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.