North Dakota Broadens Licensing Law to Include Alternative Financing
North Dakota recently enacted legislation that amends the state’s main non-mortgage lender licensing law, the North Dakota Money Brokers Act (the “Act”), to define a “loan” to include any “alternative financing product” that is identified by the state’s Department of Financial Institutions (the “DFI”). The amendment (House Bill 1127) becomes effective August 1, 2025, although the timing and content of a future DFI order to designate one or more financial products as an “alternative financing product” subject to the law is uncertain. What seems more clear is that the amendment could broadly expand the scope of the state’s Money Broker Act beyond typical lending activities.
The North Dakota Money Brokers Act has historically served as the state’s primary statute for licensing loan brokers and lenders and regulating consumer- and commercial-purpose loans. While the state enacted legislation in 2023 to separately license residential mortgage lending and servicing activities, the Money Brokers Act otherwise has required licensing of nonexempt persons arranging or providing any loans or leases, regardless of dollar amount, loan or lease purpose, or the rate of interest or charges. The Money Brokers Act also imposes substantive requirements and limitations on loans made by licensed money brokers, including prohibiting finance charges at an annual rate exceeding 36% per year and requiring lenders to provide the loan disclosures mandated under the federal Truth in Lending Act (“TILA”) regulations.
Prior to the adoption of House Bill 1127, neither the Money Brokers Act nor DFI regulations defined a “loan.” One could have reasonably concluded, then, that the Money Brokers Act applied to typical loan transactions in which one person agrees to provide a sum of money to another, who then incurs an enforceable obligation to repay it at a future time. The only public guidance on what constitutes a “loan” for Money Brokers Act purposes relates to litigation financing: the DFI states on its website that “products that take an interest in potential future proceeds from civil proceedings are generally not considered a loan if payment is contingent on a monetary award and not required in the event the funds from the civil proceedings are insufficient to repay the amount financed.” Similarly, the term “loan” would generally not include types of arrangements like factoring transactions, earned wage access, or merchant cash advances where any repayment obligation (to the extent one exists) is either contingent or is otherwise not absolute and unconditional.
However, the DFI apparently will have the authority to decide whether those or other arrangements will constitute covered “alternative financing products” subject to the Money Brokers Act once House Bill 1127 takes effect. The effect of the DFI designating a particular financial product as an “alternative financing product” will be to subject providers (and, potentially, brokers) of those products to licensing as a money broker in order to offer such products to North Dakota residents.
It is unclear whether the DFI will solicit any public input during its deliberations, as is the extent to which the agency could attempt to apply the Act’s substantive requirements to non-loan transactions. Subjecting certain non-loan transactions, such as merchant cash advances or earned wage access, to the Act’s 36% loan rate cap and TILA loan disclosure requirements could present significant challenges for providers and may result in limiting the availability of those financing alternatives in North Dakota.
The Money Brokers Act does not apply to depository institutions, insurance companies, licensed residential mortgage lenders, trust companies, institutions chartered by the Farm Credit Administration, licensed pawnbrokers, certain nonprofit organizations, or any other person or business regulated and licensed to lend money by the State of North Dakota. (The state otherwise licenses collection agencies, money transmitters, deferred presentment service providers, and debt settlement service providers.) However, depending on the actions of the DFI, the Act could apply to a much larger swath of financing providers going forward.
