It appears Yellowstone Capital, a Merchant Cash Advance (MCA) company has garnered a lot of attention from the State of New Jersey.
The State has filed a lawsuit against Yellowstone Capital LLC, its parent company Fundry.US LLC, and six other associated companies, alleging the merchant cash advance (“MCA”) providers targeted small businesses with predatory lending and abusive collection tactics that caused financial harm to small businesses and their owners across the United States.
The suit was filed in Superior Court in Hudson County by the Attorney General and Acting Director of the Division of Consumer Affairs Paul R. Rodríguez, the State’s complaint alleges that the defendants, which also include Yellowstone’s subsidiaries High Speed Capital LLC, World Global Capital LLC d/b/a YES Funding, HFH Merchant Services LLC, Green Capital Funding LLC, and MCA Recovery LLC, and Yellowstone’s affiliate, Max Recovery Group LLC (collectively with Yellowstone Capital LLC, the “Yellowstone Defendants”), acted in concert to cheat financially-strapped small businesses and their owners out of millions of dollars nationwide by luring them into predatory loans disguised as cash advances on future receivables with interest rates far exceeding the interest rate caps in the State’s usury laws.
The Yellowstone Defendants then doubled down on their abuse of merchants through numerous unconscionable, deceptive, and fraudulent servicing and collection practices that drove these small businesses and their owners into financial distress and often default, according to the complaint.
“We are taking action today to protect our State’s small businesses and small business owners from predatory practices in the market for merchant cash advances,” said Attorney General Grewal. “Local businesses are struggling due to the COVID-19 pandemic, especially since many were unable to take advantage of the limited relief made available by the federal government through the Paycheck Protection Program. We will not tolerate – now or ever – efforts to take advantage of them through predatory lending and collection practices.”
The State’s complaint against the Yellowstone Defendants asserts violations of the New Jersey Consumer Fraud Act (“CFA”) and the General Advertising Regulations.
The State seeks to permanently enjoin the Yellowstone Defendants from advertising, offering for sale, or selling MCAs and debt collection services in violation of New Jersey law, the maximum statutory civil penalties under the CFA, restitution for affected consumers, disgorgement of ill-gotten gains, and additional relief.
Yellowstone is part of a growing industry that provides cash advances to small businesses and their owners in need of capital. Proponents of the industry say these MCA companies fill a void created when bank lending to small businesses dried up in the wake of the 2008 financial crisis.
But several MCA companies have generated complaints from small business owners alleging predatory and abusive practices in an industry that operates without the same constraints that apply to other lenders. The Federal Trade Commission also has sued Yellowstone and Fundry, and the New Jersey Bureau of Securities has taken action against another MCA company—Complete Business Solutions Group, Inc., which does business as PAR Funding—for funding its cash advances through the sale of unregistered securities.
From 2012 to 2018, MCA companies collected more than $1.5 billion in judgments against consumers nationwide who allegedly breached the terms of their merchant agreements. Yellowstone was responsible for 25% of those filings, making it the biggest filer by far in the MCA industry—an industry that stands to grow substantially as a result of the COVID-19 pandemic.
Following an investigation by the Division, the State’s complaint alleges that the Yellowstone Defendants engaged in deceptive and unconscionable practices including:
- Luring consumers – often struggling, unsophisticated small businesses and their owners – into entering merchant agreements, through deceptive practices, including by describing its MCA repayment terms as flexible, “not fixed,” and “calculated as a set percentage of your sales,” when, in reality, the merchant agreements obligated consumers to pay a fixed amount subject to interest, over a defined period, not tethered to the consumers’ receivables;
- Advertising that they required “No Personal Guarantee,” while actually requiring consumers to provide personal guarantees, allowing the company to seize the personal assets of small business owners;
- Failing to adjust merchants’ daily payments when their receivables declined;
- Requiring merchants to sign an unconscionable Affidavit of Confession of Judgment (“COJ”), thereby waiving their procedural rights and consenting to the entry of judgment against them without notice or a hearing;
- Filing COJs and obtaining judgments against consumers that, in many cases, did not default or otherwise breach the merchant agreements;
- Failing to disclose the amount of all fees;
- Charging interest rates in excess of those allowed by law;
- Structuring their MCAs to be just as secure as, and to operate as, traditional fixed-payment, finite-term loans, but without the statutory interest protections afforded to borrowers of those loans;
- Making unauthorized withdrawals from consumers’ accounts even after the consumers had made all required payments pursuant to the merchant agreement; and
- Making aggressive and harassing collection calls.
The lawsuit against the Yellowstone Defendants reflects the Division’s ongoing efforts, under Attorney General Grewal’s leadership, to protect consumers from predatory lending and other unconscionable practices in the markets for consumer financial products and services.
Those protections are especially important against a bleak economic backdrop as the COVID-19 emergency enters its ninth month.
“Consumers everywhere are facing serious financial hardships as a result of the pandemic, and times are particularly tough for small business owners who have suffered severe losses in revenue. As consumers are increasingly forced to turn to lenders for help, we must ensure they are protected from predatory and deceptive practices that push them further into economic despair,” said Paul R. Rodríguez, Acting Director of the Division of Consumer Affairs. “As this lawsuit demonstrates, we will hold accountable any company that violates our consumer protection laws by subjecting consumers to punishing interest rates and draconian repayment terms that lead to their financial ruin.”
The State’s lawsuit against the Yellowstone Defendants follows other actions by Attorney General Grewal and the Administration of Governor Philip D. Murphy to address predatory lending, particularly when those practices disproportionately affect New Jersey’s lower-income and minority communities.
- In March 2019, Attorney General Grewal and the Division of Consumer Affairs sued two New Jersey “Buy Here-Pay Here” auto dealerships and their owner for targeting financially vulnerable consumers through predatory sales and lending practices. A February 2020 settlement for $800,000 also required the dissolution of the dealerships and barred their owner from owning, associating with, or assisting in any way with any business, or motor vehicle dealership in the State for a five-year period.
- Under Attorney General Grewal, New Jersey has entered into a settlement agreement with Santander over allegedly predatory sub-prime auto lending practices, as well as two settlements with private student loan companies whose predatory practices harmed students of the for-profit college ITT Tech, following multi-state investigations.
- Attorney General Grewal has led and joined efforts to oppose changes in federal policy that roll back consumer protections from predatory lending. In 2019, Attorney General Grewal led a coalition of 25 Attorneys General in opposing the federal government’s plan to rescind key protections for borrowers who take out payday, vehicle-title, and other short-term, risky, high-cost loans. Through multiple comments, amicus briefs, and litigation, Attorney General Grewal also has opposed policies that allow non-bank lenders to evade state interest rate caps through “rent-a-bank” schemes.
Deputy Attorney General Chanel Van Dyke and Section Chief Patricia Schiripo of the Consumer Fraud Prosecution Section in the Division of Law’s Affirmative Civil Enforcement Practice Group and Assistant Attorney General Janine Matton of the Affirmative Civil Enforcement Practice Group are handling the Yellowstone matter for the Plaintiffs, with assistance from attorney Andrew Esoldi. Investigator Walter Kaminski and Supervising Investigator Jennifer Micco of the Office of Consumer Protection are handling the investigation for the Division of Consumer Affairs.
Consumers who believe they have been cheated or scammed by a business, or suspect any other form of consumer abuse, whether or not related to predatory lending, can file an online complaint with the State Division of Consumer Affairs by visiting its website or calling 1-800-242-5846 to receive a complaint form by mail.