The Amendment: A Closer Look

the MBA, despite it’s name, serves as the primary law regulating both consumer and commercial lending in North Dakota. It applies to anyone arranging or providing loans, classifying them as “money brokers.” The amendment adds the following definition of “loan”:

Loan means a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which the person borrowed. This includes alternative financing products as identified by the commissioner through the issuance of an order.

Why This Matters: Potential Impact on Alternative Financing

Previously, the MBA defined “money brokering” as providing loans but lacked a concrete definition of “loan” itself. This ambiguity allowed alternative financing methods like factoring and revenue-based financing (also known as merchant cash advances) to operate outside the MBA’s regulatory framework. The new definition creates a risk that these financing options could fall under the MBA’s purview.

The implications are considerable. The MBA mandates that money brokers obtain a license from the North Dakota Department of Financial Institutions (DFI) and caps fees and charges at 36% annually.

DFI’s Role and Uncertainty

The DFI now has the authority to designate any financing product as a loan subject to the MBA. While the DFI’s intentions remain unclear, a memorandum to the legislature indicated the new definition would ensure North Dakota citizens will have access to new lending products, without sacrificing safeguards. This statement leaves open the possibility that the DFI might focus on consumer financing rather than commercial financing, but even that offers limited reassurance.

The Definition’s Breadth: A Cause for Concern

Even without direct DFI intervention, the definition’s broad language poses a risk. Consider these points:

• delivery of Funds: Revenue-based financing involves providing funds to a merchant in exchange for a percentage of future revenue. Similarly, factoring involves providing funds against the face value of invoices.
• Equivalent Sum: In revenue-based financing, the merchant repays an amount based on revenue, which could be deemed an “equivalent” sum. Recourse factoring may require clients to repurchase unpaid invoices, potentially also meeting the “equivalent sum” criterion.

A North Dakota court could interpret the definition as encompassing these products, regardless of the DFI’s actions.This could lead to businesses suing financing providers for exceeding the MBA’s 36% rate cap.

Legislative Awareness and Potential Consequences

The amendment’s inclusion in a broader legislative package focused on data security raises questions about the legislature’s understanding of its implications. house Bill 1127 passed with near-unanimous support, suggesting that lawmakers may not have fully grasped the potential impact on businesses needing working capital.

The key question is whether legislators understood that this law could drive away products that offer working capital to businesses that badly need liquidity and don’t have access to a bank line of credit.

Moving Forward: What Should Businesses Do?

Whether alternative financing providers should cease operations in North dakota is a business decision. Monitoring the DFI for guidance on “alternative financing” products is crucial. Providers of revenue-based financing and factoring should assess the need for an MBA license and the feasibility of adhering to the 36% rate cap.

The changes to the MBA are expected to take effect on Aug. 1, 2025, providing a window for businesses to evaluate their position in the North Dakota market.