Update on Anti-MCA Legislation (Texas Factors, Get a DACA!)

I wanted to provide you with an important update on the Anti-MCA Legislation that the AFA, with support from members of the IFA Texas Chapter, helped to get passed this year in Texas.  We have summarized this law before, but in short, among other things, it importantly applies specifically only to MCAs, and requires them to get a first lien on a customer’s bank account in order to be able to trigger an ACH sweep from that bank account.  See Texas House Bill 700 (2025), which amended the Texas Finance Code by adding Chapter 398:  https://statutes.capitol.texas.gov/Docs/FI/htm/FI.398.htm.  

Texas is now in the rule-making stages with its regulatory bodies, the Finance Commission and the Office of Consumer Credit Commissioner.  The regulators held a conference recently.  In the conference, it was full of MCAs, who have hired their own lobbyists, and they were obviously trying to figure out loopholes to utilize.  Here’s a link to the conference: https://www.youtube.com/watch?v=VK9AVD-NcKM.  

As you likely already know, in order to have a first lien on a bank account, you have to have “control” over the bank account.  You do not perfect this type of lien by filing a UCC1.  This means you either have to be the bank itself (if you are a division of a bank), or you need a deposit account control agreement (“DACA”) from the bank giving you control.  That’s a hard step that is not insurmountable but nonetheless hurts the MCA business model of providing fast funding.  If you’ve ever gotten a DACA, you know it takes a little time to get the bank’s attention and once they send you the form, it takes a little more time to review the DACA and get it signed and all squared away.  MCAs target businesses that need funding right before payroll, so time is of the essence.  Desperation is their friend.  Having to go get a DACA is a cold shower to the MCA.   

On that note, once this law gets enforced and the rule-making period ends, it will be my advice that Texas factors get a Springing DACA over at least the main bank account(s) of their customers.  Springing DACAs, unlike Block & Sweep DACAs, give you control and a first lien, but they don’t sweep money into your account unless and until there is an event of default and you notify the bank to start sweeping money daily out of the customers’ account and into yours.  If you get the Springing DACA, then the bank will not give anyone else (i.e., an MCA) a DACA, and therefore no MCA can legally sweep your customer’s account, thereby killing the MCAs in Texas.    

Now, even if you don’t do this, only one MCA will be able to come along and get a DACA (assuming they go through the effort). I have a case right now with a record-setting 19 MCA’s!  If this new law were being enforced, that would not have happened; only one MCA could have gotten a DACA.  You have probably executed countless DACA’s, but as a refresher, these agreements are almost always provided by the bank itself and they are largely non-negotiable in substance.  They will give you a first lien on the bank account, subject only to the bank’s fees and customary charges (NSF fees, wire fees, monthly account fees, etc.).  The DACA will also provide an exhibit that contains the form of notice the bank requires from you, in order to initiate the block and sweep feature should it later become necessary.  Getting a DACA is an extra step and added expense, and some of your prospects might not like the idea.  But given the benefits, I think it might be worth it to implement this as a new protocol for your underwriting and onboarding.  And if you explain the reasoning behind it, and the fact that the block and sweep feature does not get triggered except upon a default, I think you might be able to sell it to your prospective clients.  To mitigate concerns, you can add a notice and opportunity to cure period before triggering that particular remedy.  The goal is not to prohibit you clients from paying bills and making payroll; the goal is simply to keep the MCAs at bay.  

The Texas Chapter of the IFA will be scheduling a Teams meeting soon, before yearend, so stay tuned for that.  If you are a Texas based factor (Texas entity or use Texas law to govern your agreements), and are not on our email mailing list, please email me:  JMedley@SpencerFane.com.  Regardless, and in the meantime, please gather your stories and see if your MCA-riddled clients will share their stories with Cole Harmonson, so he can report them to the OCCC.  You can email Cole directly:  Cole Harmonson cole@darebizcapital.com  

And to help our lobbyists fight the MCA cronies, who have lawyered up, would you consider joining the AFA and making a donation?  You can make it on behalf of the Texas Chapter when filling out the online form: making a donation.     

Thank you for your support!