On November 12, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with a commercial financing company, resolving allegations that the company’s merchant cash advance (MCA) product was structured as a lending transaction and offered to California merchants without first obtaining a license as required by the California Financing Law (CFL). According to the DFPI, the MCA agreements in question provide the company with “broad authority to declare ‘default’ on its merchants and when doing so may use extensive recourse allowed under its [a]greement,” including in the event of insufficient funds requiring the full funding amount to be repaid, which DFPI argues, “does not put the risk of the ‘purchase’ of receivables on [the financing company]’s shoulders, but rather the risk of repayment on the merchant’s shoulders, just like a loan.” Moreover, the agreements provide for an indefinite repayment period, placing the “risk of repayment on the merchant by leaving the repayment period open until fully repaid (with fees and interest).” The consent order distinguishes between outstanding and future receivables, noting that under California law, commercial financiers purchasing a share of a merchant’s outstanding receivables without recourse (e.g., factoring), is generally not considered lending, but there is no similar recognition by the legislature or courts with respect to future receivables.
The consent order requires the company to (i) desist from lending in California unless and until licensed under the CFL; (ii) refund fees or payments collected from California merchants in excess of the 10 percent state interest rate cap for non-CFL licensees; and (iii) pay $20,000 to the DFPI to cover the cost of the investigation.
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