In a notice of “Intent to Make Preemption Determination under the Truth in Lending Act (Regulation Z),” the CFPB announced that it is seeking comments on its preliminary determinations that the Truth in Lending Act (TILA) does not preempt certain provisions of the New York Commercial Finance Disclosure Law (CFDL) or the commercial financing laws of California, Utah, and Virginia. TILA authorizes the CFPB to determine whether a state law requirement is preempted upon the CFPB’s own motion or upon the request of a creditor or other interested party. The CFPB’s preliminary determination regarding the CFDL was made in response to a request for a preemption determination from a business trade association. Its determinations regarding the California, Utah, and Virginia laws are made on the CFPB’s own motion. Comments are due by January 20, 2023.
The CFDL was signed into law in December 2020, and authorized the New York Department of Financial Services (DFS) to adopt regulations to implement the disclosures, including rules regarding calculation of required disclosures such as “APR” and “finance charge” disclosures. The DFS released proposed regulations in September 2022 which have not yet been finalized. The DFS has proposed that the compliance date for the disclosures would be six months after the date that the Notice of Adoption of the final regulations is published in the New York State Register.
TILA provides that it does not preempt state laws “relating to the disclosure of information in connection with credit transactions” except to the extent such laws are “inconsistent with the provisions of [TILA], and then only to the extent of the inconsistency.” Regulation Z identifies two categories of “contradictory” state law that would be preempted. One category is a state law that requires use of the same term to represent a different amount or different meaning than TILA. The other category is a state law that requires the use of a term different from that required by TILA to describe the same item. In its discussion, the CFPB noted that the Federal Reserve Board, which formerly administered Regulation Z, had framed the TILA preemption standard to mean that “[a] state law is contradictory, and therefore preempted, if it significantly impedes the operation of the federal law or interferes with the purposes of the federal statute.” It also noted that the Board had observed that the two categories of “contradictory” state laws identified in Regulation Z were not exhaustive because they would not be relevant in a context where the preemption issue being considered did not deal with disclosures of terms and amounts.
The CFDL requires disclosures to be made before consummation of covered commercial financing transactions. The trade association’s preemption determination request asserted that, even though the CFDL only applies to commercial transactions, the differences between how the CFDL and TILA use the terms “finance charge” and “APR” make the CFDL inconsistent with TILA for purposes of preemption. For example, the CFDL defines “finance charge” to include any charge imposed by a “provider,” which can include a broker, while under TILA, a broker’s fee is only included in the finance charge for a non-mortgage transaction if the creditor requires use of the broker or retains a portion of the broker’s fee. With respect to the APR disclosure required by the CFDL, the CFDL requires certain assumptions about payment amounts and frequencies to calculate the APR which assumptions are not required by TILA. In addition, the CFDL requires the APR for open-end transactions to be calculated using TILA’s closed-end APR requirements instead of its open-end requirements.
The trade group asserted that the CFDL was preempted because these differences could lead to variances in the disclosures required under state and federal law and, even if the CFDL does not contradict TILA in the specific manner described in Regulation Z, it impedes the operation of federal law or interferes with the intent of the federal scheme. According to the trade group, failing to enforce TILA’s APR and finance charge definitions even across different types of financing would impede the benefits of ensuring uniform disclosures which aid consumer understanding and allow consumers to compare financing options and could lead to confusion or misunderstanding among borrowers, including small business owners who might use both consumer credit and commercial financing to pay business expenses.
The CFPB indicated that its preliminary conclusion is that TILA does not preempt the CFDL on the grounds asserted in the request because state and federal law do not appear to be “contradictory” for preemption purposes. It first noted that TILA and the CFDL apply to different transactions (i.e. consumer purpose v. commercial transactions) “so the [CFDL] appears to be far afield of a law that contradicts TILA and Regulation Z.” The CFPB also expressed its preliminary disagreement with the trade group’s assertion that the CFDL significant impedes the operation of TILA or interferes with the operation of the federal scheme. According to the CFPB, the differences between the CFDL and TILA do not frustrate TILA’s purpose of assuring meaningful disclosure of credit terms because lenders are not required to provide the CFDL disclosures to consumers seeking consumer credit. Since consumers will continue to receive only TILA disclosures for consumer credit, they will receive the meaningful disclosure of credit terms contemplated by TILA.
The CFPB also addressed the commercial financing laws of California, Utah, and Virginia. Today is the effective date of the final regulations adopted by the California Department of Financial Protection and Innovation to implement SB 1235, the bill signed into law in 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances. In March 2022 and April 2022, Utah and Virginia, respectively, became the first two states to require the registration of providers of merchant cash advances. The new laws also include disclosure requirements.
The CFPB stated that it is also considering making determinations whether TILA preempts the California, Utah, and Virginia disclosure requirements. It indicated that it has conducted a preliminary review of those laws “which are similar in relevant aspects to the [CFDL] because they do not apply to consumer credit transactions that are within the scope of TILA.” The CFPB stated that, based on the similar coverage of these state laws, its preliminary conclusion is that they are not preempted by TILA. It noted that as an additional potential basis, but not necessary to its preliminary conclusion, several of these state laws do not require the use of the terms finance charge or APR in a manner that would be different than TILA and Regulation Z if they were applicable.
In addition to seeking comment on its preliminary preemption determinations, the CFPB indicated in the notice that it is considering whether to clarify the Federal Reserve Board’s articulation of the applicable preemption standard and requested comment on how the CFPB should articulate the standard in this and future preemption determinations.