Federal government crackdown on lenders targeting small businesses with high interest loans and aggressive collection tactics
Federal and state regulators are cracking down on lenders targeting small businesses with expensive loans and abusive collection tactics, generating unrest in a lightly regulated industry that has thrived by putting traders in a bind.
One company, Par Funding, of Philadelphia, was attacked by the FBI on July 28, an FBI official confirmed, and has been sued by the Securities and Exchange Commission. Two others – RCG advances and Capital of Yellowstone, both from New York – were sued by the Federal Trade Commission for allegedly distorting the terms of their funding. The New York Attorney General RCG also sued, claiming that he sometimes threatened physical violence to coerce repayment.
Known as merchant cash advance companies, lenders provide money to small businesses based on their current income. Merchants typically give access to their bank accounts for daily and weekly refunds that add up to a larger amount over time.
More than a dozen marketers in six states told NBC News that even after their incomes disappeared in the middle COVID-19[female[feminineclosures, lenders continued to extract money and at times decided to freeze their assets.
Jay Hoehn was one of them. Founder of a personal training studio in La Jolla, Calif., Hoehn borrowed $ 9,000 from Par Funding in late February after an operation that set him back. No bank would lend him, he said, and he agreed to repay Par about $ 16,000 over time.
After the governor of California ordered all gyms closed in mid-March, Hoehn said his income was drying up and he could no longer pay. Hoehn said Par threatened to email his clients asking them to pay all the money they owed Hoehn. On July 27, the day before the FBI raid, Par filed an admission of judgment against Hoehn, a lawsuit that can freeze a merchant’s bank accounts and force borrowers to automatically admit liability when the lender sues them. .
“It almost looks like it’s a gangster operation,” Hoehn told NBC News.
Hoehn provided NBC News with a copy of an email Par sent to clients requesting payment because Hoehn defaulted on a loan agreement. “Failure to follow the instructions in this letter and failure to comply with statutory law may result in prosecution and litigation,” the email said.
Par’s senior attorney, Brett A. Berman, declined to comment.
Because they are not banks, merchant cash advance companies have only been subject to light regulations. Effective interest rates on corporate advances can be astronomical – at par, they reach 400%, according to the SEC, and often exceed 1,000% at RCG, New York State said. The aggressive, even threatening, collection techniques of some companies were also detailed; New York State lawsuit against RCG shows one executive told one client, “I’m going to make you bleed,” and told another he would kidnap his daughters if he didn’t make the payments .
An RCG lawyer declined to comment.
Now officials investigating merchant cash advance companies say they are examining whether funding deals should be subject to usury caps and federal and state protections.
“We’re looking hard to make sure these lenders don’t add to the misery and bankrupt small businesses,” Rohit Chopra, an FTC commissioner, said in an interview with NBC News. “We have started to pursue some of them and I am looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
The business of cash advances to merchants has been in growth mode since the 2008 financial crisis, when the big banks began to cut back on lending to small businesses. Stepping in to fill the void, the merchant cash advance companies provided an estimated $ 19 billion in financing to small businesses last year, up from $ 8 billion five years ago.
The SEC case against Par Funding and others argued that nearly $ 500 million was raised from investors through unregistered securities that Par then loaned out to small businesses at exorbitant rates. In its lawsuit, the SEC identified Joseph W. LaForte as “the de facto CEO of Par” and “a twice convicted criminal” who, before forming the company, “was jailed and ordered to pay $ 14.1 million. dollars in restitution for theft and money laundering. “In 2009, for example, federal prosecutors in New Jersey filed a lawsuit against LaForte accusing him of conspiracy to operate an illegal gambling business. LaForte was sentenced to 10 months in prison.
LaPorte was arrested on August 7 on weapons charges in Haverford, Pa., And is being held by the federal government pending a bail hearing on Tuesday afternoon. Investigators had found seven loaded guns in his possession, a violation given his previous conviction for crimes carrying prison terms of more than a year. Michael Engle, LaForte’s attorney, declined to comment.
“We have started to pursue some of them and I am looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
The FBI official said his investigation into Par was ongoing. The federal SEC judge allowed the agency’s request to appoint a receiver to handle the Par Funding.
LaForte is represented by Berman, counsel for Par. He declined to comment on behalf of LaForte.
In court records, attorneys for Par Funding said the company and its owners vigorously dispute the SEC’s claims and that the company “uses best business practices and has a full-time compliance officer.”
A case filed on August 4 by Par’s attorneys said he was pursuing 1,000 collection actions against borrowers he characterized as default. The file said the business was thriving before the COVID-19 pandemic hit, generating $ 104 million in retained earnings.
NBC News obtained video of an investor presentation dinner in November 2019 hosted by Dean Vagnozzi, director of an investment firm that raised money for Par and was sued by the SEC. On the video, in which Par’s executives also appear, Vagnozzi promises investors returns of between 10% and 14%, claiming the outsized returns were possible because merchant cash advance companies like Par charge premium rates. ‘interest of 35% and more.
Brian Miller, an attorney for Vagnozzi, said in a statement that the case against his client concerned only part of his business. “Based on all of the information Mr. Vagnozzi provided by Par, Par Funding’s business appears to be a legitimate business providing finance to small businesses, some of which are currently experiencing financial difficulties amid the pandemic and economic downturn. . “
“I blame myself for not doing enough research” on Par, said Hoehn, the personal trainer who borrowed from Par, “but it’s totally inappropriate for them to harass me for receipts that I don’t. not receive. “
Bryan Hartig, a pet food manufacturer in Bangor, Pa., Had a similar experience with Par.
“When COVID started, we called them up and said, ‘We’re bankrupt,’” Hartig told NBC News. His company sells its products at fairs and festivals, he said, and “every single one of them has been shut down across the country.”
I didn’t care, Hartig reminded himself. “They said, ‘We’re going to take your house, take your cars,'” he said. “They sent letters to my suppliers that I deal with to make my products. Once they sent those, the sales people said, ‘Oh, it’s okay, this guy is in trouble’ and they cut all my lines of credit. “
Some merchants told NBC News that they were forced to sell their businesses to avoid their obligations to the merchant cash advance companies.
One is Jim Cook, a social worker and founder of Antelope Valley Community Clinic, a nonprofit healthcare facility that serves more than 100,000 people in Lancaster, Calif., Many of whom are destitute.
In 2017, after the clinic fell behind on billing and payroll taxes, its CFO borrowed about $ 1.2 million from several companies. One was a unit of RCG Advances, sued by the FTC and the New York attorney general in June.
Cook said RCG’s automatic withdrawals were soon eating away at the clinic’s cash flow more than it could handle. The clinic’s board of directors decided in early 2018 to stop the payments.
“Lenders have started putting liens on our bank accounts and our vendors,” Cook said in an interview. Even his personal bank account was frozen. “We fought with them until 2018 until the board and I decided that we weren’t going to do it alone,” Cook added.
Cook and the clinic’s board of directors decided to sell to another nonprofit. But he said they ended up paying $ 2.6 million to get out of less than $ 1.2 million in merchant cash advances they took out.
“The clinic I started continues to serve and does a good job,” Cook told NBC News. “But I lost something that I had started from scratch.”
Letitia James, Attorney General for New York State, continues to investigate the merchant cash advance industry, according to her spokesperson, Fabien Levy. “A lot of small businesses are struggling and trying to figure out how they can get by,” Levy said. “We don’t want them to feel like they have no choice but to go to these predatory lenders.”
The most recent complaint filed by the FTC was against Yellowstone Capital on August 3. She accused Yellowstone of telling borrowers that they weren’t required to sign personal guarantees to get financing when in fact they were. Yellowstone also withdrew more money from borrowers’ bank accounts than they had accepted and continued to withdraw funds after the funding was fully paid off, the FTC said.
NBC News attempted to contact Yellowstone for comment, but no one answered the company’s phones. A lawyer representing Yellowstone did not return an email requesting comment.
Shane Heskin, lawyer at White and Williams, has represented borrowers in lawsuits against these companies and other cash advance merchants since 2016, when his stepfather found himself trapped in such loans.
“I was an insurance lawyer – I had no idea the industry existed,” Heskin told NBC News. “Because it was family, I immersed myself in it and was shocked to find out what was going on. I’ve been on a crusade ever since.”