Banking and Finance Law Daily Wrap Up, CONSUMER FINANCIAL PROTECTION BUREAU—S.D. Fla.: Magistrate recommends CFPB prevail in MCA challenge to small business lending rule, (Feb 19, 2025)

By Justin Marcus Smith, J.D.

In viewing MCA agreements as a whole, rather than focusing on isolated wording, the magistrate concluded they are promises to repay.

Revenue Based Finance Coalition (RBFC), a merchant cash advance (MCA) provider, should not prevail on its motion for summary judgment in its Administrative Procedure Act (APA) action challenging the small business lending rule, recommended a magistrate judge of the federal district court in Miami, Florida. In promulgating the final rule, the Consumer Financial Protection Bureau adopted a definition of “credit” that tracked the Equal Credit Opportunity Act (ECOA) definition. Adoption of that definition was within the CFPB’s statutory authority under Section 1071 of the Dodd-Frank Act amending ECOA. The magistrate disagreed with RBFC’s argument that MCA payment obligations are not “debt” because they pertain instead to an interest in property. The magistrate reasoned that a merchant’s future sales are not property because they are inchoate, they do not yet exist. Despite attempts to cast MCA agreements as a purchase and sale, the magistrate said the reality is that an MCA agreement is “not a sale of an existing asset or property interest.” The magistrate also found that the CFPB did not act arbitrarily or capriciously in adopting the final rule where it considered RBFC and other objections to inclusion of MCAs, conducted a cost-benefit analysis, and where RFBC was not reliant on prior CFPB interpretation (Revenue Based Finance Coalition v. Consumer Financial Protection Bureau, No. 1:23-cv-24882-DSL (S.D. Fla. Feb. 17, 2025)).

Background. Plaintiff RBFC filed a judicial complaint seeking review of a CFPB final rule, known as the small business lending rule, under the APA. The rule requires financial institutions to collect and report data for applications of credit. RBFC specifically challenged that the rule did not exclude merchant cash advances (MCAs) from collection and reporting requirements.

RBFC and the CFPB defendants cross-moved for summary judgment. The magistrate judge assigned to prepare a report and recommendation on the motions recommended that the court deny summary judgment to RBFC and grant summary judgment to the CFPB defendants.

Rule history. The magistrate noted how “many stakeholders” had urged the inclusion of MCAs for reasons that included: widespread use by small businesses; disproportionate use by minority-owned small businesses; and, because MCAs should be considered credit under Section 1071 of the Dodd-Frank Act. The magistrate also noted reports of harmful practices by some MCA providers that lent “credence” to many stakeholder claims that MCAs may raise fair lending concerns. The CFPB also recognized that MCAs vary in form and substance while acknowledging that its comments addressed “typical” MCAs.

The Final Rule also observed that all but one of the commenters that supported exclusion of MCAs were MCA providers or MCA trade associations. RBFC commented in the same way it did now, that MCAs should not be regulated as credit transactions.

In the end, the CFPB defined covered credit transactions using ECOA’s statutory definition of credit, which includes MCAs, to include a wide variety of products without singling any one product out. The CFPB explained that inclusion of MCAs was important to the fair lending and community development purposes of Section 1071. It also noted that MCA transaction data would reflect financing demand by the “smallest and most vulnerable businesses.”

Inasmuch as the RBFC complaint sought final review of final agency action under the APA, the magistrate said that called for legal error standard of review of an appellate tribunal. The Supreme Court had already rejected RBFC’s argument that the CFPB’s funding is unconstitutional.

Statutory authority. In the magistrate’s opinion, a review of the final rule language showed why RBFC did not have a good argument, in light of ECOA’s statutory mandate, that the CFPB exceeded its statutory authority. The rule relied on extension of credit in any form, and the CFPB adopted the rule pursuant to the ECOA statutory mandate that the CFPB must prescribe rules and issue guidance about compiling data on credit applications, for example, whether an applicant business is women-owned, minority-owned, or a small business.

The statutory ECOA requirements defined credit broadly as the right to defer payment of debt, or to incur debts and defer payment, or to buy property or services and defer payment therefor. See 15 U.S.C. § 1691a(d). The magistrate saw an identity between statutory credit transactions and those covered by the final rule. Accordingly, the CFPB did not exceed its statutory authority through its definition of the scope of credit transactions covered. Likewise, the CFPB’s decision not to exclude MCAs from the scope of the definition of covered credit transactions was also within statutory authority. The CFPB might adopt exceptions as necessary, but its decision not to do that nonetheless tracked the ECOA’s definition of credit.

The parties agreed that the Final Rule definition of credit in 12 C.F.R. §§ 1002.2(j), 1002.102(i) was the same as in ECOA, 15 U.S.C. § 1691a(d), but they disagreed whether MCAs fit the definition. Pertinent here, they did not agree on the meaning of “debt,” which ECOA left undefined. RBFC argued “debt” should have a meaning narrower than money a merchant owes to an MCA money provider under an MCA agreement. RBFC said the meaning of “debt” should be confined to any obligation to repay a specific sum of money owed as enforceable by the creditor. Under this view, an MCA could not be viewed as a promise to repay, it would be promise to deliver to the provider the property the provider purchased, specifically, a portion of the merchant’s interest in its future sales.

However, contrary to RBFC’s contentions, the magistrate concluded that RBFC failed to establish that an MCA transaction is a purchase of all right, title, and interest in any portion of a merchant’s future revenues. Although RBFC presented examples MCA agreements that attempted to cast the agreement as a purchase and sale, the magistrate said the reality is that an MCA agreement is “not a sale of an existing asset or property interest.” The problem, per the magistrate’s reasoning, was that the purported property would not yet exist. This meant there was no present property interest, only a promise to deliver or pay something in the future, and no amount of expectation would transform that promise into a property interest in the eyes of the law.

The magistrate found that RBFC also failed to establish that MCA agreements do not create enforceable obligations when a merchant’s promised sales decline or cease. Reduction or even extinguishment of what a merchant might owe does not make an MCA agreement, itself, unenforceable. Terms that tie repayments to sales merely define the “contours and conditions” of the parties’ rights and obligations and the resulting enforceable debt.

The magistrate further distinguished between successful debt collection and being able to enforce a contractual right. RBFC did not identify anything that would prevent an MCA provider from asserting a right to enforce an MCA agreement even on merchant breach and failure to pay.

Next, as to the right to defer payment, a right intrinsic to the meaning of “debt” and “credit,” the magistrate said RBFC’s argument failed to consider what that right actually means. RBFC argued MCAs do not give merchants a right to defer payment because merchant obligations are contingent on sales. The magistrate disagreed because the fact that a merchant is not obligated to pay its debt to the MCA provider until the merchant makes future sales is, itself, a great example of a right to defer payment.

APA requirements. Despite RBFC’s various challenges to the rule and the rulemaking process, the magistrate found the CFPB’s actions were not arbitrary or capricious.

First, the magistrate concluded the CFPB did not act with improper motives. RBFC argued imposition of the final rule was arbitrary and capricious because the CFPB had an improper motive to benefit sales-based financing competitors to create a more level playing field among industry participants. RBFC cited a specific statement from the Final Rule that the CFPB believed inclusion of MCAs would “create a more level playing field across financial institutions.” RBFC tied that to a comment to the Proposed Rule in which the CFPB said it decided to include MCAs based on stakeholder concerns about unequal regulatory burdens. The CFPB responded that RBFC selectively quoted the materials and the proper context showed inclusion of MCAs was meant to generate more complete MCA market data in furtherance of Section 1071 purposes.

The magistrate’s own review found the CFPB’s explanation made sense and the CFPB did not have an improper purpose or consideration. There was no sign of animus toward MCA providers. The level playing field words referred to fulfilling Section 1071 data collection objectives and shedding light on credit transactions pertinent to small businesses. The arbitrary and capricious standard was deferential, and it appeared that the CFPB relied on the factors Congress intended.

As for MCA benefits the RFBC promoted in a comment letter, and how the rule might harm them, the CFPB said it acknowledged those benefits in the rulemaking process. The magistrate found the CFPB recognized the limited number of commenters who argued against MCA inclusion in the final rule definition of credit. The APA did not require the CFPB to respond to every point and argument raised in every comment, only to significant comments about reasonableness. The magistrate concluded RFBC’s arguments about the benefits of MCAs did not strike at the reasonableness of final rule integrity, structure, or lawfulness. The CFPB considered MCA benefits and rule impact. It also acknowledged allegations of problematic MCA provider practices. The magistrate concluded the CFPB appropriately considered RBFC’s comments when it adopted the final rule.

As to whether the CFPB conducted a proper cost analysis, the RBFC said the case mirrored PayPal, in which the U.S. District Court for the District of Columbia vacated a CFPB cost-benefit analysis that omitted mention of “digital wallets.” See PayPal, Inc. v. CFPB, 728 F. Supp. 3d 31, 43 (D.D.C. 2024). However, the magistrate observed, in contrast to PayPal, that the CFPB expressly addressed the costs and benefits of the final rule on MCAs, and the APA required no more than the best effort analysis the CFPB conducted. The magistrate also concluded the CFPB reasonably considered reliance interests where the RBFC did not show any legitimate reliance on prior CFPB interpretation.

The case is No. 1:23-cv-24882-DSL.

Magistrate Judge: Sanchez, E., M.J.

Attorneys: Daniel Randolph (Covington & Burling LLP) for Revenue Based Finance Coalition. Andrea J. Matthews for the CFPB.

Companies: Revenue Based Finance Coalition

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