Federal vs. State MCA Regulation: Where Things Stand

The regulatory landscape for MCAs is a patchwork. Some states have enacted disclosure laws. Some have strong usury protections. Some have neither. The federal framework is still emerging. The gap between what exists and what is needed is the space where predatory practices survive.

The regulation of merchant cash advances occurs at two levels — federal and state — and neither level currently provides comprehensive oversight of the industry. The federal framework is limited and evolving. The state framework varies dramatically by jurisdiction. Understanding both levels helps the business owner identify the protections available and the gaps that remain.

The Federal Landscape

There is no federal statute specifically regulating merchant cash advances. The MCA industry falls outside the scope of the Truth in Lending Act because MCAs are structured as purchases, not loans. The Equal Credit Opportunity Act applies to the extent it covers commercial financing decisions. The FTC Act’s prohibition on deceptive and unfair practices applies to MCA marketing and collection, but the FTC has historically focused its enforcement resources on consumer financial products rather than commercial ones.

The Consumer Financial Protection Bureau’s small business lending rule, promulgated under Section 1071 of the Dodd-Frank Act, will require collection of data on applications for credit to small businesses, including MCA applications. The rule does not regulate MCA terms or pricing, but it will provide the first comprehensive data on who is applying for MCAs, who is being approved, what terms are being offered, and how the market affects different demographic groups. Data is the prerequisite for regulation. The rule provides the data.

The State Landscape

State regulation of MCAs varies widely. California, New York, Virginia, Utah, Connecticut, and several other states have enacted commercial financing disclosure laws requiring MCA providers to disclose the total cost, the annualized rate, and the payment terms in standardized formats. These disclosure requirements represent the most significant regulatory development in the MCA space because they provide business owners with the information needed to compare MCA costs to alternative financing — a comparison the industry has historically prevented.

State usury laws provide another layer of protection, but only when the MCA is recharacterized as a loan. States like New York, New Jersey, Georgia, Pennsylvania, and North Carolina have usury thresholds that, when applied to recharacterized MCAs, render the agreements void or subject to severe penalties. States like Arizona and Utah have no general usury cap, providing less protection through this avenue.

State consumer protection statutes — Massachusetts Chapter 93A, New Jersey’s Consumer Fraud Act, North Carolina’s UDTPA, and similar laws in other states — provide private rights of action for businesses harmed by deceptive MCA practices. The effectiveness of these statutes varies by jurisdiction, but in states with treble damages and fee-shifting provisions, they are powerful tools.

The Gap

The current regulatory framework leaves significant gaps. There is no federal disclosure requirement. There is no federal rate cap. There is no federal licensing requirement for MCA funders or brokers. The state framework is inconsistent — a business in California receives disclosures that a business in Alabama does not. The inconsistency allows funders to target businesses in less-regulated states and to include choice-of-law clauses that select the jurisdiction most favorable to the funder.

Closing the gap requires federal action — either through legislation specifically addressing commercial financing practices, or through expanded enforcement of existing federal statutes against deceptive MCA practices. Until that action occurs, the regulatory protection available to any individual business owner depends on the state where the business is located and the specific provisions of that state’s laws. An attorney can identify the protections available in your jurisdiction and use them to maximum effect.

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The regulatory trajectory is clear even if the timeline is not. The direction is toward greater transparency, greater accountability, and greater protection for small business borrowers. Each new state disclosure law, each AG enforcement action, each court decision, and each federal data collection requirement moves the framework closer to the comprehensive regulation that the MCA industry has avoided for two decades. The business owner who challenges an MCA agreement today does so in a more favorable regulatory environment than the business owner who tried five years ago. And the business owner who challenges an agreement five years from now will have even more tools available.

For the individual business owner, the practical implication is that legal challenges to MCA agreements are more viable now than they have ever been, and they will become more viable over time. The regulatory momentum favors the borrower. The case law favors the borrower. The political attention favors the borrower. The question is not whether regulation is coming. The question is whether it arrives in time to help the businesses that are making daily payments today.

The business owner navigating the MCA regulatory landscape today must understand that protections vary dramatically by state and that the federal framework, while expanding, does not yet provide comprehensive coverage. The most protective states — those with disclosure laws, strong usury statutes, consumer protection acts with treble damages, and prohibitions on confessions of judgment — provide multiple avenues for challenge. The least protective states provide fewer tools. The choice-of-law clause in the MCA agreement may attempt to select a less protective state’s law, but that choice is itself challengeable. An attorney can navigate the regulatory patchwork and identify every protection available in your jurisdiction.