Cash Advance Law and Regulation Explained

Cash advance laws vary by state, with some states having stricter regulations than others. In California, for example, cash advance lenders are prohibited from charging more than 36% APR.

In the US, the Military Lending Act has capped interest rates on payday loans for active-duty military personnel at 36% APR. This law aims to protect military members from predatory lending practices.

Some states, like Arizona, have banned payday lending altogether, while others, like Idaho, have implemented stricter regulations. It's essential to know the laws in your state before seeking a cash advance.

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Texas has a complex web of laws and regulations surrounding cash advances and payday lending. Many businesses offering payday loans are regulated by the Texas Finance Code, Chapter 393.

The Office of Consumer Credit Commissioner's regulations regarding credit access businesses can be found in 7 TAC 83 subchapter B. This chapter outlines specific rules for credit access businesses.

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Payday lending is heavily regulated at the local level in Texas. Cities like Austin, Balcones Heights, Dallas, Denton, El Paso, Houston, and San Antonio have their own ordinances governing credit access businesses.

Here are some key local regulations to be aware of:

Merchant cash advances, on the other hand, are not considered loans and are subject to different regulations. In Texas, merchant cash advances are legal, but the law governing them is often outside of Texas, such as in New York, Utah, or Virginia.

Payday loans are small loans based on very short terms, typically for $300 or less, and require repayment within two to four weeks.

Twelve million Americans take out payday loans each year, according to a large-scale study by the Pew Charitable Trust.

Annual spending on fees exceeds $9 billion, making it a massive industry.

Most borrowers pay more in fees than they originally received in credit, with the average payday loan borrower spending $520 in fees to repeatedly borrow $375.

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The industry has a way of pulling people into a cycle of debt, often bringing more pain than relief.

Payday lenders can collect from the borrower's income before other lenders or bills are paid, due to direct access to the borrower's checking account.

The CFPB found that 80 percent of payday loans are taken out within two weeks of repayment of a previous payday loan, highlighting the cycle of debt.

Regulation of cash advance companies is a complex issue, with varying laws and regulations across different states. In Texas, for example, local regulations are enforced through ordinances such as the Payday Lending Clearinghouse, which provides access to news updates, lawsuit pleadings, and sample ordinance language.

Merchant cash advance companies, in particular, have faced scrutiny from state and federal governments. In California, the industry was attacked through a series of class-action lawsuits, which led to some companies obtaining licenses under the California Finance Lenders Law. This allowed them to avoid usury laws, but also led to the inclusion of language in contracts that affirmed the conditional obligation of borrowers to repay.

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Regulatory efforts have also been made at the federal level, with the Federal Trade Commission and the New York Office of the Attorney General filing actions against merchant cash advance companies in 2020. These cases examined critical elements such as reconciliation provisions, finite term periods, and lender recourse in case of bankruptcy.

A key factor in determining whether an MCA agreement is a regulated loan or a purchase of future receivables is the presence of a reconciliation provision. If the agreement has a finite term period and allows for lender recourse in case of bankruptcy, it may be considered a regulated loan. This was the case in the Fleetwood Services LLC vs. Richmond Capital Group ruling, where the Second Circuit Court of Appeal upheld a district court judgment in favor of a borrower against an MCA lender.

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The FTC and NY AG have been taking a closer look at merchant cash advance companies. In 2020, the Federal Trade Commission and the New York Office of the Attorney General filed actions against two merchant cash advance companies – RCG Advances and Ram Capital Funding.

These actions examined the critical elements of the cases, but the article doesn't specify what those elements were. The fact that the FTC and NY AG are taking action against these companies is a clear indication that they're cracking down on potential wrongdoing.

The FTC and NY AG actions were filed in the Southern District of New York and the Supreme Court of the State of New York County of New York, respectively. This shows that the authorities are taking a serious approach to investigating these companies.

Here are the key takeaways from the FTC and NY AG actions:

The FTC and NY AG are sending a clear message to merchant cash advance companies: they're being watched and will be held accountable if they engage in unfair or deceptive practices. This is a positive development for businesses and consumers who are seeking transparency and fairness in the lending industry.

Regulation plays a crucial role in protecting consumers from predatory lending practices. Payday lending is heavily regulated in Texas, with local regulations varying by city.

In Austin, payday lenders must register with the city, as outlined in the Austin Code of Ordinances, Chapter 4-12. The city of Balcones Heights also has strict regulations in place, including monitoring of credit access businesses to prevent abusive lending practices.

Some cities in Texas have more comprehensive regulations than others. For example, Dallas has a separate chapter dedicated to credit access businesses, including zoning regulations. In contrast, the city of El Paso has a more straightforward chapter on credit access businesses.

Merchant cash advance companies, on the other hand, are largely unregulated at the federal level. They are structured as commercial transactions, rather than traditional loans, which allows them to operate with a great deal of latitude. However, some states, like California, have established limits on payday lending, including a maximum loan amount of $300 and fees limited to $45.

Here are some examples of local regulations in Texas cities:

In California, payday lenders are regulated by the Department of Financial Protection and Innovation (DFPI), which provides a financial services search tool to help consumers research lenders.

In the cash advance industry, lenders often engage in predatory practices that take advantage of vulnerable consumers.

Some lenders charge exorbitant interest rates, with annual percentage rates (APRs) reaching as high as 700%.

These high rates can lead to a cycle of debt, where borrowers struggle to pay back the loan due to the overwhelming interest charges.

The industry's lack of regulation has enabled these practices, leaving consumers with limited protections.

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Marketing practices in the industry have been called into question. The FTC has alleged that some companies make misleading claims about their contracts.

These claims include stating that a personal guarantee is not required, when in fact it is. A personal guarantee is an unconditional obligation to repay.

The FTC has found that some contracts contain this type of provision, which can be a significant issue for business owners. This can put their personal assets at risk.

The FTC has taken action against companies that have made these types of claims. This is a warning to other companies in the industry to be transparent in their marketing practices.

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Collection Practices can be a real challenge for consumers. The FTC has found that some companies use confessions of judgment, which can be problematic.

These confessions of judgment conflict with the defendants' own contracts, which state that consumers won't be held in breach if payments are made slowly. This is a clear contradiction.

The FTC has also identified threatening calls to consumers as a collection practice issue. These calls are related to repayment of advances and can be very intimidating.

In some cases, the defendants' contracts explicitly state that they won't hold consumers in breach if payments are delayed. However, the use of confessions of judgment ignores these agreements.

Recharacterization is a key issue in the merchant cash advance industry. The New York Attorney General has argued that defendant merchant cash advance lenders disguise their loans as "Purchase and Sale of Future Receivables", but in reality, they are loans.

Defendants' cash advances are marketed as loans, which is a clear indication of their true nature. The New York Attorney General has also cited underwriting practices that factor in merchants' credit ratings and bank balances, rather than their receivables, further supporting the loan classification.

Reconciliation is a critical aspect of lending, and it's not surprising that merchant cash advance lenders are accused of not reconciling merchants' repayment of the advances. This lack of reconciliation is a red flag for loan-like behavior.

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