Discount mulberry stores in london Outlet Bench card targets lenders’ use of cognovits
A bench card recently issued by the Ohio Judicial Conference takes aim at some of the power cognovit notes give lenders over commercial borrowers in the state by reducing the chance of them being applied in what some have described as a haphazard fashion.
For at least one lawmaker, who has worked to alter laws for cognovit provisions since 2015, it’s a compromise over abolishing them entirely.
That’s something Rep. 67, which was designed to create “fairness” in commercial contract law by targeting cognovit language. Later versions of the bill would instead target specific elements of the corresponding law over an outright outlawing of it, including limiting a cognovit’s use in technical defaults of some loan convenant and giving a borrower up to a 30 day window to request a court hearing to defend themselves.
Young is now dropping the bill in light of what the bench card is expected to accomplish.
Cognovits are automatically injected into commercial loan documents in Ohio, which is one of only a few states to have them. While illegal in consumer loans, they effectively allow a creditor to obtain judgment against a commercial borrower without legal proceedings or the presentation of evidence in situations where lenders are facing nonpayment of a loan.
When that happens, a lender calling on debt to be repaid immediately can seize property or freeze accounts without prior warning to the debtor because they’ve already waived their right to defend themselves in court by signing a document with a cognovit clause in it.
But Young said the lenders were using the power cognovits provide to do that even in cases when borrowers weren’t behind on their bills.
“We did, at one point, call for the abolishment of cognovits. We would’ve liked that,” Young said, noting states like Indiana don’t use them at all. “But what was really glaring was how the law wasn’t being followed as written.”
Young described a scenario in which a lender provides a loan to a car dealer, whose loan terms were based on collateral of so many vehicles. The lender happens to drive by the lot, notices inventory is a fraction of what was claimed, and then uses the cognovit power to seize whatever assets are left even if the borrower isn’t behind on payments on the grounds that a term of the contract was violated. While that may be legally allowed, opponents of cognovits say that’s unfair to borrowers.
Courts were “rubber stamping” judgments like this, said Young, who has described such situations as a violation not of the law, but of the “American way.” Bankers don’t believe that is happening as much as Young seems to indicate, though.
“For every constituent that has come to (Young) to claim they were mistreated by a bank, there will be hundreds more who got better terms on loans because the clause was there because it lowers the risk for the bank,” said James Thurston, spokesman for the Ohio Bankers League industry trade group. “Banks are risk managers. And this is a risk management tool.”
While a bench card does nothing to change the law itself, it provides guidance to courts in Ohio’s 88 counties with the intent of making sure they’re not used for what Young has described as minor technical violations in a borrower’s contract like in the issue with the car dealer.
The bench card really just helps ensure the law is followed, which shifts just a little protection to borrowers by putting some more onus on the courts and lenders, said Steven Shandor, chair of Day Ketterer’s banking law practice group.
“And I agree with that,” he said. “But it doesn’t really change anything. They assert that cognovit judgments are infrequent and having the clauses in contracts actually results in better loan terms though that’s difficult for anyone to clearly and quantifiably prove because of the mitigation of some risk.
“The judicial conference is promoting this judicial card, which is their interpretation of the statute. We don’t agree with it,” said Jeff Quayle, senior vice president of the OBL. “Our position remains the same that we believe that these clauses are rarely used, but they’re in there to protect the lender from theft and bad actors, and we will continue to assert our rights under those provisions in the rare and unusual circumstances that they are needed.”
Other stakeholders have been split on the cognovit debate. 67, arguing it would negatively impact financial institutions and would ultimately “do more harm than good.”
Being merely guidance on how to interpret the law, the bench card is not legally binding. However, it should, in theory, prevent any supposed improper use of cognovit power by lenders.
“I’m ready to move on to other things unless my constituents come to me and say this is still a big problem and they have a valid rationale,” Young said. “Our legislation highlighted the confusion that was throughout the state on this issue, and our search for justice has been satisfied with that bench card.”