Small business lenders hoping for federal intervention will be disappointed to learn that the Consumer Financial Protection Bureau (CFPB) has reached a preliminary determination that New York’s new commercial financing disclosure law is not preempted by the federal Truth in Lending Act (TILA). The CFPB’s public notice indicates that it initially takes the same view on similar laws recently enacted in California, Utah and Virginia. In short, the CFPB concludes that these state laws are not preempted by TILA because they do not apply to the same types of transactions regulated by TILA. Specifically, the state commercial financing disclosure laws apply solely to business-purpose financing while TILA applies solely to consumer-purpose (personal, family or household) financing.
Stakeholders requested that the CFPB make a preemption determination regarding New York’s 2020 Commercial Finance Disclosure Law (the “New York Law”), the second such state law to be enacted following California’s 2018 law requiring the providers of a broad range of commercial financing to make TILA-like disclosures to applicants. The requesters argued that TILA and the New York Law both using the terms “finance charge” and “annual percentage rate,” and using these terms in ways that are not always consistent, could lead to contradictions between federal and state law. The requesters also argued that failing to enforce a single definition of these terms across laws, even where the laws apply to different product types, could cause confusion and thus thwart TILA’s purpose of facilitating a consumer’s ability to compare different offers of credit.
CFPB’s Initial Determination
The CFPB notice points out that TILA expressly exempts only those state laws that “are inconsistent with the provisions of [TILA], and then only to the extent of the inconsistency,” and that Regulation Z holds a state law to be inconsistent with TILA “if it requires a creditor to make disclosures or take actions that contradict the requirements of the Federal law.”
In the CFPB’s view, because TILA and the New York Law govern different types of transactions—consumer financing for TILA, commercial financing for the New York Law—the New York Law “appears to be far afield of a law that contradicts TILA and Regulation Z.” According to the CFPB, the New York Law will not significantly impede the operation of TILA because a consumer will not receive disclosures under both laws for any transaction, as the scopes of the respective laws are mutually exclusive. Thus, the purpose of TILA—to allow consumers to compare offers of consumer credit from different creditors—will not be frustrated by the New York Law.
Although the CFPB’s notice addresses the New York law, it also briefly mentions the recent California, Utah and Virginia commercial financing disclosure laws and gives them short shrift: “[T]he CFPB’s preliminary conclusion is that TILA does not preempt these State laws” either. California’s law took effect December 9, 2022, Virginia’s law took effect November 1, 2022, and Utah’s law took effect January 1, 2023.
Next Steps for Industry
This is not necessarily the end of the matter, however, as interested parties can submit comments on the CFPB’s preliminary determination by January 20, 2023, before the CFPB issues its final determination. But lenders should not delay their compliance activities pending the CFPB’s release of its final determination.