CFPB Proposes MCA Exclusion From Reportable Credit Transactions

The CFPB has proposed significant revisions to Regulation B's Small Business Lending Rule under Section 1071, narrowing the scope of covered transactions, redefining institutional coverage, modifying data fields, and extending compliance timelines.

Key proposed changes include:

• Scope of Covered Transactions: The CFPB proposes to exclude merchant cash advances, agricultural lending, and small dollar loans (under $1,000, inflation–adjusted) from the definition of reportable credit transactions.

• Financial Institution Coverage: The proposal would raise the coverage threshold, meaning only institutions originating a higher number of small business loans would be subject to reporting obligations, thus exempting more smaller lenders from compliance burdens.

• Data Collection & Fields: The rule aims to streamline data requirements by focusing on data points specifically listed in Section 1071 (such as time in business, NAICS industry code, number of principal owners), and removing or limiting additional data elements, like certain pricing data, due to concerns about context and data quality.

• Phased Compliance and Timing: The CFPB seeks to extend compliance dates for all tiers of lenders. For example, the largest institutions (Tier 1) now have until July 1, 2026, and smaller tiers are granted further extensions, with the first mandatory data filing deadlines falling as late as mid-2028 for some institutions.

• Other Adjustments: The Bureau is reconsidering definitions (such as ""small business""), the collection and handling of demographic data, and the timing and confidentiality of data submission to improve clarity and reduce the rule’s overall complexity.

These changes reflect the CFPB's response to litigation, operational feedback, and executive directives, aiming to make the regulation more targeted and manageable while still advancing the purpose of Section 1071—improving data on access to credit for small, minority-, and women-owned businesses.

The proposed rule is open for public comment for 30 days after Federal Register publication, and the CFPB notes that further operational or timing changes are possible in light of resource constraints and ongoing legal challenges."

How the Proposed Section 1071 Changes Could Exempt the MCA Industry and Protect Alternative Lender Pricing Models?

This proposal benefits alternative business lenders in sales-based financing by excluding their product category and sensitive data from public scrutiny, protecting proprietary structures and shielding executives from political issues related to pricing disclosure.

Why is the MCA Exclusion a Definitive Victory for Alternative Finance?

The proposed amendments to Regulation B explicitly exclude Merchant Cash Advances (MCAs) and other forms of sales-based financing from the definition of a "covered credit transaction". This move is a critical reversal of the CFPB's 2023 stance and validates the long-standing industry argument that these products are structurally incompatible with traditional lending regulation.

1. Concession of Product Heterogeneity and Non-Credit Status: The CFPB now acknowledges that MCAs are structured differently from traditional lending products and that core metrics associated with conventional loans—like "interest rate"—do not fit the way MCAs are priced.

   • The CFPB expressed concern that requiring data collection on MCAs might not advance the statutory purposes of Section 1071 because it remains unclear whether all MCAs constitute "credit" under the Equal Credit Opportunity Act (ECOA).

   • By defining an MCA as an agreement where a small business receives a lump-sum payment in exchange for the right to receive a percentage of future sales or income up to a ceiling amount, the exclusion provides clear boundaries for non-traditional, revenue-based financing structures.

   • This exclusionary stance is consistent with the Bureau's approach to complex products like leases in the 2023 rule, where the CFPB decided it could monitor the market without requiring them to be included in the formal data collection, minimizing potential confusion and compliance difficulties.

2. Strategic Focus on Core Products for Data Quality: The Bureau explicitly states that, at the onset of data collection under Section 1071, its focus should be on "core, generally applicable, lending products"—namely loans, lines of credit, and credit cards. This incremental, "start small" approach is intended to ensure initial data quality and limit market disturbance.

   • The CFPB conceded that compliance complexity could pose greater difficulties for specialized non-depository providers, risking diminished data quality if they were forced to comply without the appropriate infrastructure.

   • By removing specialized products like MCAs, which are subject to evolving state regulatory regimes, the CFPB avoids premature mandates that might conflict with state laws and waits to observe how the state landscape evolves before considering future expansion.

   • This narrowing of transactional scope means high-volume alternative lenders focusing exclusively on excluded products (like MCAs) are effectively removed from the compliance architecture entirely, resulting in substantial cost avoidance.

3. Removal of Small Dollar Lending: In addition to MCAs, the proposal excludes small dollar loans of $1,000 or less (subject to inflation adjustments beginning in 2035).

   • The CFPB believes that these very small loans are often satisfied by consumer credit options or specialized non-profit lenders, and their inclusion would not provide meaningful insight into the practices of "most core lenders".

   • Requiring detailed reporting on these transactions would make offering such small products uneconomical for lenders due to operational complexity, validating the industry perspective that regulation must respect market economics.

   • This exclusion further streamlines the definition of "covered credit transaction," minimizing the internal systems effort required by mainstream institutions that might inadvertently extend very small business credit products that resemble consumer credit.

How Does Removing Pricing Data Shield Proprietary Pricing Models?

The CFPB’s proposal eliminates several critical discretionary data fields, most controversially, pricing information and denial reasons. The decision to remove pricing data directly addresses institutional concerns about the exposure of trade secrets and the generation of misleading fair lending allegations.

1. Elimination of Highly Sensitive Data Points: The proposal excises the requirement to collect and report a complex array of pricing components previously mandated by the 2023 rule.

   • The removal specifically includes interest rate, total origination charges, broker fees, and information regarding prepayment penalties. The 2023 rule’s requirement for MCAs to report the difference between the amount advanced and the amount to be repaid is also removed as a result of the MCA exclusion and the removal of pricing data.

   • The Bureau determined that the relative utility of these specific data points was "not strong enough to justify the additional operational complexity". This effectively acknowledges the massive cost and architectural overhaul required to accurately capture and map proprietary pricing logic to a mandated regulatory format.

   • This material deletion from the external reporting requirements drastically reduces the risk of competitors reverse-engineering pricing strategies based on publicly available application-level data.

2. Mitigating Reputational and Legal Risk from Misinterpretation: The CFPB admitted that publishing pricing data without sufficient corresponding underwriting context could lead to "incorrect inferences about discrimination".

   • Lenders argued that critical proprietary metrics used to determine pricing (like credit score, collateral value, specific loan covenants, and complex risk factors) are not collected under Section 1071. Without these details, external analysts (including community groups and policymakers) would inaccurately conclude discrimination based solely on disparate pricing outcomes.

   • By removing this data, the CFPB is prioritizing reducing the operational and reputational harm to institutions over generating the most robust data set possible for fair lending enforcement. The resulting public data set shifts focus primarily to application volume and approval rates, masking potential discrimination in the quality and cost of credit.

   • The elimination of denial reasons further compounds this shielding effect; without documented justifications for adverse actions, demonstrating disparate treatment based on loan decisions becomes significantly more challenging for public data users.

3. Extended Compliance Runway for System Re-architecture: The single, delayed compliance date of January 1, 2028, for all remaining covered institutions provides ample time to incorporate these strategic regulatory changes.

   • This delay allows lending institutions to completely strip out the complex infrastructure previously designed to capture the 81 fields mandated by the 2023 rule and build a more minimal system focusing only on the statutory data points and a few critical enabling discretionary fields (like NAICS code and time in business).

   • Institutions previously covered but now falling below the increased 1,000-loan threshold will realize substantial cost savings by avoiding the one-time implementation costs and ongoing compliance expense entirely.

   • The delay and reduced scope are estimated to generate annual ongoing cost savings for impacted financial institutions ranging between $151 million and $166 million per year compared to the original rule's anticipated costs, providing direct financial relief to the high-volume providers remaining under the rule.

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