheld by several Ohio Appellate Courts.
Those changes combined create a fairer system that would encourage economic growth and jobs, according to a testimony by Young.
“We think from all angles, it’s a bad idea,” James Thurston, a spokesman for the Ohio Bankers League trade organization, told the newspaper.
Credit unions are taking a more neutral stance.
“We are in the business of protecting credit unions, and our member credit unions who are involved in business lending had concerns over the proposed notification process,” said Patrick Harris, vice president of government affairs at the Ohio Credit Union League, in a statement. “We continue to have discussions with the bill sponsors, with the hope of getting to a place that protects credit unions while allowing them to continue to offer affordable small business lending.”
The bill was introduced last July and is currently in committee. Young said he expects to see it moved out of committee in mid-April or sooner.