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Financial Services Law Insights and Observations

CFPB says TILA does not preempt NY law on commercial disclosures

Agency Rule-Making & Guidance Federal Issues CFPB State Issues New York Commercial Finance Disclosures TILA Regulation Z Preemption

Agency Rule-Making & Guidance

On December 7, the CFPB issued a preliminary determination that New York’s commercial financing disclosure law is not preempted by TILA because the state’s statute regulates commercial financing transactions and not consumer-purpose transactions. The CFPB issued a Notice of Intent to Make Preemption Determination under the Truth in Lending Act seeking comments pursuant to Appendix A of Regulation Z on whether it should finalize its preliminary determination that New York’s law, as well as potentially similar laws in California, Utah, and Virginia, are not preempted by TILA. Comments are due January 20, 2023. Once the comment period closes, the Bureau will publish a notice of final determination in the Federal Register.

Explaining that recently a number of states have enacted laws to require improved disclosures of information contained in commercial financing transactions, including loans to small businesses, in order to mitigate predatory small business lending and improve transparency, the Bureau said it received a written request to make a preemption determination involving certain disclosure provisions in TILA. While Congress expressly granted the Bureau authority to evaluate whether any inconsistencies exist between certain TILA provisions and state laws and to make a preemption determination, the statute’s implementing regulations require the agency to request public comments before making a final determination.

While New York’s Commercial Financing Law “requires financial disclosures before consummation of covered transactions,” the Bureau pointed out that this applies to “commercial financing” rather than consumer credit. The request contended that TILA preempts New York’s law in relation to its use of the terms “finance charge” and “annual percentage rate”—“notwithstanding that the statutes govern different categories of transactions.” The request outlined material differences in how the two statutes use these terms and asserted “that these differences make the New York law inconsistent with Federal law for purposes of preemption.” As an example, the request noted that the state’s definition of “finance charge” is broader than the federal definition, and that the “estimated APR” disclosure required under state law “for certain transactions is less precise than the APR calculation under TILA and Regulation Z.” Moreover, “New York law requires certain assumptions about payment amounts and payment frequencies in order to calculate APR and estimated APR, whereas TILA does not require similar assumptions,” the request asserted, adding that inconsistencies between the two laws could lead to borrower confusion or misunderstanding.

In making its preliminary determination, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes based on the request’s assertions. The Bureau explained that the statutes govern different transactions and disagreed with the argument that New York’s law impedes the operation of TILA or interferes with its primary purpose. Specifically, the Bureau stated that the “differences between the New York and Federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit.”