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Steve Inskeep speaks with Bloomberg Businessweek reporter Zeke Faux about cash advances to merchants, which are not considered loans. They bypass regulations and deny borrowers their rights.
STEVE INSKEEP, HTE:
Anyone who has taken out a loan knows that you have to sign a stack of papers. Maybe you are reading them. Maybe not. If it is a home loan, some of it may be consumer guarantees that protect you from predatory lenders. But some of the documents guarantee the rights of the lender. And some small business borrowers, who have less coverage, discovered a document they signed that cost them everything. This is called a confession of judgment. In it, the borrower accepts that if the lender accuses him of not paying, he will not challenge it in court. Bloomberg Businessweek reports that some lenders are using this document to seize the assets of small business owners who took out high interest loans and were paying. Co-author Zeke Faux spoke to two small business owners who fell prey.
ZEKE FALSE: Doug and Janelle Duncan ran a struggling real estate brokerage firm in the suburbs of Tampa. And one day Janelle got a call from someone who identified themselves as a debt counselor. And this stranger warned her that a credit company had obtained a judgment against her and that soon her bank accounts would be frozen. She thought it sounded like a scam. And she ignored the warning. But it turned out that everything he said was true. A credit company accused them of not paying and seized their accounts. And it set off a chain reaction that ultimately led to their real estate company going down. The worst part is that the Duncan’s said they were up to date 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 person you think was a company called ABC that loaned them the money. And this is part of a larger operation, which is what?
FALSE: ABC Lender is one of many names used by a larger company called Yellowstone Capital. And these are one of those cash advance companies. And as far as we can tell, they may be the first to come up with this concept of confession of judgment. Yellowstone has thus obtained more than 5,000 judgments. It’s a great sales force calling small businesses across the country offering them quick cash. And when businesses fall behind, they start using these tactics to collect loans.
INSKEEP: Businesses are falling behind. You say that the terms 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 on a daily basis. It is therefore very easy to fall behind. But these guys are – their deals are attractive because they can fund businesses overnight. And they will lend money to people who are already heavily in debt, who have very bad credit, whose businesses are on the verge of bankruptcy.
INSKEEP: Is that 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 located, wherever the barber is, the transaction takes place in New York.
INSKEEP: But then there are officials in New York who are asked to collect the money from the victims. Why are they doing this?
FALSE: So the New York Marshals mostly kick people out, tow cars. But they also apply the judgments of the courts. Thus, a marshal seems to have become the go-to person for this cash advance industry. And what the marshals association, their spokesperson, says is that these marshals only apply the judgments of the courts. And these cash advance companies have already gone to court and formalized these debts. But their favorite Marshal – he made a net profit of $ 1.7 million last year. And if he doesn’t prove he’s serving those judgments at the whim of the cash advance companies, they can go find another marshal to do it. He is therefore encouraged to do what the cash advance companies want.
INSKEEP: 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 civil servants, but they are paid by creditors. They are given what is called forage. They get 5% fees on top of everything they collect.
INSKEEP: I guess we should note when we talk about a New York City Marshal who earns $ 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 concede that they should have known better. I wonder if that’s the reason people can get away with this kind of financial crime – because it’s the kind of crime where you are humiliated. And you think that you yourself are responsible, and you blame yourself.
FALSE: Borrowers often blame themselves. They are also unable to retaliate as their bank accounts are frozen. They are broke. And they’re located, most of the time, in a different state, making it expensive for them to find a lawyer who might try to challenge a judgment that has already been handed down in New York.
INSKEEP: Zeke Faux, reporter for Bloomberg Businessweek, thank you very much.
FALSE: Thanks, Steve.
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