The CFPB Sticks to Its Guns, Finding State Commercial Finance Disclosure Laws Not Preempted in Final Determination

The US Consumer Financial Protection Bureau (CFPB) has finalized its December 2022 preliminary determination that commercial finance disclosure laws recently enacted in California, New York, Utah and Virginia are not preempted by the federal Truth in Lending Act (TILA). For commercial-purpose financers and brokers, this Legal Update summarizes the CFPB’s reasoning and notes some takeaways, looking ahead.

Preliminary Determination

Starting in 2018, California, New York, Utah, and Virginia have enacted laws requiring providers and brokers of commercial-purpose credit to provide TILA-like disclosures to applicants and, in the case of Utah and Virginia, to register with the state as well. As Mayer Brown reported in January, a trade association had sought a determination from the CFPB that New York’s Commercial Finance Disclosure Law was preempted by federal law (TILA), arguing that the New York law’s use of terms “finance charge” and “annual percentage rate” conflicted with TILA’s use of the same terms, which could confuse applicants shopping for financing and thus thwart TILA’s purpose.

The CFPB preliminarily determined that because TILA regulates only consumer-purpose financing, while the state laws regulate only commercial-purpose financing, there was no conflict that would support federal preemption.

Final Determination

In its final determination, issued March 28, 2023, the CFPB restated these points. The agency further noted that, in a parallel to the doctrine of conflict preemption, TILA provides for the displacement of state laws only in the case of “inconsistency” and that inconsistency does not result from state laws requiring different or more detailed disclosures than what TILA requires.

The CFPB also reiterated one of the key rationales informing its rejection of preemption in the preliminary determination—that TILA’s purpose will not be frustrated, and borrower confusion will not arise, due to the state commercial finance disclosure laws:

Commenters advocating preemption have not shown that consumers—when shopping for credit that they intend to use primarily for personal, family, or household purposes—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 distinguished this determination from a 1988 determination that an Indiana law was preempted on the basis that the Indiana law used “finance charge” and “APR” in the context of consumer credit transactions and used such terms inconsistently with TILA.

Timing

The CFPB’s decision to address the issue at this time may have been spurred by a lawsuit filed in December 2022 against the Commissioner of the California Department of Financial Protection and Innovation (DFPI) alleging that California’s 2018 commercial financing disclosure law violates the First Amendment and is preempted by TILA. It will be interesting to see how the lawsuit—which just survived a motion to dismiss in the US District Court for the Central District of California on March 30, 2023—will be affected by the CFPB’s final determination.

Applicability to Other State Laws

While the CFPB did not address pending, but not enacted, state legislation, the reasoning employed in the agency’s final determination would generally extend to commercial finance disclosure bills introduced recently in Connecticut, Florida, Georgia, Illinois, Kansas, Maryland, Mississippi, Missouri, New Jersey, and North Carolina, with more likely on the way. Providers and brokers of commercial financing hoping to avoid complying with these state laws should not expect a silver bullet in the form of federal preemption anytime soon.