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Survey targets lenders offering quick cash to small businesses

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The New York state attorney general has opened an investigation into potential abuses by financial companies that offer quick cash to small businesses across the country, according to a person familiar with the investigation.

Atty. General Barbara Underwood’s office is investigating whether merchant cash advance companies have engaged in fraud or abused the state’s justice system, said the person, who requested anonymity. Last week, the office subpoenaed one of the largest cash advance companies, Yellowstone Capital LLC, the person said.

“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 which did not provide any information. details. “If a business engages in fraudulent and deceptive behavior, we want to know it. “

A spokesperson for Yellowstone, based in Jersey City, NJ, did not immediately comment.

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

The civil investigation is still in its infancy and cannot lead to any execution measure. The person familiar with the matter said other companies are likely to come under scrutiny.

Entrepreneurs, truckers and other business owners across the country are bombarded with offers from cash advance companies. These lenders charge interest rates that can exceed 400% annualized, more than some Mafia loan sharks when billed. They circumvent state usury laws by asserting that cash advances on future business revenues are not loans – a distinction judges have generally recognized.

In recent years, a group of these companies have turned New York City courts into a debt collection machine that drains the bank accounts of thousands of small businesses. Lenders require customers to sign an obscure legal document called an admission of judgment in which they waive their right to defend themselves in court. Armed with one, a lender can accuse borrowers of failing to pay and legally seize their assets before they know what has happened.

Some states have banned these confessions, but New York recognizes them regardless of the borrower’s location. Since 2012, cash advance companies have obtained more than 25,000 judgments in New York City with an estimated value of $ 1.5 billion, according to data from more than 350 lenders compiled by Bloomberg. In interviews and in court papers, borrowers across the country describe lenders forging documents, lying about how much they were owed, or fabricating defaults out of thin air.

Yellowstone and its subsidiaries are the biggest users of the admissions industry, responsible for about 25% of the total, according to the data.

The New York attorney general investigated another alleged abuse of the justice system a few years ago. In 2016, the state sued Northern Leasing Systems Inc., alleging it had tricked small businesses into endless leases for overpriced credit card processing machines. State attorneys said the company was using New York City courts to prosecute out-of-state borrowers who could not defend themselves. Northern Leasing has denied the allegations and the case is pending.

Faux and Mider write for Bloomberg.