The Ohio General Assembly is currently considering a bill that would greatly restrict creditors’ ability to ask debtors to sign cognovit notes. A cognovit note allows a creditor, upon a debtor’s default, to enter judgment against the debtor without the usual notice or hearing.
Current Ohio law, specifically Ohio Revised Code Section 2323.13, generally enforces cognovit notes, but Ohio courts will not enter judgment on a cognovit note unless the note contains specific disclaimer language clearly and conspicuously visible, warning the debtor that signing the cognovit note surrenders the debtor’s rights to notice and a court trial upon default.1 Additionally, cognovit notes are banned entirely in consumer transactions.2
H.B. 291 proposes to amend R.C. Section 2323.13 to totally ban the enforcement of cognovit notes, except in the case of nonpayment of principal and interest on a debt.3 Moreover, the use of cognovit notes under such circumstances would require the creditor to provide written notice to the debtor at his last known address at least 30 days prior to the entry of judgment.4The debtor would then have 30 days to request, in writing, a hearing to determine whether the debtor committed the alleged default.5 Both parties would be allowed to call witnesses and offer evidence in accordance with the Rules of Evidence.6 Following the hearing, if the court determined that the creditor did not demonstrate a default by the debtor, the court would be required to deny the petition for judgment by confession.7
H.B. 291 would also amend the warning language required for a cognovit note to remain enforceable. The bill’s language would remove the warning that signing the note would result in the debtor giving up her right to notice; instead, the language would include the following:
You will be sent a notice by certified mail, return receipt requested, at your last known address at least thirty days prior to the entry of a judgment. You will have thirty days following receipt of the notice to request a court hearing to determine whether you have defaulted in the payment of principal and interest.8
The bill’s primary sponsors, Ohio Representative Ron Young and Jonathan Dever, argue that HB 291 “will promote fairness in commercial contract law” since the current law “leaves a debtor with little or no recourse, even when the lender is at fault.”9 Young and Dever contend that “the same problems that lead to banning [cognovit clauses] in consumer loans exist in commercial contracts,” and note with approval that neighboring state Indiana makes the use of cognovit loans a criminal offense in both consumer and commercial loans. Young and Dever add that several Ohio Appellate Courts have held that a cognovit note cannot be used for non-monetary default; thus, HB 291 will create uniformity and statutory certainty across the state.
Response from the banking community has been strongly negative. The OBL argues further that the additional 30 day notice period would serve only to provide a defaulting debtor the opportunity to “hide and shift” assets in order to frustrate collection of the debt. The Community Bankers Association of Ohio (CBAO) opposes HB 291, arguing that cognovit clauses are already sufficiently conspicuous that borrowers are made fully aware of the rights they waive by signing.10 The Ohio Bankers League (OBL) argues that cognovit notes are “useful tools used by a financial institution to reduce their risk in commercial lending – a very risky venture at times.”11 According to the OBL, HB 291’s restrictions on cognovit notes will lead to “tighter lending standards and less credit availability as depositor funds will be more at risk.” The increased risk and potential for more litigation would drive up costs, which would be passed on to all customers, not just those that default on their commercial loans. The Ohio Credit Union League opposes HB 291 as well, recognizing Ohio credit unions’ expanding role in commercial lending and cognovit notes’ role in limiting the associated risk.12