Texas Sales-Based Financing Update
When Texas introduced HB700 last June, deBanked noted that a significant part of the legislation imposes a ban on automatic debits from recipients’ savings accounts by commercial financial providers. Some critics quickly dismissed our perspective, arguing that the analysis regarding merchant cash advances (MCAs) was flawed. However, we believe the ban is quite definitive, especially since achieving a true first position in a beneficiary’s deposit account poses a steep challenge for those MCAs relying on ACH transfers instead of credit card transactions. Hence, discussions around compliance with the new law seem rather pointless.
If the Legislature’s intention was to eliminate sales-based financing, it certainly could have done so. Instead, it established a legal framework for how such financing can operate, providing guidance on registration, disclosures, and monitoring. Interestingly, the law states that the Texas Finance Commission cannot impose caps on annual percentage rates, finance charges, or fees related to commercial sales-based financial transactions. This signals that there’s no set limit on costs associated with this financing approach.
In November, the Texas Office of Consumer Credit Commissioner (OCCC) hosted a public forum to gather input from those affected regarding the creation and enforcement of upcoming regulations. As they work on developing these rules, people are revisiting the original wording that describes certain direct debits as prohibited.
Certain direct debits are prohibited.
A provider or commercial sales-based financial broker may not establish a mechanism by which a recipient’s deposit account is automatically debited unless the provider or broker holds a validly perfected security interest in the recipient’s account, first and foremost as against the claims of all others, under Title IX of the Commercial Transactions Act.
This wording doesn’t mean that merchants can’t fully pay their sales-based finance providers. Some companies agree with this interpretation. For example, MCA Pay analyzed the law’s content and created a system that helps merchants make organized payments to their sales-based finance providers without the necessity for automatically debiting from the recipients’ savings accounts. Merchants can take the initiative to set up their payment systems, maintaining control throughout the process.
It’s not just a hypothetical scenario; MCA Pay claims that merchants in Texas are already using this method for payments. “While we believe our approach complies with regulations, we advise users of this platform to consult with legal counsel,” a representative noted, emphasizing that control is going back to the merchants.
Interestingly, MCA Pay’s founders, Gavriel Kalfa and Moshe Klar, are newcomers to the industry, but they collaborated with seasoned professionals to create this system. MCA Pay itself isn’t a payment provider or a law firm, but rather a platform designed to facilitate these transactions.
“We hope MCA can deliver a compliant solution and continue its operations in Texas,” they added.
