[co-author: Stephanie Kozol]
As discussed here, on December 7, 2022, the Consumer Financial Protection Bureau (CFPB or Bureau) made a preliminary conclusion that a New York commercial financing law was not preempted by the Truth in Lending Act (TILA). The Bureau indicated it was also considering whether to make a preemption determination regarding similar state laws in California, Utah, and Virginia. On January 20, 2023, California Attorney General Rob Bonta submitted a letter to the CFPB agreeing with its preliminary determination that California’s Commercial Financing Disclosures Law (CFDL) is not preempted by TILA because the CFDL only applies to commercial financing and not to consumer credit transactions within the scope of TILA. Attorney General Bonta further urged the CFPB to “revisit the Federal Reserve Board’s (Board) vague and overbroad articulation of the TILA preemption standard. The CFPB should articulate a narrower standard that emphasizes that preemption should be limited to situations where it is impossible to comply with both TILA and the state law or where the state law stands as an obstacle to the full purposes TILA, which is to provide consumers with full and meaningful disclosure of credit terms in consumer credit transactions.”
As background, the CFDL applies to commercial financing, where the funds are “intended by the recipient for use primarily for other than personal, family, or household purposes.” The stated purpose of the CFDL 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. Under the CFDL, providers are 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. 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. The CFPB conducted a preliminary review of the CFDL and made a preliminary conclusion it was not preempted because the CFDL does not apply to consumer credit transactions that are within the scope of TILA.
In his letter, Attorney General Bonta agreed that the CFDL is not preempted because it applies to commercial not consumer credit transactions and that “there is no material difference between the disclosures required by TILA and those required by the CFDL, even if TILA applied to commercial financing.” Attorney General Bonta further urged the CFPB to “articulate a narrower preemption standard, as the Board’s prior articulation of the standard is both overly broad and vague, supporting preemption whenever a state law ‘impedes the operation of the federal law or interferes with the purposes of the federal statute.'” Instead, the Attorney General argued for finding “preemption under TILA only if it is ‘impossible’ to comply with both TILA and the state law or if the state law ‘stands as an obstacle to the accomplishment and execution of the full purposes’ of TILA.” Further, he argued, the CFPB should reemphasize two principles previously articulated by the Board: 1) state laws that require additional disclosures than TILA are not inconsistent with TILA; and 2) a state law should be preempted only where there is actual conflict, not potential or hypothetical conflict. “These limits on federal preemption will allow both TILA and related state disclosure laws to continue to provide protections to consumers, small business owners, and other borrowers, while maintaining a competitive and well-informed marketplace for consumer and commercial credit.”
Notably, 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 CFDL is preempted by TILA. We will continue monitoring developments in this case and in the CFPB’s TILA preemption determinations and will post updates as they become available.
