Regulation
North Dakota Law Regulates “Alternative Financing” as a “Loan”
May 30, 2025The state legislature in North Dakota recently passed House Bill 1127. This bill made a simple amendment to a 1970s-era law called the Money Brokers Act (“MBA”).
Despite its name, the MBA is not limited to brokers. It is the primary law regulating consumer and commercial lending in North Dakota. It applies to any person engaged in the act of arranging or providing loans. Such persons are called “money brokers” in the MBA.
This amendment adds a two-sentence definition of the word “loan”. When this amendment takes effect, the MBA will define “loan” as follows:
“Loan” means a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which the person borrowed. This includes alternative financing products as identified by the commissioner through the issuance of an order.
Is this is a big deal? Yes. Here’s why.
Until now, the MBA has always defined the term “money brokering” to include the act of providing “loans” but has never defined the term “loan”. As a result, forms of business financing that are not typically considered loans – such as factoring or revenue-based financing (also sometimes called “merchant cash advance”) would not be subject to the MBA. Adding this new definition of “loan” to the MBA creates significant risk that alternative forms of business financing will become subject to the regulatory burdens impose by MBA.
Those burdens are significant. The MBA requires money brokers to obtain a license from the North Dakota Department of Financial Institutions (“DFI”). The MBA also caps the maximum amount of fees and charges that can be impose by a money broker at a rate of 36% per year.
With this new definition, the North Dakota Department of Financial Institutions (“DFI”) can now issue an order designating any financing product as a loan subject to the MBA. Does the DFI intend to regulate revenue-based financing? That’s unknown at this time. The Commissioner of Financial Institutions provided a memorandum to the legislature stating that the new definition would allow DFI to ensure that North Dakota’s citizens “will have access to new lending products, without sacrificing safeguards”. It is possible that the Commissioner is intending to focus on consumer financing products and not commercial financing. Even if that’s the case, that’s small comfort.
There is still a problem with this law because the first sentence of the definition is simply too broad. It states that a “loan” includes a transaction with the following two features:
1. There is a contract by which a sum of money is delivered to another.
- A typical revenue-based financing is structured as a purchase of a merchant’s future revenue at a discounted purchase price. The purchase price is a sum of money delivered to the merchant.
- Invoice factoring transactions also involve a delivery of funds in the amount of the face value of the invoice minus a discount and/or a reserve.
2. At a future time, the person receiving that money agrees to return an “equivalent” sum.
- In revenue-based financing, the merchant agrees to deliver the purchased amount based on an agreed-upon percentage of the merchant’s revenue stream. Arguably this is a “sum of money” equivalent to the purchase price advanced to the merchant.
- Factoring is a bit more complicated. In recourse factoring, a factoring client sometimes is required to repurchase an invoice from the factor if the invoice is not paid on time. The repurchase price is based on the face value of the invoice. Arguably this is a “sum of money” equivalent to the face value of the invoice minus a discount and/or a reserve.
Even if the DFI does not order that revenue-based financing or factoring are loans, a North Dakota court could take the position that the definition of “loan” is now so broad that these products are already loans under the revised MBA. No DFI order is needed.
If a North Dakota court concludes these products are now subject to regulation under the MBA, including its 36% rate cap, then this opens the door for North Dakota businesses that obtain financing to sue any provider that imposes charges that effectively exceed that rate cap.
It’s not clear whether the North Dakota legislature understands what it just did. This amendment was part of a legislative package that was primarily focused on data security. The addition of the “loan” definition would be difficult to find if you weren’t looking for it. House Bill 1127 passed with almost unanimous support. Did all those legislators understand that this law could drive away products that offer working capital to businesses that badly need liquidity and don’t have access to a bank line of credit? I doubt it.
Does this mean that providers of alternative financing should stop funding in North Dakota? That’s a business decision. We’ll certainly be watching to see if the DFI provides any guidance on any kind of “alternative financing” product it considers to be a loan. But providers of revenue-based financing and factoring should start thinking about whether they might need an MBA license North Dakota and whether they can live with the MBA’s 36% rate cap.
According to the North Dakota legislature’s website, this change in the MBA is likely to take effect on August 1, 2025. That gives you some time to think about whether North Dakota is still a viable market for your financial products.
Dodd-Frank 1071: Regulatory Uncertainty in Small Business Financing
May 28, 2025Jeffrey S. Paige is the Chief Legal Officer of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com
A Changing Regulatory Landscape for Commercial Finance in New York & Beyond
When President Trump returned to office on January 20, 2025, he signed several executive orders with significant implications, particularly for New York’s commercial finance sector and the revenue-based financing industry. One such order was a regulatory freeze that could impact rules issued by the Consumer Financial Protection Bureau (CFPB), specifically those concerning small business financing data collection under Dodd-Frank Section 1071. The rationale behind this freeze is that the CFPB, an agency not directly controlled by Congress, exceeded its intended regulatory scope.
Trump’s order not only halts the issuance of new rules but also mandates the withdrawal of any rules previously sent to the Office of the Federal Register. More critically, it directs agency heads to “consider postponing” any rules that have been published but have not yet taken effect, creating a 60-day review period for reassessment of their legal and policy implications.
“Should actions be identified that were undertaken before noon on January 20, 2025, that frustrate the purpose underlying this memorandum, I may modify or extend this memorandum to require that department and agency heads consider taking steps to address those actions,” the order concludes. This places Section 1071 in limbo, leaving financial institutions uncertain about compliance obligations moving forward.
However, New York funders may still need to prepare. Under 12 U.S.C. § 5552 of the Dodd-Frank Act, individual states (including their respective financial regulators and attorneys general) have the authority to enforce federal consumer financial law, specifically, the Consumer Financial Protection Act and 18 enumerated consumer laws such as TILA, EFTA, FDCPA, GLBA, and regulations issued by the CFPB. Simply put, New York has the ability to enforce these laws and regulations, including Section 1071, by bringing suit in federal or state courts or other appropriate proceedings against any “covered person or service provider” as defined and not excluded by the Dodd-Frank Act’s terms. It is therefore prudent for non-exempt lenders and funders to take a proactive approach.
What Is Dodd-Frank 1071?
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, sought to address vulnerabilities in the financial system exposed during the 2008 financial crisis. On March 30, 2023, Section 1071 amended the Equal Credit Opportunity Act (ECOA), empowering the CFPB to collect and report key data from financial institutions on small business financing. The compliance deadline varies based on the size of the institution, with the earliest deadline set for July 18, 2025, affecting Tier 1 providers, defined as high-volume financial institutions.
The goal of Section 1071 is to identify and address disparities in small business financing by analyzing key metrics such as:
- Demographics of business owners (race, gender, ethnicity).
- Financing terms, rates, and credit outcomes.
- Geographic data, including trends in underserved regions.
By requiring funders to disclose this information, the regulation seeks to foster accountability and ensure that small businesses—especially those owned by minorities and women—have equitable access to credit and capital.
CFPB & Section 1071 Timeline
2010: Dodd-Frank Act Enacted
- Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is established.
2011: CFPB Established
- The Consumer Financial Protection Bureau (CFPB) is created as an independent agency overseeing consumer financial protection laws, including small business lending regulations under Section 1071.
2017: CFPB Faces Legal Challenges
- Industry groups challenge the CFPB’s authority and structure, arguing that it lacks proper congressional oversight.
- Under the Trump administration, regulatory focus shifts toward deregulation, and CFPB rulemaking efforts on Section 1071 slowed down.
2020: U.S. Supreme Court Decision – Seila Law v. CFPB
- The Supreme Court rules that the president can remove the CFPB director at will, weakening its independence but allowing it to continue functioning.
2021: Biden Administration Revives Section 1071 Rulemaking
- The CFPB under Director Rohit Chopra prioritizes implementing Section 1071, aiming to enhance transparency in small business lending.
2022-2023: CFPB Proposes & Finalizes Section 1071 Rule
- The proposed rule is released in 2022, requiring lenders to collect and report loan application data, including business owner demographics.
- In March 2023, the final rule is issued, with compliance deadlines set for 2024 and 2025 based on lender size.
2023-2024: Legal Pushback & Court Challenges
- Industry groups file lawsuits, arguing that Section 1071 creates excessive regulatory burdens and violates constitutional limits on CFPB authority
- In October 2023, a Texas court stays the rule for certain plaintiffs, pausing enforcement for some lenders.
- In 2024, additional lawsuits escalate concerns over the rule’s implementation.
January 20, 2025: Trump Returns to Office & Freezes Regulations
- On his first day back in office, President Trump issues an executive order freezing pending regulations, including Section 1071.
- The order:
- Blocks new CFPB rulemaking,
- Withdraws rules not yet finalized,
- Delays implementation of already published rules for a 60-day review period.
- President Trump’s justification: The CFPB is an unelected agency that overstepped its authority, and its rules should be reassessed.
2025: Uncertainty & State-Level Action
- The CFPB’s authority remains in question, leaving financial institutions uncertain about compliance requirements.
- New York may independently implement similar reporting requirements, as it has done with previous commercial financing regulations.
- Many New York funders continue preparing for potential state-level enforcement despite the federal freeze.
How Alternative Financing Providers Can Adapt
Funders in the alternative financing space should remain agile and prepare for multiple scenarios. Even if Section 1071 is rolled back, transparency and fair funding practices remain critical for fostering trust and maintaining credibility in the market.
Steps funders can take include:
- Investing in technology to automate compliance processes, ensuring readiness for future regulations.
- Engaging with industry stakeholders to advocate for practical regulatory approaches that balance fairness and business efficiency.
- Maintaining transparency in financing practices to build stronger relationships with merchants and partners.
Looking Ahead
As the financial industry navigates the potential rollback of Dodd-Frank 1071 (Republican Congressman Roger Williams of Texas has introduced H.R. 976 seeking to do just that), alternative financing companies should focus on long-term strategies that prioritize both compliance and innovation. This is especially true in New York, where the legislature is currently considering a bill called the Fair Business Practices Act, modeled after Title X of Dodd-Frank, that would among other things expand the New York Attorney General’s enforcement powers and enhance penalties in this industry sector for UDAP violations. This further signals that New York as well as other states is seeking to fill any void left by the weakening of the CFPB. Whether the regulation remains in effect or is dismantled, financial institutions should stay proactive in adapting to changes while ensuring fair access to capital for small businesses.
Texas on Pace to Pass MCA Bill With Broker Registration Requirement
May 13, 2025
The State of Texas is moving toward passing a “commercial sales-based financing” bill that would impact the merchant cash advance industry. Among the key details is an MCA broker registration requirement that would require brokers to get approved by the Office of Consumer Credit Commissioner (OCCC) in order to broker any MCAs to a merchant located in Texas. Brokers would be subject to OCCC oversight and the rules governing transactions with Texas-based merchants would apply regardless of where the broker themselves is located.
Furthermore, The Finance Commission of Texas would have the authority to adopt its own rules “to prohibit certain acts or practices by providers including acts or practices the commission considers unfair.”
The current iteration of the bill, which has already passed the House and is now in the hands of the Senate to confirm, can be found here.
Virginia’s Sales-Based Financing Provider List
April 21, 2025
Virginia updates its list of registered sales-based financing providers on a weekly basis. The current list can always be accessed via THIS LINK HERE. It has also been available on DailyFunder since March 2023. At last tally, there were 202 registered providers, which is not that many more than the 150 that were on the list two years ago.
Both funders and brokers are required to be registered if they plan to do any MCA business with VA-based merchants.
If you need help with registration, contact a qualified industry attorney. Here is a short list to start from.
NY Reminds MCA Industry That Annual Reports are Due April 30 (and how to know if this applies to your organization)
April 11, 2025
On April 10, the New York Department of Financial Services (NYDFS) sent an e-mail alert to remind providers of “sales-based financing” (New York’s term for merchant cash advance) that providers must file a report analyzing the annual percentage rates (or APRs) on transactions completed in New York. The report is required only for providers that use the so-called “opt-in” method of estimating APRs in the disclosures required by the New York Commercial Financing Disclosure Law (CFDL).
If you are currently asking yourself whether your organization uses the “opt-in” method, then there is a good chance that you are and don’t know it. The explanation of the opt-in method, its connection to APR, and the annual filing requirement, are all buried deeply within NYDFS regulations that are difficult to understand, and not very easy to explain. That said, here’s a simplified explanation.
As you may know, the CFDL is a disclosure law that requires providers of sales-based financing (and most other forms of commercial financing) to provide a set of disclosures designed to provide businesses with information about the cost of the financing they are obtaining.
Sales-based financing is a unique financial product because payments are based on a percentage of business revenue. The initial fixed payment is supposed to be a factor of this agreed percentage and the estimated average revenue of the business. Under the NYDFS regulations, there are two permitted methods for estimating this revenue. The first involves looking back at the historic revenue of the business and estimating future revenue based on a review of past revenue. In the NYDFS regulations, this is called the “historical method”. There are rigid rules for using the historical method. For example, the time period for the look-back generally must be no less than four months and no more than 12 months. You must use that period for all transactions in the state. There are a number of exceptions to these general rules. Another requirement is that, once you decide on the look-back period, you must record this decision in an internal document that identifies the effective date of this decision. You must do the same any time you change the look-back period.
The “opt-in method” is essentially any method that does not conform to the rules for the historical method. In other words, unless you are following the rules for the historical method, you are using the opt-in method.
If you are using the opt-in method, then you have to provide a report to NYDFS no later than April 30 of each year. Currently, the report must include the following information covering the period of the preceding calendar year:
- For each transaction, the estimated APRs disclosed to the recipient and actual retrospective APRs of completed transactions.
- The annual mean of all differences between the estimated APRs disclosed to the recipient and actual retrospective APRs of completed transactions, which mean shall be reported both weighted by financing amount, and unweighted.
- A statement of any unusual and extraordinary circumstances impacting the provider’s deviation between estimated and actual APR.
Making this report is not a task for the faint-hearted. A comparison of estimated APR to “actual retrospective” APR requires tracking the performance of all completed transactions in New York for the year and calculating APRs based on the exact date and exact amount of every payment!
Note that the reporting is exclusively focused on APR, not revenue. What does average business revenue have to do with APR? To paraphrase Michael Corleone . . . my answer is this Senator: Nothing.
The NYDFS seems to be under the impression that the estimated APR on a sales-based financing transaction can be manipulated by aggressively interpreting average sales revenue, which would (so the theory goes) lower the initial fixed payment and increase the effective term of the transaction. There are some very good reasons to conclude that this theory is deeply flawed. For example, reducing the payment and lengthening the term would lower the estimated APR. But it will also result in a lower actual retrospective APR. There is nothing manipulative about it. A provider need not manipulate the average revenue estimate to provide a lower payment and longer effective term.
Setting aside the point that it was unnecessary to create rules for estimating average sales revenue, it should be clear that few providers would knowingly put themselves in the position of having to file this annual APR report. How can you ensure that you do not trigger this reporting requirement? Make sure your organization is complying with the rules for the historical method.
Will the CFPB’s Small Business Data Collection Rules Change?
April 4, 2025On April 3, the CFPB filed papers agreeing with the Revenue Based Finance Coalition’s (RBFC) request to stay the litigation between them over coverage of the Small Business Lending Rule. As it last stood, a federal court was leaning toward the CFPB’s side that the 888 pages of data collection rules should apply to MCAs despite them not being loans.
As to why the CFPB would agree to a stay, the agency explained that it may now be tweaking the rules at issue.
“New leadership has been assessing the Final Rule and the issues that this case presents to determine the CFPB’s position. CFPB’s new leadership has directed staff to initiate a new Section 1071 rulemaking. The CFPB anticipates issuing a Notice of Proposed Rulemaking as expeditiously as reasonably possible. Because the anticipated rulemaking process may moot or otherwise resolve this litigation, holding this matter in abeyance would conserve the Court’s resources.”
– CFPB in its response to the Motion to Stay
“The CFPB respectfully proposes submitting periodic status reports every 90 days during the pendency of the rulemaking and will promptly inform the Court when the rulemaking process is complete,” the Agency stated. “Within 30 days of the issuance of a final rule, the CFPB proposes that the parties confer and notify the Court of whether and how they wish to proceed.”
The small business data collection rules are scheduled to go into effect in July.
Small Business Truth in Lending Bill Under Consideration in Maryland
March 27, 2025The “Small Business Truth in Lending” Bill introduced in Maryland on January 24, 2025, is continuing to advance through the state’s legislature. Among the finer details in the bill is an APR disclosure requirement on commercial finance transactions. The bill has attracted testimony from various organizations including the Responsible Business Lending Coalition, Revenue Based Finance Coalition, Innovative Lending Platform Association, Electronic Transactions Association, Rapid Finance, the Maryland Transportation Builders and Materials Association, and the Maryland Bankers Association. The majority have argued against the bill’s APR requirement. The combined testimonies are available here.
The bill’s path can be followed here.
Connecticut General Assembly Banking Committee Discusses Prejudgment Remedies and MCA
March 4, 2025The scheduled hearing on Connecticut Bill 1093 as it pertains to Ex Parte Prejudgment Remedies for Merchant Cash Advances took place this morning, the discussion of which was broadcast live.
It’s the very first bill discussed in this video below. I’d make the video start where the discussion starts but at present it is still being streamed live and won’t let me do that. Watch below:
