Small businesses fall victim to merchant cash advances: NPR

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Steve Inskeep talks to Bloomberg Businessweek reporter Zeke Faux about merchant cash advances, which are not considered loans. They circumvent regulations and deprive borrowers of their rights.



STEVE INSKEEP, HOST:

Anyone who’s taken out a loan knows you have to sign a stack of papers. Maybe you read them. Maybe not. If it’s a home loan, some of these may be consumer guarantees that protect you from predatory lenders. But some documents guarantee the rights of the lender. And some small business borrowers, who have fewer protections, have discovered a document they signed that cost them everything. This is called a judgment confession. In this document, the borrower agrees that if the lender accuses him of default, he will not challenge it in court. Bloomberg Businessweek reports that some lenders are taking advantage of this document to seize the assets of small business owners who have taken out high-interest loans and paid off. Co-author Zeke Faux spoke with two small entrepreneurs who fell prey.

ZEKE FALSE: Doug and Janelle Duncan ran a struggling real estate agency in suburban Tampa. And one day, Janelle got a call from someone who identified themselves as a debt counselor. And this stranger warned her that a loan company had obtained a judgment against her and that soon her bank accounts would be frozen. She thought it looked like a scam. And she ignored the warning. But it turned out that everything he said was true. A loan company had accused them of not paying and seized their accounts. And that set off a chain reaction that ultimately led to the demise of their real estate company. Worst of all, the Duncans said they were current on their loan.

INSKEEP: So they didn’t even have to be behind. Someone just said he was late and took his money. And the someone you think is a company called ABC, which loaned them the money. And it’s part of a larger operation, which is what?

FALSE: Lender ABC is one of many names used by a larger company called Yellowstone Capital. And this is one of those cash advance companies. And as far as we can tell, they may have been the first to come up with this concept of confession of judgment. Yellowstone has thus obtained more than 5,000 judgments. It’s a big sales force that calls small businesses all over the country, offering them quick cash. And when companies fall behind, they start using these tactics to collect loans.

INSKEEP: Companies are falling behind. You say that the conditions offered on these loans are quite extreme.

FALSE: Interest rates on these loans, when annualized, can be over 400%. And businesses are required to make payments daily. It is therefore very easy to fall behind. But these guys are – their deals are attractive because they can fund businesses overnight. And they’re going to lend money to people who are already heavily in debt, who have very bad credit ratings, whose businesses are on the verge of bankruptcy.

INSKEEP: Is this something that happens specifically under New York State law? Is it correct?

FALSE: Merchant cash advance companies are located in many states and borrowers are spread across the country. But these cash advance companies have realized that the laws of New York State are particularly favorable to their practices. So wherever the business is, wherever the barber is, the transaction takes place in New York.

INSKEEP: But then there are officials in New York who are being asked to go and collect money from the victims. Why are they doing this?

FALSE: So New York City marshals mostly evict people, towing cars. But they also enforce court decisions. Thus, a marshal seems to have become the go-to person for this cash advance industry. And what the association of marshals, their spokesperson, says is that these marshals only apply court decisions. And these cash advance companies have already gone to court and formalized these debts. But the marshal they prefer – last year he made a net profit of 1.7 million dollars. And if it turns out that he doesn’t mean those judgments to the liking of the cash advance companies, they can go get another marshal to do it. So he has an incentive to do whatever the cash advance companies want.

INSKEEP: The city marshals get a percentage of the debts – the supposed bad debts – that they collect?

FALSE: It’s an old-fashioned system that dates back to Dutch colonial times. Marshals are public officials, but they are paid by creditors. They receive what is called the pound. They receive a 5% fee on top of whatever they collect.

INSKEEP: I guess we should note that when we’re talking about a marshal of New York making $1.7 million, that’s a lot more – several times more – than the governor of New York, than the mayor of New York or any other New York official.

FALSE: Yes. This New York City Marshal – he’s the highest paid public servant in New York City.

INSKEEP: You said that some of the people you spoke with recognize that they should have been better informed. I wonder if that’s why people can get away with this kind of financial crime – because it’s the kind of crime where you get humiliated. And you think you yourself are responsible, and you blame yourself.

FALSE: Borrowers often blame themselves. They are also unable to fight back as their bank accounts are frozen. They are broke. And they are located, most of the time, in a different state, which makes it expensive for them to find a lawyer who could try to challenge a judgment that has already been rendered in New York.

INSKEEP: Zeke Faux, reporter for Bloomberg Businessweek, thank you very much.

FALSE: Thanks, Steve.

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