The Texas House and Senate are considering twin bills which would require companies offering commercial sales-based financing to provide specified disclosures and register with the Texas Finance Commission. While the spread of such requirements to additional states is not surprising, it is highly notable that the bills purport to make these transactions subject to usury laws.
The bills define "sales-based financing" as a transaction that is not intended for personal, family, or household purposes and is repaid (A) as a percentage of sales or revenue in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient; or (B) according to a fixed payment mechanism that provides for a reconciliation process that adjusts the payment amount to a percentage of sales or revenue. The definition would include, for example, loans with a sales-based repayment mechanism and merchant cash advances.
While the disclosure and registration requirements of these bills are similar to those adopted in other states, they also provide that fees and charges imposed in these transactions constitute "interest" for usury purposes under state law. The bills provide no guidance on how interest would be calculated for these purposes, which is simply not possible for most sales-based financing transactions because the timing of payments or revenue remittances is unknown at origination. If adopted as proposed, these provisions would represent a profound change in usury law and may be challenged—particularly by merchant cash advance providers—since it is well-established that those transactions cannot be usurious. We also note that the bills do not eliminate the "absolute repayability" element of a usury claim, and therefore would not achieve their objective of expanding price controls in Texas even if passed.
The bills provide for agency enforcement—including a civil penalty of $10,000 per violation (up to an aggregate cap of $100,000) and treatment as an Unfair or Deceptive Act or Practice—but importantly expressly disclaim any private right of action.
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