New York Said to Open Investigation into Potential Small-Business Lending Abuse

By and Zachary Mider | December 7, 2018

New York’s attorney general has opened an investigation into potential abuses by finance firms that offer quick money to small businesses nationwide, according to a person familiar with the probe.

Attorney General Barbara Underwood’s office is looking into whether merchant cash-advance companies engaged in fraud or abused the state court system, said the person, who spoke on the condition of anonymity. Last week the office subpoenaed one of the largest cash-advance companies, Yellowstone Capital LLC, the person said.

“It’s reprehensible to defraud, deceive and harass small-business owners through predatory debt-collection practices and the abuse of our court system,” Underwood said in a statement to Bloomberg News that didn’t provide details. “If a company is engaging in fraudulent and deceptive conduct, we want to know.”

A spokesman for Yellowstone, based in Jersey City, New Jersey, had no immediate comment.

Although Underwood’s office has been monitoring the cash-advance business for some time, it opened a formal investigation last month after Bloomberg News published articles about the industry’s use of the courts to squeeze small-business borrowers, according to the person.

The civil probe is in its early stages and may not lead to any enforcement action. The person familiar with the matter said additional companies are likely to face scrutiny.

Contractors, truckers and other business owners across the country are being bombarded with offers from cash-advance companies. These lenders charge interest rates that can exceed 400 percent annualized, more than some mafia loan sharks once charged. They get around state usury laws by saying cash advances against future business receipts aren’t loans, a distinction judges have generally recognized.

Over the past few years, a group of these firms have turned New York courts into a debt-collection machine that’s draining the bank accounts of thousands of small businesses. The lenders require customers to sign an obscure legal document called a confession of judgment in which they forfeit their right to defend themselves in court. Armed with one, a lender can accuse borrowers of not paying and legally seize their assets before they know what’s happened.

Some states have outlawed these confessions, but New York recognizes them no matter where the borrower is located. Since 2012, cash-advance companies have obtained more than 25,000 judgments in New York worth an estimated $1.5 billion, according to data on more than 350 lenders compiled by Bloomberg. In interviews and court filings, borrowers across the country describe lenders who’ve forged documents, lied about how much they were owed or fabricated defaults out of thin air.

Yellowstone and its affiliates are the industry’s biggest users of confessions of judgment, responsible for about 25 percent of the total, the data show.

New York’s attorney general investigated another alleged abuse of the court system a few years ago. In 2016, the state sued Northern Leasing Systems Inc., alleging that it trapped small businesses in never-ending leases for overpriced credit-card processing machines. Lawyers for the state said the company was using New York City courts to go after out-of-state borrowers who couldn’t defend themselves. Northern Leasing has denied the allegations, and the case is pending.


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