The merchant cash advance industry enters mid-2026 at an inflection point: a landmark federal data rule keeps MCA in a regulatory gray zone, yet state legislatures and courts are filling that void fast, and a flood of tariff-squeezed borrowers is expanding the market even as warnings multiply.

CFPB Finalizes Section 1071 Rule — MCAs Left Out

On May 1, 2026, the Consumer Financial Protection Bureau issued its long-awaited final revision to Regulation B's small-business lending data collection requirements under Section 1071 of Dodd-Frank. The rule requires lenders to collect and report application data for women-owned, minority-owned, and small businesses — but the final text expressly excludes merchant cash advances from the definition of "covered credit transaction."

The Bureau defines MCAs in the rule as agreements "under which a small business receives a lump-sum payment in exchange for the right to receive a percentage of the small business's future sales or income up to a ceiling amount," and concluded that initial data collection should focus on "core, widely used lending products." Agricultural lending and small-dollar loans under $1,000 are also excluded. The rule is effective June 30, 2026, with lender compliance required by January 1, 2028.

Significantly, the CFPB acknowledged in the rule's preamble that some advances could resemble loans — signaling possible future scrutiny — but for now, MCA funders face no federal reporting mandate.

Tariffs Create a New Wave of High-Cost Borrowers

The MCA industry has grown from roughly $9 billion in 2014 to nearly $20 billion, and tariff-driven demand is accelerating that trajectory. As NPR reported in February 2026, MCA funders have found a fresh market in small businesses scrambling to cover the added cost of imported goods — from steel and aluminum to microchips — after tariffs raised landed costs by 10% to 25% or more. Traditional bank credit is too slow for businesses facing immediate cash crunches.

The price of that speed is steep. Average annualized costs on MCAs run roughly 94%, and the debt spiral risk is real: one grooming business profiled stacked three cash advances totaling $950,000 to cover $800,000 in tariff bills, only to find the fees pushed total obligations to $1.2 million. NPR's follow-up reporting in March 2026 described the sector as a "shadowy world" exploiting a regulatory gap that states are now racing to close.

New York's FAIR Act Reshapes the Litigation Landscape

Effective February 17, 2026, New York's FAIR Business Practices Act — signed by Governor Hochul on December 19, 2025 — represents the most significant update to the state's General Business Law § 349 in more than four decades. The law extends the statute's prohibition on "unfair" or "abusive" acts to small businesses and non-profits, abrogating the prior requirement that conduct be "consumer-oriented."

For MCA borrowers, this is a material shift: small businesses in New York can now challenge funder conduct under the state's core consumer protection statute, opening new avenues for litigation and counterclaims in enforcement proceedings.

Connecticut Moves to Ban Prejudgment Remedy Waivers for MCAs

Connecticut, which restricted confessions of judgment (called "prejudgment remedy waivers" under state law) for cash advances under $250,000 back in 2023, is pushing further. In February 2026, state representative Jonathan Jacobson testified before the legislature on a bill that would outlaw prejudgment remedy waivers for merchant cash advances entirely. Funders found workarounds in the 2023 statute; the new legislation would close them.

At least three other states have introduced similar COJ restriction bills in 2026, following New York's 2019 ban on out-of-state confessions of judgment. The FTC has also continued pursuing MCA funders that use COJs as a collection shortcut.

Yellowstone Capital Settlement Payments Distributed

On April 3, 2026, Rust Consulting mailed settlement payments to qualifying merchants in the New York Attorney General's Yellowstone Capital case. AG Letitia James sued Yellowstone in March 2024, alleging that the company was effectively making loans — not true revenue-based purchases — at interest rates far exceeding what New York law permits, using fraud and deception in collections. The claim period closed January 9, 2026; merchants who submitted timely claims and paid more to Yellowstone than they received qualified for distributions.

What It Means

The CFPB's decision to exclude MCAs from its Section 1071 data rule gives the industry a temporary reprieve from federal transparency mandates — but the preamble's language about "loan-like" advances signals that relief may not last. In the meantime, state-level pressure is intensifying on multiple fronts: New York's FAIR Act broadens legal exposure for funders, Connecticut's COJ bill would eliminate one of the industry's most aggressive collection tools, and the Yellowstone settlement reinforces that state AGs are willing to pursue MCA providers who blur the line between advances and loans. For funders, the message is clear: the window for self-regulation is narrowing.