By Chad Otar
Small businesses across America have been leaning on alternative lending solutions like merchant cash advances (MCAs) for years now. Helping small businesses and entrepreneurs access the cash and capital they need to build and grow their businesses, this form of financing offers benefits that traditional financing can't. Luckily, there haven't been many regulatory barriers or obstacles for lenders looking to offer these lending opportunities. The industry is streamlined, does a solid job of regulating itself, and for the most part, succeeds or fails based on the reputation of the individual lenders themselves.
That may be changing in the near future, though.
Currently, there isn't much regulatory interference associated with MCAs. That goes for many other nontraditional lending products, too. The majority of MCAs aren't considered loans in the traditional sense. That allows them to sidestep regulations intended for traditional lenders.
The current landscape of nontraditional lending, from a regulatory standpoint, allows these kinds of lenders to be more flexible and more adaptive, and to innovate and iterate their services much faster. There just aren't as many regulatory issues to contend with.
However, this has fostered a bit of a Wild West perception on the part of state and federal regulators, who are itching to institute regulations on MCA offers and similar nontraditional lending packages.
New York is quickly becoming a hotbed for legislation by state and federal government officials and lenders scrutinizing MCA lending packages and other nontraditional lending services. In June 2020 both the Federal Trade Commission and the New York Office of the Attorney General filed lawsuits against major MCA companies.
These lawsuits were filed in the Southern District of New York (a particularly litigious federal court system) as well as with the Supreme Court of the state of New York. The suits make claims against the marketing of MCA programs, the collection practices that MCA companies utilize, and the alleged re-characterization of these types of lending offers to skirt regulations intended for traditional lending offers.
Nothing has been finalized regarding these lawsuits (yet). But it's obviously not the best of news when both the state of New York and the FTC are taking action against this kind of financing.
California is also eyeing regulation of MCA contracts. California has been particularly litigious against nontraditional lenders for quite a while now, and it appears to be leading the charge in this department. Because of unique verbiage and the California laws that govern lending for loans of $2,500 or more, MCA organizations were able to obtain California Finance Lenders Law licenses.
Once companies have these licenses registered to them, all of their transactions—including those that could be re-characterized later as traditional loans—are not considered to be usurious by the state of California. However, the Department of Business Oversight in California (working closely with the California Senate and Assembly) have been looking for ways to change the laws to strip out these kinds of protections for nontraditional lenders.
Again, nothing has been done (yet) but it will be interesting to see how things proceed moving forward.
The odds are good that as alternative lending solutions continue to gain popularity, nonbank lending and nontraditional lending operations will come under closer scrutiny by state and federal government organizations.
State and federal government bodies are already taking a closer look at the kinds of regulations already in place—as well as the kind of regulations that are missing—to better control nontraditional lending operations. So 2022 could very well be a year that we see a number of new bills signed into law governing this industry. Only time will tell.
Note: I referred to the following resources for this article:
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