Cash-Advance Pioneer Yellowstone Accused of Deception by FTC

Yellowstone Capital LLC, a pioneer in a form of unregulated lending known as merchant cash advance, was accused by federal regulators of deceiving small-business customers, hitting them with surprise fees and overcollecting on debts.

The Federal Trade Commission filed a lawsuit against Yellowstone in federal court in Manhattan on Monday claiming the firm engaged in deceptive and unfair business practices and asking a judge to order restitution for customers. The suit also names Chief Executive Officer Yitzhak “Isaac” Stern and President Jeffrey Reece.

Calls, emails and text messages to the executives and to the company’s outside lawyer weren’t immediately answered.

Companies like Yellowstone, based in Jersey City, New Jersey, use armies of phone salespeople to pitch cash advances to plumbers, nail salons and other small businesses that can’t get bank loans. The deals are structured as an “advance” on the business’s future revenue, so most lending laws don’t apply. They’re typically repaid over a few months through daily bank debits.

Co-founded in 2009 by Stern and the stock salesman who inspired the movie “Boiler Room,” Yellowstone is one of the biggest players in cash advance, which took off after the U.S. financial crisis. It reported advancing $553 million to customers as of 2017.

Yellowstone was long the leading user of an aggressive method of obtaining court judgments against delinquent borrowers. A Bloomberg News series about these “confessions of judgment” in 2018 found that of the 25,000 judgments sought in New York courts against cash-advance borrowers across the country, one in four was from Yellowstone. The series prompted a flurry of state and federal investigations of the industry. The use of confessions was curtailed by a change in state law last year.

The FTC said Yellowstone falsely advertises its cash advances as requiring no collateral or personal guarantee, but then uses collateral pledges and personal guarantees to collect against delinquent borrowers. Yellowstone routinely provides customers with less money than expected by deducting obscure fees, the FTC said. And it routinely continues debiting customers’ bank accounts for four or five days after a debt is repaid, the agency said.

The New York attorney general subpoenaed Yellowstone in 2018 but hasn’t announced a lawsuit or settlement. New York and the FTC both sued another cash-advance firm, Richmond Capital Group LLC, last month. A lawyer for Richmond didn’t immediately respond to a voicemail message and email seeking comment on Monday.

The case is Federal Trade Commission v. Yellowstone Capital LLC, 20-cv-6023, U.S. District Court, Southern District of New York (Manhattan).

©2020 Bloomberg L.P.

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