- 1HB 700 bars automatic debits without a perfected first-priority security interest in the account.
- 2The law also bars the Finance Commission from capping rates, charges or fees on sales-based financing.
- 3MCA Pay says merchants in Texas already use its tool to initiate payments to funders.
When Texas passed HB 700 last June, the most notable piece was a prohibition on automatic debits of a recipient's deposit account by a commercial sales-based financing provider unless it holds a perfected first position. Some observers argued that this effectively banned merchant cash advances, on the premise that perfecting a true first position on a deposit account is nearly impossible for MCAs that rely on ACH instead of credit card splits. The text of the law supports a narrower reading.
A framework, not a ban
The legislature could have banned sales-based financing outright. Instead it set out a framework for providing it legally, with guidance on registration, disclosure and oversight. It also barred the Finance Commission of Texas from setting any ceiling on the annual percentage rate, finance charge or fees for commercial sales-based financing, which signals that there is no cost cap.
The Texas Office of Consumer Credit Commissioner (OCCC) held an open forum in November to hear how best to craft and enforce rules. While the OCCC writes those rules, attention has returned to the statute's "certain automatic debits prohibited" provision. In substance, a provider or broker may not set up automatic debiting of a recipient's deposit account unless it holds a validly perfected, first-priority security interest in that account under Chapter 9 of the Business & Commerce Code. The HB 700 text and the earlier report on the governor signing the ACH prohibition cover the details.
One company's workaround
That language does not say merchants cannot pay providers at all. MCA Pay analyzed the law and built a tool that lets merchants pay sales-based financing providers without funders automatically debiting accounts. Merchants set up a system on their own initiative to send payments to the funder they choose, so the merchant stays in control. MCA Pay says merchants in Texas are already using it.
An MCA Pay representative said the company is comfortable on the regulatory side but urged everyone using the platform to check with their own counsel.
MCA Pay's two main partners, Gavriel Kalfa and Moshe Klar, come from outside the industry but worked with experienced operators to build the system. MCA Pay says it is neither the payments provider nor a law firm, but the platform that connects the pieces. The partners said they hope it allows MCA to continue in Texas compliantly.
Source reporting: deBanked.
