On December 7, the Consumer Financial Protection Bureau (CFPB) published a notice of intent to make a preemption determination on whether the Truth in Lending Act (TILA) preempts a New York commercial financing law. The CFPB has made a preliminary conclusion that the law is not preempted by TILA, and is also considering whether to make a preemption determination regarding similar state laws in California,
Utah, and Virginia. The practical effect of the CFPB’s planned position is to remove a potential roadblock to the implementation of new laws in New York and other states requiring lenders to provide disclosures to commercial borrowers of the cost of financing, similar to those required by TILA and other state laws for consumer financing transactions. The CFPB will be accepting comments on its proposal until January 20, 2023.
TILA authorizes the CFPB to determine whether a state law requirement is preempted, upon its own motion or upon the request of a creditor, state, or other interested party. In this instance, the CFPB received a request from a business trade association asking it to determine that TILA preempts certain provisions in New York’s Commercial Financing Law (the New York law). Like TILA, the New York law requires rate and cost disclosures for certain covered transactions, however, the New York law applies to multiple types of commercial financing products instead of consumer credit. It requires providers to issue disclosures when “extending a specific offer” for various types of commercial financing. The request asserted that TILA preempts the New York law with respect to its use of the terms “finance charge” and “annual percentage rate” (APR), notwithstanding that the statutes govern different categories of transactions.
The request focused on what it alleged are material differences between how the
New York law and federal law use the terms “finance charge” and “APR,” and alleged that these differences make the New York law inconsistent with federal law for purposes of preemption. For example, the request noted that the New York law defines “finance charge” to include any charge imposed by a “provider,” which includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.” The request stated that the definition is broader than the federal definition, under which the requester asserted a “finance charge” for non-mortgage transactions includes certain broker fees only if the creditor requires the use of the broker. Additionally, the request asserted that the “estimated APR” disclosure that the New York law requires for certain transactions is less precise than the APR calculation under TILA and Regulation Z, and that the New York law requires certain assumptions about payment amounts
and payment frequencies to calculate APR and estimated APR, whereas TILA does not require similar assumptions. The request stated that these types of differences could lead to variances in the disclosures required under state and federal law, and, thus, the federal law preempts the New York law. Notably, the New York law also requires a closed-end APR calculation method for open-end transactions, which significantly differs from the APR calculation for open-end transactions under Regulation Z.
The CFPB’s preliminary determination is that TILA does not preempt the New York law for two reasons. First, the statutes govern different transactions. TILA requires creditors to disclose the finance charge and APR only for “consumer credit” transactions, which the statute defines as credit that is “primarily for personal, family, or household purposes.” The New York law, on the other hand, requires the disclosures only for “commercial financing,” specifically defined as financing “the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.” Second, the CFPB disagrees that the New York law significantly impedes the operation of TILA or interferes with the purposes of the federal scheme. A primary purpose of TILA is to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available and avoid the uninformed use of credit. The differences between the New York and federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit. Therefore, consumers applying for consumer credit should continue receiving only TILA disclosures.
The CFPB concluded by stating it is also considering making determinations regarding whether TILA preempts state laws in California, Utah, and Virginia that prescribe disclosures in certain commercial transactions. The CFPB has conducted a preliminary review of these laws, which are similar to the New York law because they do not apply to consumer credit transactions that are within the scope of TILA. Accordingly, the CFPB’s preliminary conclusion is that TILA does not preempt these state laws. The CFPB is encouraging commenters to provide information about any relevant differences in these state laws that would affect the CFPB’s preemption analysis and final determination.
Notably, the California Commercial Financing Disclosures (California Disclosure Regulations) are set to take effect on December 9 and are already the subject of litigation in the United States District Court for the Central District of California. There, the Small Business Finance Association filed a complaint against the Commissioner of the California Department of Financial Protection and Innovation, in part, on the grounds that the California Disclosure Regulations are preempted by TILA. The stated purpose of the California Disclosure Regulations is to assist small businesses in making informed decisions about the potential costs of various commercial financing options. The industries subject to the regulation include, among others, traditional installment loans and open-end credit, factoring, and merchant cash advances. Providers will be required to disclose metrics such the amount of funding the small business will receive, the APR calculated for the transaction, a payment amount (if applicable), the term, details related to prepayment policies, and (for products without a monthly payment) an average monthly cost.