Regulation
Concerned About The MCA Automatic Debit Law in Texas? This ACH Company Says There’s a Way
March 25, 2026
There may be no need to overcomplicate Merchant Cash Advance compliance in Texas. A key phrase in the MCA prohibition law that went into effect last year specifies that it’s a prohibition on “establishing a mechanism for automatically debiting a recipient’s account” unless a lot of other requirements are met.
One company looked closely at that piece of the language and came up with a simple solution.
“…our approach is to request the payment at each time and capture the authorization at the time of the transaction,” said John Innes, President of the Texas-based and aptly-named ACH Processing Company. “So instead of capturing an authorization at the beginning and embedding that into the documents where you’re going to do a recurring debit transaction to the merchant’s account, you are sending a request saying, ‘Okay, please authorize this payment.’ And so each payment is individually authorized so you don’t need that security interest [component] anymore.”
No automatic recurring debits. Instead there’s a Request For Payment that requires merchants to manually authorize debits on a debit-by-debit basis whether that be daily, weekly, or monthly, depending on whatever the agreed frequency is.
“I think this was maybe the intent of the law,” Innes continued. “It gives the merchant kind of that control over that debit and it fosters communication between the two parties.”
Innes said there’s various ways that this interaction can be conducted to reduce the friction of this process.
Other options proposed across the industry have focused on another piece of the language, that the prohibition is specifically meant for “commercial sales-based financing providers” and the proposed cure for that is to offer a non-sales-based financing product in the state instead. ACH Processing Company’s solution, however, allows an MCA funder to keep its product suite as-is.
“…you don’t have to break all that,” said Innes. “Continue with the same business plan. ”
Since the Texas law went into effect seven months ago, Innes says that numerous funders have still been in a holding pattern trying to figure out how to approach it. It’s their belief that this solution is a simple way to now get Texas turned back on if they’re ready.
California Bill Asserts Businesses Generating Up to $18 Million/Year in Sales Need Consumer Protections
March 10, 2026California’s AB2116 is proposing to amend the state’s Consumer Financial Protection Law and declare that small businesses generating less than $18 million a year in revenue be considered a consumer for the purpose of consumer financial protections.
“Small business” means a business entity organized for profit with annual gross receipts of no more than sixteen million dollars ($16,000,000) or the annual gross receipt level as biennially adjusted by the Department of General Services in accordance with Section 14837 of the Government Code, whichever is greater.-AB2116
The DGS alternative, when applied to the “whichever is greater” test, currently sits at $18 million, making that the current applicable baseline for what is small.
“Small business owners are often similarly situated as consumers with regards to their sophistication and bargaining power relative to providers of financial services and products,” the bill says. “Many of the rationales supporting legal protections for consumers apply also to small business owners. Small businesses have a better chance to survive and grow if they are able to access safe and effective financial products and are protected from unfair, deceptive, or abusive practices when accessing financial products and services.”
For comparison’s sake, deBanked tracked one online small business lender that originated $200 million in business loans that generated just $14.3M in revenue. Per the bill, this lender would also be presumed an unsophisticated consumer that is unable to bargain on financial service products without consumer protections.
CFPB Costs Consumers At Least 10x More Than They Get Back
February 19, 2026A new study published by the White House Council of Economic Advisors found that the CFPB costs consumers more than it saves them. According to the report, CFPB regulations increased borrowing costs to consumers by $222 billion to $350 billion over the time period of 2011 – 2024. In return the CFPB has touted that it has returned more than $21 billion to consumers over the same time period.
A takeaway is that the while the CFPB has provided the optics of doing good for consumers it has actually cost them far in excess of the perceived benefit to them.
No, Texas Did Not Ban Merchant Cash Advances
January 28, 2026
When Texas passed HB 700 last June, deBanked was among the first to point out that its most notable component was a prohibition on automatic debits of a recipient’s deposit account by a commercial sales-based financing provider unless they had a perfected first position. Some observers were quick to tell us that we had it all wrong, that MCAs had effectively been “banned” entirely and that we should have reported it that way. This was premised on a belief that perfecting a true first position on a recipient’s deposit account was a near-insurmountable obstacle (for MCAs that rely on ACHs instead of credit card splits) and thus a nuanced discussion of how to comply with the new law a moot debate.
But if the state legislature had intended to ban sales-based financing outright, it simply could have done so. Instead, it codified a framework for how to legally provide sales-based financing. It provided guidance on registration, disclosure, and oversight. And it even went as far as to say that the Finance Commission of Texas cannot “adopt a maximum annual percentage rate, finance charge, or fee for commercial sales-based financing transactions.” This was an incredible signal: No cost cap on sales-based financing.
The Texas Office of Consumer Credit Commissioner (OCCC) even held an open forum this past November to hear from impacted parties on the best way to craft and enforce the rules going forward. And so while they’re now busy promulgating those precise rules, collective minds have returned back to the original language surrounding that “certain automatic debits” are “prohibited.”
CERTAIN AUTOMATIC DEBITS PROHIBITED.
A provider or commercial sales-based financing broker may not establish a mechanism for automatically debiting a recipient’s deposit account unless the provider or broker holds a validly perfected security interest in the recipient’s account under Chapter 9, Business & Commerce Code, with a first priority against the claims of all other persons.
This language does not say that merchants cannot pay sales-based financing providers entirely. Others agree. deBanked spoke with one company, MCA Pay, which analyzed what the law says and they created a tool for merchants to pay sales-based financing providers in an orderly easy manner so that funders do not in fact have to automatically debit a recipient’s deposit account at all. Though there are some layers to how it’s done, merchants are, on their own volition, setting up a system to initiate payments to whichever funder they choose. They’re in control.
Far from theoretical, this methodology is already being used by merchants in Texas to pay sales-based financing providers, according to MCA Pay.
“We’re comfortable from a regulatory perspective, but I encourage everybody who uses this platform to run this by their counsel,” a representative said. “We’re putting the control back into the merchant’s hands.”
The two main partners at MCA Pay, Gavriel Kalfa and Moshe Klar, do not hail from within the industry, but they worked with experienced operators in the industry while building out the system. MCA Pay is not the payments provider or a law firm, they’re just the platform that loops the pieces together.
“Hopefully we’ve made a product here that’s going to allow MCA to continue in Texas compliantly for everybody,” they said.
New Jersey Reintroduces APR Disclosure Bill for Commercial Financing
January 14, 2026A commercial financing APR disclosure bill was introduced in the New Jersey State Senate on Tuesday. The bill is mostly templated from other state legislation in which estimated APR disclosures on sales-based financing transactions would be determinable by using either the Historical method or Opt-in method. Senator Troy Singleton introduced it as Senate Bill 1760 and it is described as a bill that “requires certain disclosures by providers of commercial financing.” It can be viewed here.
Brokers and Funders – Are You Ready for Changes to California Law Effective January 1, 2026?
December 20, 2025Bob Gage is a partner in Hudson Cook, LLP’s Michigan office. Kate Fisher is a partner in Hudson Cook, LLP’s Maryland office. https://www.hudsoncook.com/
California has a new law, California S.B. 362, impacting how brokers and funders communicate with merchants starting on January 1, 2026. The new law adds provisions to California’s Commercial Financing Disclosures Law (“CFDL”) which became effective in 2023 and established the first law requiring commercial financers and brokers (described in the CFDL as “providers”) to provide cost-of-funding disclosures to applicants. Here is an overview of what you need to know:
Don’t Say “Factor Rate”
Under S.B. 362, commercial financing providers are not allowed to use the term “rate” in a manner that is likely to deceive a recipient. A “recipient” is generally a person who receives an offer of commercial financing of $500,000 or less. The preamble to the new law (which is not part of the law but informs how the regulator will approach enforcement) gives the following example of what California means by likely to deceive:
- Describing the price of credit as “X% fee rate” or “Y% factor rate,” particularly when those “rates” diverge materially from the APR.
A factor rate will almost always be much lower than any APR. This means that California has effectively banned use of the term “factor rate” when communicating with applicants for loans, sales-based financing, merchant cash advance and yes – even factoring transactions. It is probably safe to talk in terms of “factor rates” internally. But, starting on January 1, 2026 – saying “factor rate” to a California recipient can get you into hot water.
Don’t Say “Interest Rate” Unless Referring to an Annual Simple Interest Rate
S.B. 362 also prohibits commercial financing providers from using the term “interest” in a manner that is likely to deceive a recipient. The preamble to the new law gives the following examples of what California means by likely to deceive:
- Describing the price of credit as “simple interest” when referring to a nonannual rate as opposed to a noncompounding annual rate that a reasonable person would understand “simple interest” to mean; and
- Describing the price of credit as an “interest rate” when describing a daily, weekly, or monthly rate and not an annual rate; and
This potentially impacts providers who describe the cost of commercial credit using a daily or weekly rate and describing that rate as “interest”. For example, loan agreements that use a daily, weekly, or monthly “interest rate” may need to be modified.
California Requires Brokers and Funders to Remind Recipients of the Disclosed “APR” or “Estimated APR”
S.B. 362 complicates post-offer negotiations between providers and recipients by requiring redisclosure of the APR or Estimated APR calculation already required by the CFDL. It does this by adding the following new provision to the CFDL:
- After extending a specific offer to a potential recipient, whenever a provider states a charge, pricing metric, or financing amount to the potential recipient for that specific offer during an application process for commercial financing, the provider shall also state the annual percentage rate of that commercial financing offer by using the term “annual percentage rate” or the acronym “APR.”
What this means for providers:
- The APR reminder requirement applies “during an application process.” The term “application process” is not defined, but it probably does not end until the recipient receives funding or the provider definitively declines to proceed with the financing.
- During the “application process,” anytime a provider communicates with the recipient and states a charge, pricing metric, or financing amount, the provider must remind the merchant of the APR or Estimated APR for that offer. Here are examples of how this might impact brokers and funders:
|
New York Already has a Similar Law
New York already has similar requirements in its Commercial Financing Disclosure Law. See 23 N.Y. Admin. Code Section 600.1(f)(1). Accordingly, brokers and funders should implement these practices in New York as well.
This is only a high-level overview and not legal advice. If you have questions regarding how these laws impact your business, please contact knowledgeable counsel.
Bob Gage is a partner in Hudson Cook, LLP’s Michigan office. Kate Fisher is a partner in Hudson Cook, LLP’s Maryland office. https://www.hudsoncook.com/
Comments On the CFPB’s Proposed Changes to Section 1071 Applicability
December 2, 2025With the CFPB having proposed a revision to the Small Business Lending Data Collection Rules, public commentary is being accepted on it through December 15th.
Fifty-two comments have been submitted so far with the majority of them being publicly accessible online. “Agencies review all submissions and may choose to redact, or withhold, certain submissions (or portions thereof),” the Federal Register says. “Submitted comments may not be available to be read until the agency has approved them.” Comments can be signed on behalf of an individual, an organization, or anonymously. Comments can be submitted here.
If you are planning to submit a comment, consider consulting with an industry trade association before doing so.
CFPB Reverses Course: Now Proposes to Remove Merchant Cash Advances from Section 1071 Rule
November 16, 2025The CFPB has come back with a new proposal on how to roll out its section 1071 rules. Inside the 198 pages, the agency opines at length on merchant cash advances and reverses its previous opinions. It now believes they should not be subject to the rules.
The CFPB believes that at the onset of data collection under section 1071 the rule should focus on core, generally applicable, lending products that are most likely to be foundational to small businesses’ formation and operation—loans, lines of credit, and credit cards—before determining whether to expand the scope of the rule to include more niche or specialty lending products. The CFPB therefore proposes to exclude MCAs, agricultural lending, and small dollar loans from the definition of covered credit transaction to better ensure the smooth operation of the initial period of data collection, while minimizing disruptions and regulatory complexity in the credit markets subject to section 1071.
Current § 1002.104(a) defines a “covered credit transaction” as “an extension of business credit that is not an excluded transaction under paragraph (b) of this section.” Section 1002.104(b)(1)-(6) enumerates six types of transactions that are excluded from covered credit extensions. The Bureau proposes adding MCAs to the list of excluded transactions in § 1002.104(b). Proposed § 1002.104(b)(7) would exclude MCAs, which it would define as an agreement under which a small business receives a lump-sum payment in exchange for the right to receive a percentage of the small business’s future sales or income up to a ceiling amount. Consistent with this proposed new exclusion, the CFPB proposes deleting several references to MCAs, and the related term sales-based financing, in commentary.
In the 2023 final rule, the CFPB explained its belief that the statutory term “credit” in ECOA is intentionally broad so as to include a wide variety of products without specifically identifying any particular product by name, such that all credit products should be included in the rule unless the CFPB specifically excluded them and concluded that “credit” encompasses MCAs. It further explained that MCAs should not be understood to constitute factoring within the meaning of the existing commentary to Regulation B subpart A or the definition in existing comment 104(b)-1, because factoring involves entities selling an existing legal right to payment from a third party, while no such contemporaneous right exists in an MCA. The CFPB also noted its understanding that, as a practical matter, MCAs are underwritten and function like a typical loan (i.e., underwriting of the recipient of the funds; repayment that functionally comes from the recipient’s own accounts rather than from a third party; repayment of the advance itself plus additional amounts akin to interest; and, at least for some subset of MCAs, repayment in regular intervals over a predictable period of time), although it also implicitly acknowledged practical differences between MCAs and conventional loans by including numerous provisions intended to capture MCA-specific data.
This proposal reconsiders the CFPB’s previous conclusions, as illustrated in existing comment 104(a)(1)-1, which does not exclude MCAs from the definition of “covered credit transactions” under § 1002.104(a), for several independent reasons. First, the CFPB believes that at the onset of the data collection under section 1071 the focus should be on core lenders and products before the CFPB considers expanding the scope of the rule. MCAs are structured differently from traditional lending products; traditional lending concepts like “interest rate” do not fit the way that MCAs are priced. As a result, it is not clear that data collection on MCA transactions under section 1071 would yield information that advances section 1071’s statutory purposes to the extent that some or many such transactions do not constitute credit. The CFPB believes it would advance the purposes of section 1071 at this time to exclude MCAs from the definition of covered credit transaction, and to focus on ensuring the smooth operation of data collection as to core lending products and providers most likely to be foundational to small businesses’ formation and operation.
Second, the CFPB believes it erred in prematurely determining that collection of data on MCA transactions would serve section 1071’s statutory purposes by concluding that all MCAs constitute credit. The 2023 final rule’s one-size-fits-all approach also does not take into account the varied terms and features of MCAs across the market that may be relevant to whether the products meet the definition of “credit” under ECOA, nor did it account for the fact that MCAs are relatively new products whose features and practices may be evolving, including in response to State regulation. Moreover, while some State courts have analyzed whether some MCAs meet State law definitions of “debt” or “credit,” there is a dearth of case law analyzing whether MCAs meet ECOA’s definition of “credit.”
Excluding MCAs from the definition of “covered credit transaction” would be consistent with the way the CFPB has already treated leases, which also present close questions as to whether they meet the definition of “credit” under ECOA. In the 2023 final rule’s analysis of leases, the CFPB acknowledged that some lease transactions could constitute “credit.” But rather than include all lease transactions in the 2023 final rule to ensure coverage of those leases that did actually constitute credit and credit disguised as leases, the CFPB determined that it would be able to monitor the market for such products without including them in the 2023 final rule. The CFPB proposes taking a similar approach to MCA transactions as it did to leases.
Further, the CFPB believes that the 2023 final rule’s coverage of MCAs does not take into account State law developments addressing sales-based financing. Several States have legislation and/or regulations in place addressing the MCA market and requiring providers to disclose terms such as the total cost of capital and the financing rate. Such laws provide key protections for users of MCAs and may shape MCA terms and practices in ways that bear on the question of whether they meet ECOA’s definition of “credit.” While the 2023 final rule referenced these pieces of State legislation, it did not consider the extent to which the evolving landscape under State law rendered premature a determination that including MCAs in the definition of “covered credit transaction” for purposes of mandating data collection furthered section 1071’s statutory purposes. The CFPB believes that it would be advantageous to observe how State laws address MCAs before the CFPB decides how, and whether, to collect data regarding MCAs pursuant to section 1071.
Finally, while the final rule cited concerns about high costs and predatory practices in the MCA market, those concerns may be addressed by Federal and State law enforcement agencies through their respective enforcement authorities.
The CFPB believes that taking into account the factors listed above, the relative novelty and evolving landscape of the MCA industry and the ongoing changes at the State level concerning the regulation of MCAs, that excluding MCA transactions from coverage under the rule at this time is necessary and appropriate to carry out the purposes of section 1071.
As explained above, MCAs differ in kind from traditional lending products, such that collecting data on MCA transactions under Section 1071 may not produce information that is comparable to data collected on other types of transactions. And because MCAs have not generally been regulated as credit, many smaller MCA providers may lack the infrastructure needed to manage compliance with regulatory requirements associated with making extensions of credit. Taken together, requiring MCAs to be reported could lead to data quality issues, which would not advance the purposes of section 1071.
The CFPB will continue to monitor developments in the markets for MCAs and other sales-based financing to determine whether over time a subset might be appropriately included in the definition of “covered credit transaction” for purposes of data collection.
The CFPB seeks comment on this proposed revision to the rule. It also seeks comment on topics including, but not limited to, the extent to which MCAs differ from or resemble traditional lending products; the diversity of MCA terms and practices and how they impact whether MCAs, or a subset of MCAs, meet the definition of “credit” under ECOA; whether certain types of MCAs are more or less appropriate for exclusion; and suggestions for how the 2023 final rule could be modified with respect to MCAs if the CFPB ultimately does not exclude them. The CFPB further seeks comment on alternative definitions to the one proposed in
§ 1002.104(b)(7).
