How New York's MCA Criminalization Bill Reshapes Bank Verification Compliance for Funders

Key Takeaways

A new New York State Senate bill would extend criminal usury laws to merchant cash advances, invoice factoring, and revenue-based financing, potentially classifying certain MCA transactions as felonies.
If the bill advances, funders will need ironclad audit trails proving the commercial nature and agreed-upon terms of every deal, making bank verification documentation a frontline compliance tool.
Asynchronous, video-based bank verification creates timestamped, tamper-resistant records that satisfy the evidentiary demands a criminalization framework would introduce.
Funders who rely on phone-based verification or unrecorded processes face the highest exposure under this proposed regime, because they cannot retroactively produce proof of due diligence.
The bill's language is broad enough to capture renewal and stacking scenarios, meaning every funding position, not just the first advance, needs verifiable documentation.

TL;DR: A New York Senate bill proposes criminalizing merchant cash advances and similar products under expanded usury statutes. For MCA funders, this means every deal must carry defensible, timestamped proof of underwriting due diligence. Bank verification software for funders, particularly async platforms like Exact Balance that produce recorded audit trails, shifts from a workflow convenience to a compliance necessity overnight.

New York Wants to Make MCA a Criminal Offense. Here's What Funders Need to Know.

Bank verification software for funders has long been framed as a speed and fraud tool. A new bill in Albany is about to make it a legal survival tool. In May 2026, a New York State Senate bill surfaced that would rewrite the state's criminal usury statutes to explicitly cover invoice financing, revenue-based financing, merchant cash advances, retail installment contracts, and any transaction that "in substance functions as the advance of funds in exchange for a future payment." The language is sweeping. If enacted, it would not merely regulate MCA activity but potentially classify certain transactions as criminal acts carrying felony-level penalties.

For funders operating in or originating deals through New York, the implications are profound. The bill does not carve out exemptions for products structured as purchase agreements rather than loans. It looks at economic substance over legal form. That means the compliance burden shifts from contract drafting to provable due diligence: can you demonstrate that you verified the merchant's financials, understood the cash flow, and documented the entire process? This article breaks down what the bill actually says, where the compliance gaps hide, and why async bank verification is the most practical response funders can deploy right now.

What the Bill Actually Says and Why the MCA Industry Should Pay Attention

Substance Over Form: The Core Legal Shift

Most MCA contracts are structured as purchases of future receivables, not loans. This distinction has historically shielded funders from usury statutes in New York and other states. The proposed bill dismantles that shield. By targeting any transaction that "in substance" functions as an advance of funds for future repayment, the legislation invites prosecutors and courts to look past contract labels and examine the economic reality of each deal.

This is not a new legal concept. Courts in multiple jurisdictions have already applied substance-over-form analysis to MCA agreements, most notably in cases where fixed daily payment amounts and reconciliation provisions were deemed to create a loan-like obligation. What is new is the criminal dimension. Previous reclassification arguments played out in civil litigation, where the worst-case outcome was contract rescission or penalty damages. Under a criminal framework, individual executives and compliance officers could face personal liability.

The Breadth of Covered Products

The bill does not stop at traditional MCAs. Invoice factoring, revenue-based financing, and retail installment contracts all fall within its scope. For funders who have diversified into multiple product lines, perhaps offering both MCAs and small business term loans, this means a single compliance framework must cover the entire portfolio. As we explored in our analysis of how the diversity of revenue-based financing products complicates bank verification, many funders already struggle to apply consistent underwriting standards across different product types. The proposed bill would turn that inconsistency into a prosecutable vulnerability.

Renewal and Stacking Exposure

One of the bill's most underappreciated risks involves renewals and stacked positions. If a funder provides a second or third advance to the same merchant, each transaction could be evaluated independently under the proposed statute. A renewal that consolidates an existing balance and adds new funds might be analyzed differently than the original advance. Stacking scenarios, where multiple funders hold concurrent positions, create even more complexity. Each funder in the stack would need to demonstrate independent due diligence, because relying on another funder's verification would not satisfy the evidentiary standard that criminal proceedings demand.

Where Bank Verification Fills the Compliance Gap

The Audit Trail as Criminal Defense Evidence

In a civil dispute, incomplete records might cost you a settlement premium. In a criminal proceeding, they cost you your defense. The proposed bill would create an environment where prosecutors could argue that a funder failed to conduct adequate due diligence before advancing funds. The strongest rebuttal is a complete, timestamped, tamper-resistant record of what the funder reviewed before funding.

Traditional bank verification methods, phone calls where an underwriter walks a merchant through their online banking portal, produce almost no documentary evidence. Even if the underwriter takes notes, those notes are self-generated, undated in any verifiable way, and trivially challengeable in court. A recorded, asynchronous bank verification session is fundamentally different. It captures the merchant's live banking portal in real time, with timestamps on every interaction, encrypted storage, and a chain of custody that holds up to legal scrutiny.

Exact Balance was built for exactly this scenario. Every verification request generates a complete activity log: when the link was sent, when the merchant opened it, when recording began, what screens were captured, and when the submission was completed. That audit trail does not just help underwriters make better decisions. Under a regime like the one proposed in New York, it becomes Exhibit A in demonstrating that the funder acted responsibly.

Criminal usury prosecutions often hinge on whether the borrower (or, in MCA terms, the merchant) understood the terms of the transaction. A recorded verification session in which the merchant navigates their own banking portal, views their own balances, and reviews their own transaction history creates implicit evidence of engagement and understanding. The merchant is not passively signing a document they may not have read. They are actively participating in a process that demonstrates financial literacy and consent.

This is a subtle but powerful distinction. Regulators and prosecutors increasingly look for evidence that merchants were informed participants, not victims of predatory practices. The New York State Senate's broader push toward merchant protection mirrors trends we have tracked in other states. Funders who can prove a collaborative verification process, rather than a perfunctory checkbox, will be far better positioned if this bill or anything like it becomes law.

Custom Instructions as Compliance Documentation

One feature that becomes critically important under a criminalization framework is the ability to define exactly what the merchant needs to show during verification. Generic instructions like "show us your bank statements" are not sufficient when a prosecutor asks whether the funder verified specific transaction patterns, outstanding obligations, or account ownership. Exact Balance allows funders to specify account summaries, date ranges, transaction details, and other criteria in the verification request itself. Those custom instructions are stored alongside the recording, creating a documented record of what the funder sought and what the merchant provided.

This level of specificity matters because the proposed bill's substance-over-form test will inevitably lead to questions about what the funder knew or should have known at the time of funding. If your verification instructions demonstrate that you were looking for signs of existing obligations, cash flow irregularities, or balance manipulation, you have a far stronger defense than a funder who cannot produce any record of what they checked.

Real-World Scenarios: How This Plays Out for Different Funders

Consider three hypothetical funders operating in New York in 2026, each with a different verification approach.

Funder A uses phone-based verification calls. An underwriter dials the merchant, asks them to log into their bank portal, and verbally confirms balances and recent deposits. No recording is made. The underwriter jots down a few numbers on a notepad or spreadsheet. If the bill passes and a deal goes bad, Funder A cannot produce verifiable evidence of what was reviewed. The underwriter's notes are hearsay at best. Prosecutors can argue that the funder skipped meaningful due diligence, and there is nothing to refute the claim.

Funder B uses open banking APIs to pull transaction data automatically. The data is clean and structured, but it only shows what was in the account at the time of the pull. It does not capture whether the merchant understood the process, whether account ownership was visually confirmed, or whether the data was manipulated before the API connection was established. As we discussed in our piece on how real-time balance checks create false confidence in MCA underwriting, API-based data is valuable but incomplete. Under criminal scrutiny, its gaps become liabilities.

Funder C uses Exact Balance. The merchant receives a secure link, records their banking portal at their convenience, and submits the recording. The funder's underwriter reviews the video, checks the activity log, and marks the verification as complete. Every step is timestamped, encrypted, and stored with a full audit trail. If the deal is later challenged, Funder C produces the recording, the activity log, the custom instructions, and the email chain. The evidence speaks for itself.

The difference between these three scenarios is not theoretical. It is the difference between a defensible position and an indefensible one. And under a criminal statute, "indefensible" carries consequences that no funder wants to contemplate.

Frequently Asked Questions

Would the New York bill make all merchant cash advances illegal?

Not necessarily. The bill targets transactions that function as advances of funds in exchange for future payments and exceed specified cost thresholds under criminal usury standards. MCAs priced below those thresholds, or those that genuinely operate as purchases of future receivables with variable repayment tied to actual sales, may fall outside the statute's reach. However, the substance-over-form language means courts would examine the economic reality rather than the contract's label, so funders cannot assume their current structure provides automatic protection.

How does bank verification help if an MCA funder faces criminal charges?

Bank verification recordings serve as contemporaneous evidence of underwriting due diligence. In a criminal proceeding, prosecutors must prove intent and conduct beyond a reasonable doubt. A funder who can produce timestamped video evidence of a thorough verification process, complete with custom instructions and an activity log, demonstrates that the transaction was conducted with care and transparency. This does not guarantee acquittal, but it is far more defensible than having no records at all.

Is asynchronous bank verification more compliant than live verification calls?

Asynchronous verification produces stronger compliance documentation because the entire session is recorded, timestamped, and stored with an immutable audit trail. Live calls, unless recorded with proper consent and stored systematically, generate little verifiable evidence. In jurisdictions moving toward stricter oversight, the evidentiary quality of your verification process matters as much as whether you performed one at all.

Are other states likely to follow New York's approach to MCA regulation?

New York has historically been a bellwether for financial regulation. California, Virginia, and several other states have already introduced MCA-specific disclosure and registration requirements. While criminal usury expansion is more aggressive than most current proposals, the trend toward treating MCAs as regulated financial products is accelerating. Funders who build compliance-ready workflows now will be better positioned regardless of which states act next.

Conclusion

New York's proposed bill to criminalize certain MCA transactions is not yet law, but it signals a clear direction. The days of relying on contract structure alone to avoid regulatory exposure are ending. Funders who invest in verifiable, documented, and auditable bank verification processes today are building the compliance infrastructure that tomorrow's legal landscape will demand.

Exact Balance provides the async, recorded, and fully auditable bank verification workflow that turns every deal into a defensible file. No scheduling, no unrecorded phone calls, no gaps in your audit trail. Visit exactbalance.ca to see how async verification fits into your compliance strategy before the regulatory window closes.