Fraud, Risk & Regulation: What Lenders Need to Watch in 2026 with Jim Cretella

Current Market Dynamics

• 💡 The market in 2025-2026 is characterized by both distress in some borrowers and significant opportunities, requiring bespoke analysis rather than macro trends.
• 🎯 Banks are holding onto credits longer, which can lead to stretched situations for private lenders, but also creates opportunities for specialty finance.
• 📈 Lender behavior varies, with some being aggressive and others pulling back, highlighting the importance of a clear risk appetite.

Rising Fraud & MCA Impact

• ⚠️ In the lower market, deals can go bad "overnight" due to fraud, including fake invoices and redirected collections, as squeezed companies resort to desperate measures.
• ⛽ Merchant Cash Advances (MCAs) are identified as "putting gasoline on the fire" of an overleveraged market by funding deals other lenders would avoid.

Texas MCA Legislation

• ⚖️ New Texas legislation aims to curtail MCAs by preventing them from debiting bank accounts without a first priority security interest, often requiring a Deposit Account Control Agreement (DACA).
• 🚫 The law also states that MCAs no longer qualify for the "sale" exemption from usury laws in Texas, posing a significant challenge to the industry.
• 🌐 While jurisdictional questions exist, other states are likely to adopt similar statutes, and lawyers are expected to seek ways around the new regulations.

Lessons from First Brands

• 🧠 The First Brands bankruptcy highlighted the dangers of blindly relying on algorithms and AI, as AR purchasers were unable to identify what they had bought due to insufficient diligence.
• 📝 The case involved double and triple pledging of invoices, even after warnings, underscoring the critical need for thorough verification and traditional underwriting.
• 🤝 Lenders should ensure their contracts and NDAs do not prohibit them from communicating with other parties in the capital stack to avoid similar blind spots.

Navigating Distress & Success

• 📉 Most distress and workouts are occurring outside of formal bankruptcy proceedings, particularly through out-of-court restructurings and Article 9 sales in the lower-middle market.
• ✅ Proactive lenders who document defaults and waivers, and closely monitor payables and bank statements for cash movement, tend to be more successful.
• 🛠️ Successfully navigating these distressed situations requires not only financial acumen but also the experience and network to manage failing businesses.

Strategic Advice for Lenders

• 🚀 Lenders should seek opportunities for collaboration with both bank lenders and other private lenders to secure deals and leverage collective expertise.
• 🔑 Emphasize the importance of traditional underwriting and thorough homework, ensuring that the underwriting phase is never skipped.
• 💡 Approach the market with "eyes open," balancing opportunity with diligent risk assessment and a clear understanding of potential pitfalls.