The Regulatory Gap
Merchant cash advances occupy a regulatory gray zone. Because MCAs are structured as purchases of future receivables rather than loans, they fall outside the scope of most federal and state lending laws. The Truth in Lending Act does not apply. Usury laws do not apply. Most fair lending regulations have limited applicability.
This is not an accident. The MCA industry specifically structures its products to avoid loan classification.
Federal Oversight
At the federal level, there is no agency with primary regulatory authority over merchant cash advances. The CFPB has limited authority over commercial transactions. The FTC can pursue MCA companies for deceptive practices but this is enforcement after the fact. The result is that the federal government has essentially no proactive oversight of the MCA industry.
State-Level Regulation
States have been more active:
- New York. Banned the use of confessions of judgment against out-of-state borrowers in 2019.
- California. SB 1235 requires MCA providers to disclose estimated APR alongside factor rates, effective December 2022.
- Virginia. Enacted disclosure requirements for commercial financing including MCAs.
- Utah. Passed the Commercial Financing Registration and Disclosure Act.
Court Challenges and Recharacterization
The most significant regulatory pressure has come from courts. In landmark cases, judges have examined MCA contracts and concluded that the transaction functioned as a loan. When recharacterized, usury laws apply, and MCA effective rates routinely exceed legal limits.
What This Means for Borrowers
Minimal regulation means fewer protections. This makes it even more important to have an attorney review any MCA contract before you sign, and to consult with one immediately if you are struggling with an existing MCA.