On December 27, the New Jersey Division of Consumer Affairs (the Division) entered a consent order with Yellowstone Capital LLC (Yellowstone) and several related companies to resolve allegations that, in violation of the New Jersey Consumer Fraud Act, the company engaged in abusive lending practices in connection with Merchant Cash Advances to small business owners (MCAs). Pursuant to the settlement, Yellowstone must forgive all outstanding balances for customers who entered MCAs, which is estimated to be approximately $21.7 million, and pay more than $5.6 million to the Division for purposes that may include, restitution, attorneys’ fees, costs of investigation and litigation and costs of administering restitution, and penalties up to $250,000. The order also imposes additional requirements regarding Yellowstone’s agreements and collections activity discussed below.

As background, MCAs are a form of financing in which the MCA company provides money to a small business up front in exchange for the right to receive a percentage of the company’s future revenue up to a specified aggregate dollar amount. Frequently, MCAs require the merchant to deliver the future revenues through daily payments reflecting actual revenues or an estimate of such revenues, subject to some form of periodic reconciliation process. Unlike a loan, a properly structured MCA contract does not guarantee the issuer regular payments over a fixed, finite term. Instead, a decline in the merchant’s revenues should entitle the merchant to an automatic reduction in payments or a reconciliation which either decreases the merchant’s periodic payments, resulting in the MCA payments continuing over a longer period, or requires the MCA company to provide a refund to the merchant of any excess payments received. The concept is that, at least in most states, properly structured MCA agreements are sales of future receivables, and not loans, and, accordingly, lending and usury laws do not apply to MCA agreements.

As part of the settlement, Yellowstone was required to reform its reconciliation procedures, providing more favorable reconciliation terms to merchants, including allowing merchants more time to request a reconciliation and requiring that reconciliations cover the entire transaction, rather than only the preceding month. Yellowstone was also required to implement new procedures to: (1) inform merchants who are not in default that they may request the more favorable reconciliations; (2) review accounts when merchants default prior to sending the accounts to collection; (3) provide certain notices related to default; (4) not engage in certain collections activities including the use of confessions of judgment and specified uses of UCC notices; and (5) implement certain procedures related to the use of brokers. Yellowstone was also required to reform certain contractual provisions to limit the scope of personal guarantees, decrease or eliminate certain fees, improve disclosures, and remove limited liability clauses, among other changes.

In the complaint, the Division alleged:

• Although Yellowstone’s merchant agreements were presented to consumers as MCA contracts, the merchant agreements included numerous terms and conditions that made them substantially less favorable to consumers than typical MCA contracts.
• Yellowstone’s merchant agreements obligated consumers to pay a fixed amount subject to interest, over a defined period, untethered from the consumers’ receivables, just as the consumers would be obligated to repay a traditional loan, but without the legal protections (such as interest rate caps) afforded to loan borrowers.
• Yellowstone’s MCAs compelled consumers to execute additional documents that not only obligated the small business owners to personally guarantee repayment of the loans, but also made it exceedingly simple for Yellowstone to obtain a consent judgment against and/or to freeze and seize the assets of not only the small business, but the small business owner.

Yellowstone denied all allegations in the consent order. However, this is not the first settlement Yellowstone has entered into regarding allegations of unfair lending. On May 4, 2021, the Federal Trade Commission announced that Yellowstone would pay more than $9.8 million in restitution to settle allegations that it took money from businesses’ bank accounts without permission and deceived them about the amount of financing they would receive, net of inadequately disclosed fees, and other features of its financing products. Specifically, the FTC alleged that Yellowstone continued withdrawing money from businesses’ bank accounts for days after their balance had been satisfied.

This action by the New Jersey Attorney General constitutes a continuation of the office’s policy goal of addressing alleged usurious lending, particularly when such practices are asserted to disproportionately affect New Jersey’s lower-income and minority communities. For example, the New Jersey Bureau of Securities issued a Cease and Desist Order to another MCA company, Complete Business Solutions Group, for violating New Jersey securities law by offering and selling unregistered securities to purportedly raise capital to fund MCAs to small businesses.

Additional state attorneys general have scrutinized the use of MCA companies issuing short-term, high-cost funding for small businesses. Dating back to 2018, the New York Attorney General opened an industrywide investigation into MCA companies, which resulted in a report that a subpoena was sent to Yellowstone and the 2020 lawsuit against New York-based Richmond Capital Group.

We will continue to watch the states attorneys general activity with regard to MCAs and alleged usurious lending, and we will post updates here as they occur.

Troutman Pepper Consumer Financial Services Team

	Jeremy Rosenblum Jeremy focuses his practice on federal and state lending and consumer practices laws, with emphasis on the interplay between federal and state laws, joint ventures between banks and nonbank financial services providers, the development and documentation of new financial services products (especially products designed to serve the needs of unbanked and under-banked consumers), bank overdraft practices and disclosures, geographic expansion initiatives, and compliance with federal and state consumer protection laws, including statutes prohibiting unfair, deceptive and abusive acts and practices (UDAAP); usury laws; the Truth in Lending Act (TILA); the Electronic Funds Transfer Act; E-SIGN; the Equal Credit Opportunity Act; and the Fair Credit Reporting Act (FCRA).
	Mark Furletti Mark helps clients navigate regulatory risks posed by state and federal laws aimed at protecting consumers and small business, particularly in connection with credit, deposit, and payments products. He is a trusted advisor, providing practical legal counsel and advice to providers of financial services across numerous industries.
	Caleb Rosenberg Caleb is an associate in the firm’s Consumer Financial Services Practice Group. He focuses his practice on helping federal and state-chartered banks, fintech companies, finance companies, and licensed lenders navigate regulatory risks posed by state and federal laws aimed at protecting consumers and small businesses in the credit and alternative finance products industry.
	Chris Carlson Chris represents clients in regulatory, civil, and criminal investigations and litigation. In his practice, Chris regularly employs his prior regulatory experience to benefit clients who are interacting with and being investigated by state attorneys general.

Troutman Pepper State Attorneys General Team

	Ashley Taylor – Co-leader and Firm Vice Chair Ashley is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. He focuses primarily on federal and state government regulatory and enforcement matters involving state attorneys general, the Consumer Financial Protection Bureau (CFPB), and the Federal Trade Commission (FTC). Drawing upon his experience as a deputy attorney general, Ashley has developed an extensive consumer practice with regard to the consumer financial services industry.
	Clay Friedman – Co-leader Clay is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. Informed by nearly a decade in a state attorneys general office, and more than 25 years in private practice, Clay spends much of his time representing clients in singular or multistate regulatory actions. Clay has repeatedly led teams before all 50 state attorneys general and also handles matters with the Federal Trade Commission, the Consumer Financial Protection Bureau, and other local, state and federal agencies.
	Stephen Piepgrass Stephen represents clients interacting with, and being investigated by, state attorneys general and other enforcement bodies, including the CFPB and FTC, as well as clients involved with litigation, particularly in heavily regulated industries.
	Avi Schick A former deputy attorney general of New York, Avi applies his experience in bet-the-company matters, representing clients in criminal and civil investigations and enforcement actions before state and federal regulators, prosecutors and enforcement agencies.
	Michael Yaghi Michael handles high-profile state attorneys general, FTC, and CFPB investigations by advising clients through these complex government inquiries. He assists clients through the entire life cycle of investigations, from regulatory enforcement through formal litigation.
	Ketan Bhirud As a former government official at the state and federal level, Ketan leverages extensive experience in the public and private sectors to skillfully represent client interests.
	Tim Bado Tim is an attorney in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, with a primary focus on financial services litigation.
	Chris Carlson Chris represents clients in regulatory, civil and criminal investigations and litigation. In his practice, Chris regularly employs his prior regulatory experience to benefit clients who are interacting with and being investigated by state attorneys general.
	Natalia Jacobo Natalia is an associate in the firm’s business litigation practice. She recently received her J.D from the University of California, Davis School of Law.
	Namrata Kang Namrata is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, based in the Washington, D.C. office. Her work includes advising clients in regulatory investigations and compliance matters, in addition to representing clients in civil litigation matters.
	Whitney Shephard Whitney is an attorney in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group. She represents clients facing state and federal regulatory investigations and enforcement actions, as well as related civil litigation.
	Stephanie Kozol Stephanie is Troutman Pepper’s senior government relations manager in the state attorneys general department.