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NY AG takes a closer look at merchant cash advance companies

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Confessions of judgment. Frozen bank accounts. Staggering interest rates hitting small businesses… thanks to small business lenders.

News came this week that New York Attorney General Barbara Underwood has opened an investigation into small business loans – specifically, if financial firms known as the merchant cash advance companies have abused their small customers.

Bloomberg reported that the GA investigate whether the cash advance companies have engaged in fraud or abused the New York State court system. This disclosure comes from an anonymous source.

“It is 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, which as the news wire said, did not provide details. “If a business engages in fraudulent and deceptive behavior, we want to know it. “

Among the companies offering liquidity to SMEs named so far, according to the report, is one of the largest cash advance companies, Yellowstone Capital LLC.

The investigation follows reports from Bloomberg in recent weeks that detailed practices in which prompt payment companies allegedly used the court system to “crush” small business customers.

In typical cash advance In practice, lenders give money to these small business borrowers and charge annualized interest rates that can translate into hundreds of percentage points. Bloomberg noted, the high interest rates come as lenders are able to circumvent usury laws – primarily by stating that they are giving cash advances on the company’s future profits.

As stated in a more detailed article Bloomberg article last month, several of these small business lenders helped turn state courts into a “debt collection machine that drains the bank accounts of thousands of small businesses.”

The weapon is known as the “confession of judgment” – and has been used against thousands of companies in New York State courts. These documents require borrowers to waive the right to a court hearing. And without legal proceedings in place, the lender can foreclose borrowers’ assets, including, of course, bank accounts. There have been more than 25,000 judgments obtained in the past six years, the newswire reported, covering 350 lenders, who have made $ 1.5 billion from those judgments.

In at least some cases, many of these lenders have forged documents or used other underhand means to obtain judgments.

On the face of it, Yellowstone and its affiliates, as Bloomberg reports, are among the most notable lenders who have received admissions of judgments that total 25% of that $ 1.5 billion tally.

It comes amid a previous, still pending case that shows New York AG’s focus on small business lending issues. In this case from a few years ago, the state sued a lender, Northern Leasing Systems, which was accused of using New York courts to sue borrowers linked to leases of card processing equipment. credit.

Cash advances from traders remain a relatively weak source of finance for SMEs. As noted in this space earlier in the year, small business use of alternative financing platforms is on the rise. The Federal Reserve has shown that only 7 percent of small businesses that turned to outside sources for financing last year did so through cash advances to merchants.

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