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California Enacts AB 801, the Fair Lending Examination Act: What Banks, Credit Unions, and Mortgage Licensees Need to Know

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On September 30, 2026, California Governor Gavin Newsom signed Assembly Bill 801 (AB 801), the California Fair Lending Examination Act. Effective January 1, 2027, AB 801 requires the California Department of Financial Protection and Innovation (DFPI) to incorporate compliance with federal and California mortgage nondiscrimination laws into recurring examinations of covered state-chartered banks, California credit unions, and California Residential Mortgage Lending Act (CRMLA) licensees. Under the Act, a violation of an applicable mortgage nondiscrimination law becomes independently enforceable under the institution’s governing California financial law.

What Happened?

AB 801 adds a formal fair lending examination framework to the Banking Law and California Credit Union Law and expands the existing scope of examinations required under the CRMLA. For covered banks and credit unions, the DFPI Commissioner generally must conduct a mortgage fair lending examination at least once every four years. For CRMLA-licensed residential mortgage lenders and servicers, DFPI must include fair lending compliance within the examination already required at least once every 48 months.

The examination scope expressly includes the federal Equal Credit Opportunity Act (ECOA), the federal Fair Housing Act, the California Fair Employment and Housing Act (FEHA), the Holden Act, and the Unruh Civil Rights Act. A violation of any applicable nondiscrimination law is treated as a violation of the Banking Law, California Credit Union Law, or CRMLA, as applicable, allowing DFPI to use its existing supervisory and enforcement authority or its authority under the California Consumer Financial Protection Law.

Which Institutions Are Covered?

AB 801 does not apply the same threshold to every institution. The new four-year examination requirement applies to a state-regulated bank or California credit union that satisfies at least one criterion in the federal Regulation C definition of a “financial institution” at 12 C.F.R. § 1003.2(g)(1)(v). In practical terms, the institution must meet the applicable federal loan-volume threshold referenced by that provision. By contrast, AB 801 amends the CRMLA to require a fair lending review as part of the regular examination of each residential mortgage lender and servicer licensee. Notably, the statutory text does not import the Regulation C threshold for CRMLA licensees.

What Laws Will DFPI Examine?

The Act identifies five central fair lending statutes, while preserving DFPI authority to examine for compliance with any other federal or California nondiscrimination law applicable to mortgage lending:

  • ECOA (and implementing regulation, Regulation B). Prohibits discrimination in any aspect of a credit transaction on a prohibited basis, including race, color, religion, national origin, sex, marital status, age, receipt of public assistance, and the good-faith exercise of rights under the Consumer Credit Protection Act.
  • Federal Fair Housing Act. Prohibits discrimination in residential real estate-related transactions based on race, color, religion, sex, familial status, national origin, and handicap.
  • California FEHA. Prohibits specified discriminatory housing and housing-finance practices and recognizes discriminatory-effect liability. For banks and credit unions, AB 801 specifically directs DFPI to require correction of a discriminatory effect under FEHA that is not attributable to the institution’s legitimate business interest.
  • Holden Act. Prohibits discrimination in the availability or terms of financial assistance for housing based on specified protected characteristics and certain neighborhood conditions. It also restricts consideration of a neighborhood’s racial, ethnic, religious, or national-origin composition in appraisal and credit decisions.
  • Unruh Civil Rights Act. Requires full and equal accommodations, advantages, facilities, privileges, and services in all business establishments and prohibits arbitrary discrimination, including discrimination based on characteristics enumerated in Civil Code § 51.

How Will the Examination Framework Operate?

DFPI may review records, examine personnel under oath, coordinate with state and federal agencies, Fannie Mae, and Freddie Mac, and accept another entity’s examination unless it lacks information DFPI needs. For covered banks and credit unions, DFPI must coordinate fair lending examinations with other scheduled examinations when practicable but may conduct targeted or off-schedule reviews for due cause. DFPI may also exempt a bank or credit union, or examine it less frequently, following a fully compliant examination. No parallel exemption applies to CRMLA licensees.

DFPI must provide written findings and ensure correction of violations. Findings are confidential but may be shared with law enforcement and regulators. Affiliates of banks and credit unions may be examined when documented evidence shows qualifying unlawful activity involving the affiliate. Examination fees may not exceed reasonable examination expenses.

Why Does It Matter?

AB 801 makes California mortgage nondiscrimination laws part of routine DFPI supervision and renders any such violations enforceable under each covered institution’s governing financial statute.

For covered banks and credit unions, the Act expressly requires correction of unjustified discriminatory effects under FEHA. DFPI may therefore assess whether facially neutral practices produce discriminatory outcomes in underwriting, pricing, exceptions, marketing, redlining, servicing, loss mitigation, and other mortgage activities. This state-law focus is especially significant because the CFPB’s 2026 amendments to Regulation B state that ECOA does not authorize disparate-impact liability. That federal position does not displace FEHA, which may also apply to CRMLA licensees engaged in covered housing-finance activities.

Covered banks and credit unions also face examination risk outside the ordinary four-year cycle: complaints or other evidence of possible discrimination may support a targeted or off-schedule examination.

What Do I Need to Do?

Covered institutions should use the period before January 1, 2027 to evaluate whether their fair lending compliance management systems are prepared for examination by the DFPI. This should include the following steps:

  • Map California-law requirements. Update fair lending policies and risk assessments to address FEHA, the Holden Act, and Unruh in addition to ECOA and the federal Fair Housing Act. The analysis should identify California-specific protected classes, prohibited geographic considerations, and discriminatory-effect risk.
  • Maintain comprehensive records. Document all facts surrounding inquiries, applications, and decisions. If a complaint is received, having a clean, transparent audit trail is critical because written findings from DFPI exams go directly to principals, officers, or directors, and violations become actionable breaches under the Banking Law, Credit Union Law, or the CRMLA. Also retain current policies, risk assessments, loan-level data, exception reports, complaint logs, management reporting, and remediation evidence in an exam-ready format.
  • Scrub and geocode loan data. Assemble comprehensive loan datasets and ensure every single record is accurately geocoded, and track marketing footprints and branch locations by geography.
  • Run statistical testing on underwriting and pricing. Conduct periodic (at least annually) risk-based testing of underwriting, pricing, exceptions, steering, redlining, marketing, servicing, and loss-mitigation outcomes, controlling for legitimate factors supported by policy and loan-level records.
  • Document business justifications for disparities. If the statistical review flags any disparities, pull comparative files, review exceptions and manual overrides, and document a clear legitimate business interest for any remaining variance.
  • Prepare for state-level disparate impact scrutiny. Evaluate whether neutral policies or automated underwriting/pricing rules inadvertently generate a disparate impact against protected groups, and review pricing exception reports for trends in magnitude or frequency of exceptions. Unlike recent federal rollbacks, the new statute explicitly requires the DFPI to address discriminatory effect (disparate impact) under California fair housing and civil rights laws unless it is justified by a legitimate business interest.
  • Treat complaints as exam triggers. Escalate and route complaints immediately to the compliance officer or legal counsel to review whether the complaint highlights systemic patterns, steering, redlining, or inconsistent application of underwriting standards. The DFPI explicitly uses incoming discrimination complaints as cause to launch off-schedule or targeted fair lending examinations outside of the standard four-year examination cycle.
  • Prepare for examinations. The new statute authorizes the DFPI to conduct examinations under oath and issue formal written statements of findings requiring direct correction of violations. Therefore, covered institutions should maintain materials for efficient production and readiness for sworn examinations, written findings, and corrective action.

Alston & Bird’s Consumer Financial Services team is available to assist banks, credit unions, and mortgage lenders and servicers in assessing AB 801 coverage, evaluating California fair lending risk, and preparing for DFPI examinations.

FHA Updates Credit Score Methodology to Accommodate FICO 10T and VantageScore 4.0: What Mortgage Lenders Need to Know

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On October 8, 2026, the Federal Housing Administration (FHA) issued Mortgagee Letter 2026-11 (ML 2026-11), updating FHA’s Minimum Decision Credit Score (MDCS) methodology to facilitate the use of alternative credit scoring models. Most notably, the new framework accommodates FICO 10T and VantageScore 4.0 alongside Classic FICO and establishes a methodology for determining a borrower’s score when a mortgagee submits more than one credit score model. The changes apply to all FHA-insured Title II Single Family mortgage programs and are effective for FHA case numbers assigned on or after January 1, 2027.

What Happened?

FHA revised Handbook 4000.1 to establish a new framework for calculating the MDCS when one or more credit score models are submitted. ML 2026-11 expressly identifies Classic FICO, VantageScore 4.0, and FICO 10T as examples of a “Credit Score Model Type.”

The change reflects FHA’s adoption of FICO 10T and VantageScore 4.0 alongside Classic FICO. FHA explains that the newer models use trended credit data reflecting consumers’ credit behavior over time and also use non-traditional credit information such as rent and utilities. According to FHA, these features can provide greater predictive power and help expand access to homeownership.

Importantly, FHA will continue to require a tri-merge credit report, and its existing minimum credit score thresholds are not changing based on the Credit Score Model Type used.

Background

Historically, FHA’s MDCS methodology focused on selecting a score from the scores reported for each borrower and then, for a multiple-borrower transaction, using the lowest applicable score among the borrowers. ML 2026-11 modifies that framework to address a new circumstance: a lender may now submit scores generated under multiple Credit Score Model Types.

To accomplish this, FHA introduces a new concept, the “Borrower-Level Score,” meaning the credit score selected for each borrower after evaluating the scores from each Credit Score Model Type submitted. The MDCS is then the lowest Borrower-Level Score among all borrowers on the transaction.

How Will the New MDCS Methodology Work?

Under the revised methodology, the mortgagee must first determine a score for each Credit Score Model Type submitted for each borrower. Within each model:

  • If three differing scores are reported, the lender uses the middle score.
  • If two differing scores are reported, the lender uses the lower score.
  • If only one score is reported, the lender uses that score.

The lender then compares the selected scores across the different model types submitted for that borrower. The lowest of those scores becomes the Borrower-Level Score. Finally, where there are multiple borrowers, the lender uses the lowest Borrower-Level Score among all borrowers as the transaction’s MDCS.

In other words, submitting multiple scoring models does not allow a lender to select whichever model produces the most favorable score. FHA’s methodology effectively applies a “lowest of the selected scores” approach at the model level, followed by another lowest-score determination across borrowers.

For transactions involving multiple borrowers where one or more borrowers have no credit score because of non-traditional or insufficient credit, the MDCS is the lowest Borrower-Level Score among the borrowers who do have credit scores.

Lenders May Submit Multiple Models, but Must Use Them Consistently

FHA permits a mortgagee to submit one or more Credit Score Model Types, but the same model type or types must be used for all borrowers. Thus, a lender could not, for example, submit FICO 10T for one borrower while submitting only VantageScore 4.0 for a co-borrower.

Moreover, the credit report retained in the FHA case binder must contain all Credit Score Model Types submitted in the final TOTAL Mortgage Scorecard submission; however, the credit report may contain additional scoring models that were not submitted to TOTAL.

FHA’s Existing Credit Score Thresholds Remain Unchanged

Despite the methodological changes, FHA is not altering the substantive MDCS thresholds.

A transaction remains ineligible for FHA financing if its MDCS is below 500. An MDCS of 500 through 579 generally limits a transaction to 90% LTV, while an MDCS of 580 or higher remains eligible for maximum financing. For applicable refinances, the existing 97.75% maximum financing threshold for an MDCS of 580 or above likewise remains unchanged.

What About HECMs?

ML 2026-11 also cleans up FHA’s Home Equity Conversion Mortgage (HECM) provisions. Because credit scores are not an underwriting component for HECMs, FHA is deleting the Handbook’s standalone “Borrower Minimum Decision Credit Score” provision for HECMs rather than carrying the new MDCS framework into the reverse mortgage program.

Why Does It Matter?

For FHA mortgagees, the primary impact is likely to be operational rather than a change in credit eligibility standards. The new methodology affects how lenders determine the operative score when multiple scoring models are used and establishes consistency and documentation requirements that will need to be reflected in the FHA origination process.

What Do I Need to Do?

FHA’s adoption of alternative credit scoring models represents a meaningful modernization of its underwriting framework. Although the underlying FHA credit score thresholds remain intact, mortgagees that elect to use multiple scoring models will need to ensure that their systems, documentation, and controls correctly implement FHA’s new method for translating those scores into a single MDCS. Specifically, FHA mortgagees should:

  • Review Credit and Underwriting Systems: FHA lenders should assess whether their loan origination, credit-reporting, and underwriting systems can identify multiple Credit Score Model Types, calculate a Borrower-Level Score under FHA’s prescribed methodology, and correctly determine the transaction-level MDCS.
  • Coordinate With Credit and Technology Vendors: Lenders planning to use FICO 10T or VantageScore 4.0 should evaluate vendor readiness and ensure that credit-reporting and underwriting integrations support the model types the lender intends to submit.
  • Update Policies, Procedures, and Quality Control: Written FHA underwriting procedures and QC testing should be reviewed for references to the existing MDCS methodology and updated as necessary to address model-level score selection, consistency across borrowers, and the new documentation requirements.
  • Prepare for January 1, 2027: The new requirements apply based on FHA case-number assignment, not application date or closing date. Mortgagees therefore should ensure that affected processes are ready for loans receiving FHA case numbers on or after January 1, 2027.

Alston & Bird’s Consumer Financial Services team is available to assist FHA mortgagees in evaluating and implementing the requirements of ML 2026-11.

CFPB Requests Input on TRID and Reverse Mortgage Disclosure Requirements: What Mortgage Industry Participants Need to Know

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On July 9, 2026, the Consumer Financial Protection Bureau (CFPB) published a Request for Information (RFI) seeking public input on potential changes to several mortgage disclosure requirements, including the TILA-RESPA Integrated Disclosure (TRID) rules and reverse mortgage disclosures. The RFI reflects the CFPB’s broader effort to identify regulatory requirements that may increase costs, create operational burdens, or unnecessarily impede access to mortgage credit while continuing to provide meaningful consumer protections. The RFI follows the President’s March 13, 2026, Executive Order (the “March EO”), which directed the CFPB to consider, as appropriate and consistent with applicable law:

(i) proposing amendments to Regulation Z that tailor the following requirements for smaller banks: ATR and QM requirements (including potentially a broader QM safe harbor for portfolio loans) and the requirements of the Truth in Lending Act, Public Law 90-321 (TILA), Real Estate Settlement Procedure[s] Act, Public Law 93-533 (RESPA), and TILA-RESPA Integrated Disclosure (TRID) rules;

(ii) replacing TRID timing rules with a materiality-based standard that preserves consumer clarity and reduces closing delays; [and]

. . . .

(vii) exempting rate-and-term refinancing (including cash-out refinancing) from rescission rights.”

For mortgage lenders, servicers, and reverse mortgage participants, this development may signal the beginning of a new round of regulatory reform in the mortgage disclosure space.

What Happened?

The CFPB issued an RFI requesting comments on whether existing mortgage disclosure requirements should be revised to reduce burdens on industry participants and consumers. The Bureau specifically seeks feedback regarding three areas:

  1. TRID disclosures;
  2. The right of rescission applicable to certain refinance transactions; and
  3. Reverse mortgage disclosures.

The comment period closes on August 10, 2026.

TRID Is Back on the Table

The TRID rules, which became effective in 2015, integrated disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) into two primary forms: the Loan Estimate and the Closing Disclosure. The CFPB’s RFI asks whether certain aspects of the current framework create unnecessary burdens for lenders or confusion for consumers. Areas identified for comment include disclosure timing requirements, tolerance rules, electronic delivery requirements, and whether smaller institutions should be subject to different or more tailored requirements.

Although the CFPB has amended TRID several times over the last decade, industry participants have continued to identify operational challenges associated with disclosure redisclosures, timing requirements, cure processes, and technology implementation. The RFI provides stakeholders an opportunity to raise those concerns directly with the Bureau.

Reverse Mortgages Receive Particular Attention

The RFI also focuses on reverse mortgage disclosures, an area where the disclosure regime remains largely separate from the integrated TRID framework.

Unlike most forward mortgage products, reverse mortgages continue to rely on multiple disclosure forms and calculations, including Truth in Lending disclosures, Good Faith Estimates, HUD-1 settlement statements, and the Total Annual Loan Cost (TALC) disclosure. The CFPB is seeking comment on whether these disclosures continue to serve borrowers effectively or whether a more streamlined approach would improve consumer understanding.

Among other topics, the Bureau asks whether:

  • Reverse mortgage borrowers would benefit from a single integrated disclosure framework similar to TRID;
  • TALC calculations remain useful and understandable;
  • Alternative disclosures showing projected loan balance growth in dollar terms would be more meaningful than annualized cost metrics; and
  • Consumers would benefit from reverse mortgage-specific educational materials.

These questions suggest that the CFPB may be considering a significant modernization of reverse mortgage disclosures.

Why Does It Matter?

This RFI could represent the first step toward meaningful changes in mortgage disclosure regulation.

Potential Changes to Longstanding TRID Compliance Requirements

TRID compliance remains one of the most operationally intensive areas of mortgage origination. Loan origination systems, document preparation vendors, settlement service providers, and lenders have invested substantial resources in implementing and maintaining TRID compliance. Even relatively modest regulatory changes could require system modifications, vendor updates, revised procedures, employee training, and quality-control enhancements.

At the same time, many industry participants have argued that certain aspects of the rules create costs without providing corresponding consumer benefits. The CFPB appears interested in identifying those areas and assessing whether simplification is possible.

Reverse Mortgage Reform Could Be Significant

The reverse mortgage portion of the RFI may prove especially noteworthy. Reverse mortgage disclosures are governed by requirements that predate TRID and often present information differently than consumers encounter in forward mortgage transactions. Critics have long questioned whether the TALC disclosure is useful or understandable to borrowers. The CFPB’s willingness to revisit those requirements suggests that the Bureau may be open to a broader redesign of the reverse mortgage disclosure framework.

If the CFPB ultimately pursues a more integrated disclosure model for reverse mortgages, lenders and technology providers may face substantial implementation projects but could also benefit from a more streamlined and consumer-friendly framework.

The RFI May Signal Broader Deregulatory Efforts

The RFI was issued as part of a broader federal initiative—announced in the March EO—focused on promoting access to mortgage credit and evaluating regulations that may increase lending costs. As a result, stakeholders should view this development not simply as a disclosure review, but as part of a potentially larger conversation regarding mortgage regulation, operational burden, and consumer protection.

What Do I Need to Do?

Mortgage industry participants should not assume that regulatory changes are imminent, but they should take the RFI seriously.

Consider Submitting Comments

Lenders, servicers, investors, settlement service providers, and technology vendors should evaluate whether they have operational experience or data that could inform the CFPB’s review. The most persuasive comments will typically identify specific compliance burdens, quantify costs where possible, and propose practical alternatives that preserve consumer protections.

Identify TRID Pain Points

Organizations should take inventory of recurring compliance challenges, including: disclosure timing issues; redisclosure triggers; tolerance cure processes; electronic delivery requirements; secondary market impacts; and vendor and system implementation costs.

These issues may become particularly relevant if the CFPB moves beyond the information-gathering stage and begins considering proposed rule changes.

Reverse Mortgage Participants Should Engage Early

Reverse mortgage lenders, investors, and servicers should pay particular attention to the CFPB’s questions regarding TALC disclosures, integrated disclosure concepts, and consumer education. Stakeholders with direct experience observing borrower confusion—or disclosure practices that work particularly well—may have a meaningful opportunity to influence future policy.

Monitor for Next Steps

The RFI is only the beginning of the process. Following the comment period, the CFPB may decide to take no action, issue additional guidance, propose targeted amendments, or pursue broader rulemaking initiatives. Stakeholders should continue monitoring developments closely, particularly given the potential implications for mortgage origination systems, disclosure platforms, and compliance management programs.

For now, the message is clear: after more than a decade of living with TRID—and decades of operating under the current reverse mortgage disclosure framework—the CFPB is actively considering whether these requirements should be modernized. Industry participants have a limited window to help shape what comes next.

Illinois Enacts Comprehensive Buy-Now-Pay-Later Law: Implications for Licensing, Bank Partnerships, and Program Structure

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What Happened?

On June 25, 2026, Illinois enacted Senate Bill 3561, which establishes the Buy-Now-Pay-Later Loan Consumer Protection Act. The measure creates a new state-level licensing and regulatory framework governing certain buy-now-pay-later (“BNPL”) products offered to Illinois consumers.

The Act applies to closed-end consumer credit products offered in connection with a specific purchase of goods or services where the credit is either (i) payable in four or fewer installments or (ii) has a term of 120 days or less. The definition expressly includes both interest-free “pay-in-four” products and BNPL products that carry interest or finance charges.

With this legislation, Illinois joins a growing number of states seeking to impose a tailored regulatory framework on BNPL products. The law is effective immediately, although it includes a transitional compliance period for existing market participants.

Overview of the Act

At a high level, the Act:

  • Requires licensure for persons engaged in the business of offering BNPL loans in the state
  • Establishes a regulatory regime administered by the Illinois Department of Financial and Professional Regulation
  • Imposes consumer protection, underwriting, reporting, and examination requirements
  • Applies broadly to a wide range of market participants involved in BNPL programs
  • Provides that violations constitute an unlawful practice under the Illinois Consumer Fraud and Deceptive Business Practices Act

The Act also provides that BNPL loans made in compliance with its requirements are not subject to certain existing Illinois lending statutes, including the Consumer Installment Loan Act and the Payday Loan Reform Act.

Scope of Coverage: Broad and Functional

A defining feature of the Illinois law is its expansive approach to coverage. The Act applies not only to entities that directly originate BNPL loans, but also to persons that:

  • Arrange or broker loans
  • Acquire or hold whole or partial interests in loans
  • Act as agents or service providers in connection with BNPL programs

In addition, the Act includes anti-evasion language intended to capture transactions that are “in substance” loans or structured to avoid application of the statute.

This framing reflects a broader trend in state legislation focusing on functional activity and economic substance, rather than formal labels or contractual roles.

Merchant and Passive Investor Carve-Outs

The Act includes several notable exceptions:

  • Merchant platform exception: A merchant or platform is not covered solely by offering BNPL options to consumers, provided it does not originate, underwrite, service, or hold an ownership interest in the underlying loans.
  • Passive investor exception: Persons holding a partial interest in a BNPL loan as a passive investor are excluded, so long as they do not control origination or servicing functions.

These carve-outs are consistent with approaches seen in other recent legislation, but their practical scope will depend on how regulators interpret concepts such as “control” and “participation” in the lending program.

Bank Partnership and “True Lender” Considerations

Although the Act exempts banks, credit unions, and certain other depository institutions, it does not automatically exempt nonbank participants in bank-partner BNPL programs.

Instead, the statute’s broad applicability provisions—combined with its anti-evasion framework—suggest that Illinois regulators may evaluate BNPL programs based on economic interest and operational control, rather than the nominal identity of the originating lender.

As a result, fintech companies and other nonbank program participants should consider how their roles—particularly in marketing, underwriting, funding arrangements, and servicing—may be viewed under the Act.

Underwriting and Consumer Protections

The Act introduces a set of consumer protection requirements that align BNPL products more closely with traditional consumer lending obligations.

Among other things, the law:

  • Requires disclosure of loan terms, costs, and repayment structure
  • Mandates processes for handling consumer disputes and refunds
  • Imposes an expectation that lenders assess a borrower’s ability to repay prior to extending credit

While the statute does not prescribe a specific underwriting formula, it signals a shift toward ability-to-repay–type standards in the BNPL context.

Transition Period and Implementation Timeline

The Act provides a transition pathway for existing BNPL providers.

Specifically, a person that was offering BNPL products in Illinois prior to January 1, 2028, and submits a license application by that date, may continue operating while the application is pending.

Key Takeaways

The Illinois BNPL Act raises several important considerations for market participants:

  1. Licensing analysis will be broader than traditional lender-focused regimes. Entities involved in program structure, marketing, servicing, or funding should assess whether they fall within scope.
  2. Form will not control over substance. The Act’s anti-evasion provisions suggest regulators will look beyond contractual labels to determine who is effectively acting as the lender.
  3. Bank partnership structures may be subject to scrutiny. Nonbank participants should evaluate their role in underwriting, economic exposure, and program governance.
  4. Merchant and investor carve-outs are helpful—but limited. These exclusions depend heavily on the absence of operational control or program-level influence.
  5. Compliance will extend beyond licensing. The Act introduces substantive obligations around disclosures, underwriting, dispute resolution, and regulatory oversight.

Looking Ahead

Illinois’s enactment of a comprehensive BNPL framework reflects an accelerating trend toward state-level regulation of point-of-sale financing products.

As additional states consider similar legislation, market participants should expect continued divergence in regulatory requirements—and a growing need to align program structures with evolving expectations around licensing, consumer protection, and risk management.

Vermont Enacted HB 648 that Imposes Licensing, Disclosure and Certain Restrictions on Sales-Based Financing and Factoring Transactions

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What Happened?

On June 16, 2026, Vermont enacted HB 648 that imposes licensing, disclosure and certain restrictions on sales-based financing and factoring transactions. The bill incorporates certain notable provisions from Texas HB 700, which was enacted on May 29, 2025, including an ACH debit ban and confession-of-judgment prohibition. The law takes effect on July 1, 2027.

Why Does It Matter?

Notably, the Vermont law applies to both sales‑based financing (e.g., merchant cash advances, revenue‑based financing) as well as factoring / receivables purchase transactions, and covers both providers (funders) and brokers. The law requires providers of sales-based financing and/or factoring to obtain a Vermont Lender license and persons who solicit prospective recipients of sales-based financing and/or factoring to obtain a Vermont loan solicitation license. The Vermont law requires providers to disclose the amount of financing, the APR, the total cost of capital, the repayment terms / method and other material pricing and structural terms. Similar to Texas HB 700, the law prohibits sales-based financing and factoring providers from automatically debiting a recipient’s deposit account unless the provider holds a validly perfected, first-priority security interest in the recipient’s account. The law includes salient restrictive provisions such as prohibitions on confessions of judgment and similar provisions in any factoring or sales-based financing contracts and requires that contracts must be governed exclusively by Vermont law. Further, the law mandates that all disputes be brought in Vermont courts, and that if arbitration is necessary, face-to-face proceedings cannot occur outside Vermont.

The Vermont law does not apply to banks and other depository institutions, sellers of goods or services that finance the sale of goods or services, and transactions of $1,000,000 or more that are not primarily for personal, family, or household use.

What to Do Now

Vermont joins eleven states that require providers of certain types of commercial financing to disclose key terms to small businesses and other covered entities before a transaction is consummated. The new Vermont law is notable because it requires providers and brokers to obtain licenses, not the more ministerial registrations mandated by the state statues adopted in Texas, Utah and Virginia, and it covers both sales-based financing and factoring transactions. The Vermont prohibitions against debiting a recipient’s deposit account and requirement to litigate in Vermont courts are especially burdensome if not impractical. It is a certainty that other states will enact similar types of laws regulating commercial financing arrangements.