New York Attorney General Letitia James has announced a landmark $1.065 billion settlement with Yellowstone Capital, a network of 25 lending companies accused of predatory practices against small businesses.
Key Details of the Settlement
- Total Judgment: $1.065 billion
- Debt Cancellation: $534 million in outstanding debts for over 18,000 small businesses will be canceled
- Restitution: $16.1 million to be paid to affected businesses
Predatory Lending Practices
The lawsuit revealed that Yellowstone:
- Targeted small businesses with illegal high-interest loans
- Disguised fraudulent loans as merchant cash advances
- Caused closure of successful companies and job losses
Consequences for Yellowstone
- Permanent ban from the merchant cash advance industry
- Must cease all debt collection attempts
- Required to vacate unsatisfied court judgments
- Terminate liens on small businesses' property
The lawsuit, initially filed in March 2024, continues against additional entities including Delta Bridge Funding, Cloudfund, and eight other individuals involved in the lending operation
Yellowstone Capital's Violations Specific Predatory Lending Practices
Yellowstone Capital's merchant cash advance (MCA) model was systematically designed to exploit small businesses through several key fraudulent mechanisms:
1. Deceptive Contract Structuring
- Disguised loans as "revenue purchases" to circumvent usury laws
- Used contracts that fraudulently described transactions as purchases of future revenues
- Claimed flexible payment terms while implementing fixed daily withdrawals
2. Manipulative Payment Extraction
- Collected fixed daily amounts directly from businesses' bank accounts
- Implemented short repayment periods (60-90 days)
- Daily collections had minimal correlation to actual business revenues
3. Refund Manipulation
- Promised to "reconcile" or refund daily payments
- Used fraudulent measures to ensure businesses almost never qualified for refunds
- Effectively creating ultra-high interest rates up to 820% annually
Underwriting Criteria Red Flags
- Ignored stated percentage of revenues when underwriting
- "Backed into" desired daily payment amounts
- Targeted businesses unable to secure traditional bank loans
- Implemented aggressive personal guarantee requirements
Aggressive Collection Tactics
- Continued withdrawing money after balances were satisfied
- Manipulated court systems to obtain fraudulent judgments
- Used personal guarantees to seize business owners' assets
- Forced businesses into additional loans to cover existing debt
Industry Implications
This settlement signals a critical turning point for alternative lending:
- Increased regulatory scrutiny of MCA products
- Mandatory review of lending structures
- Emphasis on transparent, fair lending practices
- Potential industry-wide compliance overhaul
Compliance Recommendations:
- Conduct comprehensive internal audit of lending practices
- Ensure transparent fee structures
- Implement robust reconciliation mechanisms
- Develop ethical underwriting criteria
- Create customer-friendly collection processes
Our Opinion
Many alternative lenders provide MCA products, and this case shows practices that draw attention from regulators. The permanent ban from the MCA industry serves as a significant warning for everyone.
The 820% APR is shocking. Merchant cash advances are costly, but that's extreme. Typically lenders keep it under 200% APR, which can still be uncomfortable.
Lastly, that $534 million in canceled debt - that's going to send ripples through the entire MCA industry. Every alternative lender is going to face tougher questions from regulators and more skeptical merchants because of this mess.
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