- 1The CFPB proposes adding MCAs to the transactions excluded from Section 1071 coverage.
- 2The agency says it erred in the 2023 rule by treating all MCAs as credit.
- 3The CFPB is seeking comment, including on alternatives to its proposed MCA definition.
The CFPB has put forward a revised plan for rolling out its Section 1071 small business lending data rules, and it takes a different view of merchant cash advances than the agency did before. The 198-page proposal says MCAs should not be covered.
What the CFPB proposes
The Bureau would exclude MCAs, agricultural lending and small-dollar loans from the definition of a covered credit transaction. Its stated reasoning is that early data collection should focus on core, widely applicable products, namely loans, lines of credit and credit cards, before expanding to more niche products.
Mechanically, the CFPB would add a new item, proposed Section 1002.104(b)(7), to the list of excluded transactions. It defines an MCA as an agreement in which a small business receives a lump sum in exchange for the right to a percentage of future sales or income, up to a ceiling amount. References to MCAs and to the term "sales-based financing" would be deleted from commentary.
Why the agency is reversing course
In its 2023 final rule, the CFPB concluded that the ECOA's term "credit" is broad enough to cover MCAs, that MCAs are not factoring, and that in practice they are underwritten and repaid much like loans. The new proposal revisits that. It gives several independent reasons:
- Different structure. Concepts like an interest rate do not fit how MCAs are priced, so it is unclear data collection would serve the statute's purposes if many MCAs are not credit.
- A premature conclusion. The CFPB says it erred by deciding all MCAs are credit. The 2023 approach ignored differences across the market, and little case law addresses whether MCAs are ECOA credit.
- Precedent with leases. The Bureau left leases out of the 2023 rule while saying it could monitor the market, and proposes the same approach for MCAs.
- State law. Several states now require disclosures such as total cost of capital and financing rate, and the CFPB wants to watch how those laws develop first.
- Enforcement. Concerns about high costs and predatory practices can be handled through federal and state enforcement.
The agency also warns that many smaller MCA providers, which have not generally been regulated as credit, may lack compliance infrastructure, and that mandatory reporting could produce poor-quality data.
What's next
The CFPB says it will keep monitoring MCAs and other sales-based financing to see whether a subset should later be covered. It is seeking comment on how MCAs differ from or resemble traditional loans, how varied MCA terms affect the "credit" question, whether some MCAs are better candidates for exclusion, and how the 2023 rule might be modified if MCAs are not excluded. It also invites alternatives to the proposed definition.
Source reporting: deBanked.
