Federal oversight of small-business lending has fallen to its lowest level in more than a decade. As the Consumer Financial Protection Bureau (CFPB) scales back enforcement and data-collection rules, states are moving quickly to fill the gap with disclosure laws, registration requirements, and aggressive enforcement actions targeting commercial financing providers.
Key Takeaways
- The CFPB has suspended enforcement of small-business lending rules, dismissed 17 of 34 active enforcement cases (16 with prejudice), and attempted an 88% workforce reduction from 1,689 to roughly 207 employees.
- Eleven states now have commercial financing disclosure laws, up from two enforceable laws at the end of 2022, with Texas (HB 700, effective September 2025) being the largest new market to regulate sales-based commercial financing.
- Proposed amendments to Section 1071 would raise the lender origination threshold from 100 to 1,000 covered transactions, drop the small-business revenue definition from $5 million to $1 million, and explicitly exclude merchant cash advances from coverage.
- New York secured a $1.065 billion settlement against Yellowstone Capital for fraudulent MCA practices with effective interest rates reaching 820%, and expanded enforcement authority through the FAIR Business Practices Act (effective February 17, 2026).
- The D.C. Circuit en banc ruling on the CFPB workforce reduction, expected spring 2026, will determine whether the bureau retains enough staff to function as a regulator, while ongoing state legislative sessions are expected to produce additional commercial financing disclosure laws.
Regulatory Summary
- What: Collapse of federal small-business lending oversight; acceleration of state-level regulation
- Who: CFPB (federal retreat), 11 state legislatures and attorneys general (state advance)
- When: Federal retreat began January 2025; state acceleration ongoing through 2026
- Status: Federal enforcement suspended; state enforcement expanding
Who Is Affected
This shift affects every participant in the small-business lending market. Borrowers using merchant cash advances, revenue-based financing, and other alternative commercial products face weakened federal protections but stronger state-level disclosure requirements depending on where they operate. SBA and conventional bank borrowers are less directly impacted, though the scaling back of Section 1071 data collection reduces market transparency for all borrower types. Lenders and brokers face a fragmenting compliance landscape where federal rules are being rolled back while state requirements multiply.
Background
The CFPB was created under the Dodd-Frank Act in 2010 with a mandate to protect consumers and small businesses from unfair financial practices. Under Director Rohit Chopra (2021-2025), the bureau finalized Section 1071 of the Equal Credit Opportunity Act, which required lenders to collect and report data on small-business loan applications, including demographic information designed to identify potential discrimination in commercial lending.
That trajectory reversed in January 2025. President Trump fired Director Chopra and installed Russell Vought, the OMB Director, as acting head of the bureau. Vought has publicly stated his intention to shut down the CFPB entirely.
What followed was systematic. A February 2026 GAO report (GAO-26-108448) documented the scope: stop-work orders on active examinations, 17 of 34 enforcement cases dismissed (16 with prejudice, meaning they cannot be refiled), and an attempted 88% workforce reduction from 1,689 to roughly 207 employees. Courts have partially blocked the layoffs, with a D.C. Circuit en banc ruling pending after oral argument on February 24, 2026.
On April 30, 2025, the bureau announced it would not prioritize enforcement of small-business lending under ECOA and Regulation B. By November 2025, remaining active litigation was being transferred to the Department of Justice.
What Changed
| Area | Before (2024) | Now (March 2026) |
|---|---|---|
| CFPB enforcement posture | Active supervision and enforcement | Suspended for small-business lending |
| Section 1071 scope | All lenders with 100+ originations; $5M revenue threshold | Proposed: 1,000+ originations; $1M revenue threshold |
| MCA coverage under 1071 | Included as covered credit | Proposed exclusion |
| CFPB staffing | ~1,700 employees | ~1,300 (25% reduction; 88% RIF pending court ruling) |
| Enforcement cases | 34 active | 17 dismissed (16 with prejudice) |
| States with disclosure laws | ~8 | 11 (TX, NY expansion in 2025-2026) |
Section 1071: Scaled Back Before It Started
The proposed November 2025 amendments to Section 1071 would dramatically narrow the rule's reach if finalized. The small-business definition would drop from $5 million to $1 million in gross annual revenue, reducing the universe of covered transactions. The origination threshold would rise from 100 to 1,000 covered credit transactions, exempting most community banks and smaller lenders. Most significantly for borrowers using alternative products, merchant cash advances would be explicitly excluded from coverage, reversing the bureau's 2023 position that MCAs fall within the scope of the rule.
A single compliance date of January 1, 2028 would replace the tiered schedule. The comment period closed December 15, 2025. No final rule has been issued. Given the bureau's operational state, the timeline for finalization is uncertain.
States Filling the Gap
While federal oversight contracts, state regulation of commercial financing is expanding at an accelerating pace. Eleven states now have commercial financing disclosure laws on the books, up from just two enforceable laws at the end of 2022. The trajectory is clear: as federal oversight contracts, state-level regulation accelerates.
Texas (HB 700, effective September 2025) is the most significant recent addition and the largest new market to impose regulation on sales-based commercial financing. The law requires written disclosure of total financing amounts, repayment totals, and estimated periodic payment amounts for transactions under $1 million. Providers must register with the Texas Office of Consumer Credit Commissioner.
The law also voids confession-of-judgment provisions and requires a first-lien security interest before establishing automatic debits from a merchant's account, creating significant operational friction for merchant cash advance (MCA) providers, companies that offer financing where repayment is tied to a percentage of future sales rather than a fixed loan schedule.
New York continues to set the enforcement standard. In January 2025, the state attorney general secured a $1.065 billion settlement against Yellowstone Capital and 25 affiliated entities for operating what the AG called fraudulent loans disguised as merchant cash advances, with effective interest rates reaching 820%. The settlement canceled over $534 million in outstanding small-business debts and permanently banned the defendants from the industry.
New York then expanded its enforcement authority with the FAIR Business Practices Act, signed December 19, 2025 and effective February 17, 2026. The law extends the attorney general's powers to cover "unfair" and "abusive" business-to-business practices, not just deceptive ones. Commercial financing terms, billing practices, and servicing conduct now fall squarely within the AG's enforcement mandate.
California (SB 1235, enforced since December 2022) requires standardized disclosures for commercial financing offers under $500,000. SB 362, signed October 2025 and effective January 1, 2026, strengthened pricing disclosure requirements and clarified the Department of Financial Protection and Innovation's enforcement authority over both licensed and unlicensed providers.
Borrower Implications
The practical result for small-business borrowers is a two-track regulatory environment. Borrowers working with SBA lenders and regulated banks operate under federal banking supervision that remains largely intact regardless of the CFPB's status. OCC, FDIC, and Federal Reserve oversight of depository institutions has not changed.
Borrowers using alternative products face a different picture. Those relying on merchant cash advances, revenue-based financing, and invoice factoring now depend heavily on the state they operate in for meaningful protection. A borrower in New York or California has enforceable disclosure rights and active enforcement mechanisms. A borrower in a state without a commercial financing disclosure law has significantly fewer protections than they did two years ago.
For all borrowers, the scaling back of Section 1071 means less data transparency in the commercial lending market. The original rule would have required lenders to report application data that could reveal patterns of discrimination and pricing disparities across demographics and geographies. The proposed narrower version would cover far fewer transactions and exclude merchant cash advances entirely.
What to Do
Borrowers evaluating commercial financing should take three steps now.
Check your state's disclosure requirements. If your state has a commercial financing disclosure law (California, Connecticut, Florida, Georgia, Kansas, Louisiana, Missouri, New York, Texas, Utah, and Virginia as of this writing), lenders are required to provide standardized terms before you sign. If your state does not, request written disclosure of total repayment cost, APR or equivalent rate, and all fees before committing to any financing agreement.
Understand the regulatory difference between products. SBA loans, bank term loans, and lines of credit carry federal banking supervision that has not materially changed. Merchant cash advances, factoring arrangements, and revenue-based products may carry little or no federal oversight depending on the provider and your location.
Document everything. In a regulatory environment where federal enforcement is suspended and state enforcement varies by jurisdiction, your own records are your strongest protection. Keep copies of all offer disclosures, signed contracts, payment records, and communications with lenders or brokers.
What to Watch
Three developments will shape this landscape in the coming months. The D.C. Circuit en banc ruling on the CFPB workforce reduction, expected in spring 2026, will determine whether the bureau retains enough staff to function as a regulator at all. The Section 1071 final rule, if and when issued, will set the scope of small-business lending data collection for years to come. And state legislative sessions through 2026 will likely produce additional commercial financing disclosure laws as the federal vacuum persists.
Borrowers and lenders should monitor their state attorney general offices and financial regulators as the primary source of regulatory risk in commercial financing for the foreseeable future.
Businesses comparing financing products can review the regulatory structure and qualification requirements for different loan types in CapitalXO's financing guides.