- 1The CFPB's Section 1071 rule applies to MCA funders with 100+ annual originations
- 2Funders must collect demographic data including race, ethnicity, and gender of business owners
- 3Implementation begins in phases starting Q3 2027
A Regulatory Earthquake
The Consumer Financial Protection Bureau has finalized its Section 1071 rule under the Equal Credit Opportunity Act, which will require lenders — including many MCA funders — to collect and report data on small business credit applications. The data includes the race, ethnicity, and gender of business owners, as well as detailed transaction information.
The rule, which survived multiple legal challenges including a Supreme Court review of the CFPB's funding structure, is now set to take effect in phases beginning Q3 2027. For the MCA industry, the implications are significant and far-reaching.
Who Is Affected?
The 100-Transaction Threshold
The rule applies to financial institutions that originate at least 100 small business financing transactions in each of the two preceding calendar years. For the MCA industry, this captures virtually every funder of meaningful size.
"Any funder doing more than about $5 million annually is going to be above the 100-transaction threshold," explains compliance attorney Rachel Marks of Berger, Marks & Partners. "That's the vast majority of the industry."
Do MCAs Qualify as "Credit"?
This is the critical question the industry has debated since the rule was first proposed. The CFPB's final rule defines "credit" broadly enough to encompass merchant cash advances and revenue-based financing products, despite the industry's longstanding position that MCAs are commercial transactions (purchases of future receivables), not loans.
The CFPB's position: if a product extends financing to a small business and involves repayment, it falls under Section 1071 regardless of how it's legally structured.
What Data Must Be Collected?
Funders will be required to collect and report the following data for every application received:
Applicant Information
- Business name, address, and legal structure
- NAICS (industry) code
- Number of employees
- Annual revenue
- Years in operation
Demographic Data
- Race and ethnicity of principal owners
- Gender of principal owners
- Veteran status of principal owners
Transaction Data
- Amount applied for and amount approved
- Type of financing product
- Decision (approved, denied, withdrawn)
- Reason for denial (if applicable)
- Interest rate or estimated cost of financing
Key Requirement: Self-Identification
Demographic data must be collected through a self-identification process — the applicant fills out the information voluntarily. Funders cannot refuse to process an application if the applicant declines to provide demographic data.
Compliance Timeline and Costs
Phased Implementation
Estimated Costs
Industry analysts and compliance consultants estimate implementation costs will vary significantly by funder size:
- Large funders (2,500+ transactions): $400K-$500K implementation, $150K-$250K annual ongoing
- Mid-size funders (500-2,499): $200K-$350K implementation, $80K-$150K annual ongoing
- Smaller funders (100-499): $100K-$200K implementation, $40K-$80K annual ongoing
"This is going to fundamentally change how we onboard merchants," said one compliance officer at a top-10 funder. "The data collection requirements alone will add friction to the application process, which runs counter to the speed advantage that MCA has over traditional lending."
Everyone saw the paper they were buying. Nobody wanted to be the first to stop sending them deals.
What Funders Should Do Now
Compliance experts recommend immediate action, even though the earliest effective date is Q3 2027:
- Assess your transaction volume to determine which tier you fall into
- Engage compliance counsel specializing in Section 1071
- Audit current application processes to identify gaps in data collection
- Evaluate CRM and origination platform capabilities — most systems will need updates
- Budget for implementation in your 2026-2027 planning cycle
- Train staff on demographic data collection procedures and anti-discrimination requirements
Frequently Asked Questions
Can funders avoid the rule by structuring MCAs as true sales of receivables? The CFPB's broad definition of "credit" makes this strategy unlikely to succeed. Legal challenges to the rule's scope were rejected during the rulemaking process.
What happens if a merchant refuses to provide demographic data? Funders must provide the opportunity for self-identification but cannot require it. Applications must be processed regardless of whether the applicant provides demographic information.
Will the data be made public? Yes, in anonymized form. The CFPB will publish aggregated data that allows analysis of lending patterns by geography, industry, and demographics — similar to HMDA (Home Mortgage Disclosure Act) data for home loans.
This article was reviewed by compliance attorney Rachel Marks of Berger, Marks & Partners and reflects the final rule as published by the CFPB. This is not legal advice — consult qualified counsel for compliance guidance specific to your operation.
