The CFPB has issued a determination that the Truth in Lending Act (TILA) does not preempt the commercial financing laws of New York, California, Utah, and Virginia.  The determination will be effective on the date it is published in the Federal Register.

TILA authorizes the CFPB to determine whether a state law disclosure requirement is preempted upon the CFPB’s own motion or upon the request of a creditor or other interested party.  In response to a request for a preemption determination from a business trade association, the CFPB issued a preliminary determination that New York’s law was not preempted.  On the CFPB’s own motion, it also provided notice that it was considering making determinations whether TILA preempts the California, Utah, and Virginia laws and indicated that it had preliminarily concluded that those laws were not preempted by TILA.

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.”  Having indicated in its notice of preliminary determination that it was considering whether to clarify the Federal Reserve Board’s formulation of the applicable preemption standard, the CFPB addresses the standard before discussing its determination that the laws of the four states are not preempted.  The CFPB indicates that TILA’s inconsistency standard aligns with conflict preemption.  In conflict preemption, a conflict exists when it is impossible to comply with both state and federal law or when the state regulation “stands as an obstacle to the accomplishment and execution of the full purposes of the federal law” (the “obstacle prong”). The CFPB notes that because state laws rarely or never make delivery of TILA disclosures impossible, impossibility does not figure prominently in the Fed’s precedents and, instead, the Fed’s consideration of preemption typically focuses on the obstacle prong.  According to the CFPB, for a state law to be preempted under the obstacle prong, it must “frustrate the meaningful disclosure of credit terms to consumers that TILA and Regulation Z provide.”

The CFPB begins its discussion of California and New York law by observing that both laws require providers to issue disclosures before consummation of certain commercial-purpose transactions.  The CFPB contrasts this with TILA’s application to consumer-purpose credit.  The CFPB also observes that although California and New York disclosures include a finance charge and APR disclosure, the CFPB does not need to resolve the question of “whether California’s and New York’s respective specifications result in different finance charges and APRs than would be generated under Regulation Z if it were hypothetically applicable, or whether they should instead be viewed as tailoring the finance charge and APR to the structures of certain types of commercial financing arrangements that are not shared by consumer credit transactions.”

With no commenter having suggested that compliance with California and New York laws as well as TILA and Regulation Z is impossible, the CFPB only applied the obstacle prong in its preemption analysis and concluded that the states’ laws do not stand as an obstacle to the accomplishment of TILA’s purposes.  According to the CFPB, for purposes of a preemption analysis, the relevant TILA purpose is meaningful disclosure of credit terms so that a consumer can compare available credit terms and avoid the uninformed use of credit.  The CFPB observes that TILA achieves this purpose by requiring disclosures for consumer credit and that consumers applying for credit that is primarily for personal, family, or household purposes (i.e. consumer-purpose credit) will continue to receive only TILA disclosures.  It states that commenters advocating preemption had not shown “that consumers when shopping for consumer-purpose credit would somehow be prevented from understanding the terms of credit available to them for those purposes by State disclosures provided in different (business-purpose) transactions.”  The CFPB also observes that where a potential borrower is shopping for consumer-purpose credit, the borrower would receive TILA disclosures and not the California or New York disclosures. 

The CFPB’s discussion includes a footnote responding to commenters who asserted that consumers with small businesses and who receive California or New York disclosures when applying for commercial credit “will, in their personal lives, distrust the TILA finance charge and APR” because they do not have consistent meanings under state and federal law.  The CFPB states that these commenters had not offered any evidence or other support for the assumption that consumers would react with distrust under such circumstances “rather than an understanding that different calculations may be appropriate in the context of different types of transactions.”  It also comments that “even assuming this scenario were to occur, the CFPB would not consider the issue to be so significant as to interfere with TILA’s purpose of enabling consumers to compare consumer credit products.”

While acknowledging that a borrower might use proceeds from a primarily business purpose transaction for consumer purposes, the CFPB states that because Congress did not require TILA disclosures “whenever any minor portion of primarily-business credit might be used for a personal purpose…such transactions should not drive an assessment of whether State disclosure regimes interfere with Congress’s purposes.”  Also, responding to comments that advertisements for commercial financing that include APRs calculated using California’s or New York’s formulas could cause confusion, the CFPB stated that California and New York do not require commercial lenders to include an APR in advertisements and to the extent they might choose to include an APR, “that is not a requirement of those laws and not a basis to declare those laws’ disclosure requirement to be inconsistent with TILA.”

With regard to Utah law, the CFPB observes that because the transactions for which disclosures are required do not include consumer-purpose transactions, the Utah law is not preempted for the same reasons as the California and New York laws.  As an additional reason, the CFPB notes that “because [the Utah law] does not require disclosure of a finance charge, APR, or other TILA-related disclosure, there would be no occasion for it to be preempted even if applicable to consumer credit transactions.”

With regard to Virginia law, the CFPB observes that because the law requires disclosures only in connection with “sales-based financing” as defined by the law, it would not apply to a consumer credit transaction as defined in TILA and Regulation Z.  The CFPB further observes that there would be no basis to find an inconsistency with TILA even if the law did apply to consumer credit transactions because the only TILA-related disclosure term used in the law is the finance charge which, as defined in Virginia’s implementing regulation, has the same definition as in Regulation Z.