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CFPB: TILA does not preempt state commercial financial disclosures
On March 28, the CFPB issued a determination that state disclosure laws covering lending to businesses in California, New York, Utah, and Virginia are not preempted by TILA. The preemption determination confirms a preliminary determination issued by the Bureau in December, in which the agency concluded that the states’ statutes regulate commercial financing transactions and not consumer-purpose transactions (covered by InfoBytes here). The Bureau explained that a number of states have recently enacted laws requiring improved disclosure of information contained in commercial financing transactions, including loans to small businesses. A written request was sent to the Bureau requesting 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. In making its preliminary determination last December, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes, and that “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.”
After considering public comments following the preliminary determination, the Bureau again concluded that “[s]tates have broad authority to establish their own protections for their residents, both within and outside the scope of [TILA].” In affirming that the states’ commercial financing disclosure laws do not conflict with TILA, the Bureau emphasized that “commercial financing transactions to businesses—and any disclosures associated with such transactions—are beyond the scope of TILA’s statutory purposes, which concern consumer credit.”
CFPB asks for comments on alternative disclosures for construction loans
On February 27, the CFPB announced it is in the final stages of reviewing an application for alternative mortgage disclosures for construction loans submitted by a trade group representing small U.S. banks. The applicant maintains that it is not uncommon for first-time homebuyers in rural communities to build their home instead of purchasing an existing home due to the scarcity of “existing affordable ‘starter’ homes.” The applicant seeks to adjust existing mortgage disclosures to facilitate the offering of loans that finance both the construction phase and the permanent purchase of a home. According to the applicant, a consumer’s understanding of construction loans would be improved if disclosures are more specifically tailored to these types of transactions. The Bureau stated that should it approve this “template” application, individual lenders will be able to apply for enrollment in an in-market testing pilot. However, the Bureau noted that, as indicated in its Policy to Encourage Trial Disclosure Programs (covered by InfoBytes here), the mere approval of a template neither permits a lender to unilaterally conduct a trial disclosure program without further approval by the CFPB, nor does it “bind the CFPB to grant individual applications.”
The disclosure of the application comes as a result of efforts undertaken by the Bureau to be more open and transparent when adjusting regulations for new business models. The Bureau stated that in addition to publicly releasing the application, it is seeking input from stakeholders who have experience with construction loans. Comments will be accepted through March 29.
DFPI modifies CCFPL proposal
On February 24, the California Department of Financial Protection and Innovation (DFPI) released modifications to proposed regulations for implementing and interpreting certain sections of the California Consumer Financial Protection Law (CCFPL) related to commercial financial products and services. As previously covered by InfoBytes, DFPI issued a notice of proposed rulemaking (NPRM) last June to implement sections 22159, 22800, 22804, 90005, 90009, 90012, and 90015 of the CCFPL related to the offering and provision of commercial financing and other financial products and services to small businesses, nonprofits, and family farms. According to DFPI, section 22800 subdivision (d) authorizes the Department to define unfair, deceptive, and abusive acts and practices in connection with the offering or provision of commercial financing. Section 90009, subdivision (e), among other things, authorizes the Department’s rulemaking to include data collection and reporting on the provision of commercial financing or other financial products and services.
After considering comments received on the NPRM, changes proposed by the DFPI include the following:
- Amended definitions. The proposed modification defines a “commercial financing transaction” to mean “a consummated commercial financing transaction for which a disclosure is provided in accordance with California Code of Regulations, title 10, section 920, subdivision (a).” The modifications to the definitions also amend a “covered provider” to exclude “any person exempted from division 24 of the Financial Code under Financial Code section 90002,” and defines a “small business” to be “a business entity organized for profit with annual gross receipts of no more than $16,000,000 or the annual gross receipt level as biennially adjusted by the Department of General Services in accordance with Government Code section 14837, subdivision (d)(3), whichever is greater.” In determining a business entity’s annual gross receipts, the proposed modifications state that covered providers “may rely on any relevant written representation by the business entity, including information provided in any application or agreement for commercial financing or other financial product or service.”
- UDAAP. In addition to making several technical changes, the proposed modifications clarify that “[i]t is unlawful for a covered provider to engage or have engaged in any unfair, deceptive, or abusive act or practice in connection with the offering or provision of commercial financing or another financial product or service to a covered entity.” The changes remove text that would have made it unlawful should a covered provider “propose to engage” in any if these practices.
- Annual reporting requirements. The proposed modifications specify that covered providers who offer commercial financing will be required to electronically file reports to the DFPI on or before March 15 of each year starting in 2025. The proposed changes to the reporting requirements also clarify certain terms, address when covered providers are not required to calculate or report certain information, and stipulate that covered providers “licensed under division 9 (commencing with section 22000) of the Financial Code shall not include in the report required under this section information for activity conducted under the authority of that license.”
Comments on the proposed modifications are due March 15.
11th Circuit advances TILA suit weighing agency theory of liability
On February 6, the U.S. Court of Appeals for the Eleventh Circuit reversed a district court’s finding of summary judgment in favor of a financing company concerning alleged violations of TILA. The plaintiff agreed to purchase air conditioning repairs by taking out a loan with a company that finances home-improvement loans for heating and air conditioning products. According to the plaintiff, the repair company lied about the price of the loan and prevented him from viewing the loan paperwork. The plaintiff sued the defendants for violations of TILA and various state consumer protection laws, claiming he was not provided certain required disclosures and maintaining that had he received the disclosures he would not have accepted the loan. The plaintiff eventually decided to cancel the order before the work was commenced and was told he would have to contact the financing company to cancel the loan. The plaintiff was not released from the unpaid loan for work that never happened, and the negative payment history was reported to the credit bureaus.
The financing company argued that the plaintiff’s injuries are not traceable to the disclosure paperwork because the repair company never showed him the paperwork. The plaintiff countered that the repair company was not independent of the financing company because it was acting as the financing company’s agency. Under the “agency theory of liability,” the plaintiff argued that the financing company is liable under TILA for the repair company’s failure to provide the required disclosures. The district court ruled, however that the plaintiff lacked standing based on the finding that his injuries were not traceable to the financing company’s TILA violation, and that the plaintiff had not alleged that the repair company was acting as the financing company’s agent to provide the required disclosures.
On appeal, the 11th Circuit concluded that the plaintiff had standing to raise his agency-based TILA claim against the financing company. As a threshold matter, the appellate court first recognized that the plaintiff suffered a concrete injury (e.g., time spent disputing his debt; the impact on his credit; money spent sending documents to his attorney; and feelings of anxiousness), noting that injury and traceability were separate analyses. With respect to traceability, the appellate court next reviewed whether there was “a causal connection” between the plaintiff’s injuries and the challenged action of the financing company. The 11th Circuit accepted one theory of traceability—a theory of agency. “TILA liability attaches not only to the provision of incorrect disclosures, but also to the failure to provide any disclosures at all,” the appellate court explained, stating that in this case, the plaintiff argued that the repair company was acting as an agent of the financing company for the purpose of providing the disclosures. While expressing no opinion on the merits of the claim, the 11th Circuit concluded that the plaintiff had adequately pled that the financing company contracted with the repair company “who at all times acted as its agent” and that the financing company “is vicariously liable for the harms and losses” caused by the repair company’s misconduct by virtue of this agency relationship.
NYDFS finalizes commercial financing disclosures
On February 1, NYDFS adopted a final regulation (23 NYCRR 600) outlining disclosure requirements for commercial financing transactions in the state. Under the state’s Commercial Finance Disclosure Law (CFDL)—which was enacted at the end of December 2020—providers of commercial financing, which include persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
The final regulation took into consideration comments received on revised proposed regulations published in 2021 and 2022 (covered by InfoBytes here and here), and provides specific instructions for providers on how to comply with the CFDL. Among other things, the final regulation:
- Outlines detailed definitions for terms used within the CFDL and in the regulation;
- Clarifies the definition of “finance charge” with respect to commercial financing transactions, and explains how the finance charge and annual percentage rate should be calculated;
- Describes allowed tolerances and specifies occurrences where providers or financers will not assume liability for disclosure errors or inadvertent disclosures;
- Lays out formatting and content requirements for disclosures required by the CFDL for the following types of financing: (i) sales-based financing; (ii) closed-end financing; (iii) open-end financing; (iv) factoring transaction financing; (v) lease financing; (vi) general asset-based financing; and (vii) all other commercial financing transactions that do not fall within the aforementioned categories;
- Clarifies specific itemization disclosure requirements for when the amount financed is greater than the recipient funds;
- Outlines signature requirements;
- Describes how the CFDL’s disclosure threshold of $2,500,000 is calculated;
- Explains how providers should calculate required disclosures for commercial financing transactions with multiple payment options/balances payable on demand;
- Details certain duties of financers and brokers involved in commercial financing;
- Prescribes a process under which certain providers that use the opt-in method of calculating an estimated annual percentage rates will report data to the superintendent; and
- Specifies provisions related to the assignment of commercial financing agreements.
23 NYCRR 600 will take effect upon publication of the Notice of Adoption in the State Register. The compliance date is six months after the Notice of Adoption is published.
D.C. Circuit says CFPB’s Prepaid Rule does not mandate model disclosures for payment companies
On February 3, the U.S. Court of Appeals for the D.C. Circuit reversed a district court’s decision that had previously granted summary judgment in favor of a payment company and had vacated two provisions of the CFPB’s Prepaid Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the company sued the Bureau alleging, among other things, that the Bureau’s Prepaid Rule exceeded the agency’s statutory authority “because Congress only authorized the Bureau to adopt model, optional disclosure clauses—not mandatory disclosure clauses like the short-form disclosure requirement.” The Bureau countered that it had authority to enforce the mandates under federal regulations, including the EFTA, TILA, and Dodd-Frank, and argued that the “EFTA and [Dodd-Frank] authorize the Bureau to issue—or at least do not foreclose it from issuing—rules mandating the form of a disclosure.”
The district court concluded, among other things, that the Bureau acted outside of its statutory authority, and ruled that it could not presume that Congress delegated power to the agency to issue mandatory disclosure clauses just because Congress did not specifically prohibit it from doing so. Instead, the Bureau can only “‘issue model clauses for optional use by financial institutions’” since the EFTA’s plain text does not permit the Bureau to issue mandatory clauses, the district court said. The Bureau appealed, arguing that both the EFTA and Dodd-Frank authorize the Bureau to promulgate rules governing disclosures for prepaid accounts, and that the decision to adopt such rules is entitled to deference. (Covered by InfoBytes here.) However, the Bureau maintained that the Prepaid Rule “does not make any specific disclosure clauses mandatory,” and stressed that companies are permitted to use the provided sample disclosure wording or use their own “substantially similar” wording.
In reversing and remanding the ruling, the appellate court unanimously determined that because the Bureau’s Prepaid Rule does not mandate “specific copiable language,” it is not mandating a “model clause,” which the court assumed for purposes of the opinion that the Bureau was prohibited from doing. While the Prepaid Rule imposes formatting requirements and requires the disclosure of certain enumerated fees, the D.C. Circuit stressed that the Bureau “has not mandated that financial providers use specific, copiable language to describe those fees.” Moreover, formatting is not part of a “model clause,” the appellate court added. And because companies are allowed to provide “substantially similar” disclosures, the appellate court held that the Bureau has not mandated a “model clause” in contravention of the EFTA. The appellate court, however, did not address any of the procedural or constitutional challenges to the Bureau’s short-form disclosures that the district court had not addressed in its opinion, but instead directed the district court to address those questions in the first instance.
California: TILA does not preempt state laws on commercial financial disclosure
On January 20, California Attorney General Rob Bonta sent a comment letter to CFPB Director Rohit Chopra in response to a preliminary determination issued by the Bureau in December, which concluded that commercial financial disclosure laws in four states (New York, California, Utah, and Virginia) are not preempted by TILA. As previously covered by InfoBytes, the Bureau 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. The Bureau noted that a number of states have recently enacted laws requiring improved disclosures of information contained in commercial financing transactions, including loans to small businesses, to mitigate predatory small business lending and improve transparency. In making its preliminary determination, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes, explaining, among other things, that the statutes govern different transactions (commercial finance rather than consumer credit).
Under the California Commercial Financing Disclosures Law (CFDL), companies are required to disclose various financing terms, including the “total dollar cost of the financing” and the “total cost of the financing expressed as an annualized rate.” Bonta explained that the CFDL only applies to commercial financing arrangements (and not to consumer credit transactions) and “was enacted in 2018 to help small businesses navigate a complicated commercial financing market by mandating uniform disclosures of certain credit terms in a manner similar to TILA’s requirements, but for commercial transactions that are unregulated by TILA.” He pointed out that disclosures required under the CFDL do not conflict with those required by TILA, and emphasized that there is no material difference between the disclosures required by the two statutes, even if TILA were to apply to commercial financing. According to Bonta, should TILA preempt the CFDL’s disclosure requirements, there would be no required disclosures at all for commercial credit in the state, which would make it challenging for small businesses to make informed choices about commercial financing arrangements.
While Bonta agreed with the Bureau’s determination that TILA does not preempt the CFDL, he urged the Bureau to “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 [of] TILA, which is to provide consumers with full and meaningful disclosure of credit terms in consumer credit transactions.” He added that the Bureau “should also reemphasize certain principles from prior [Federal Reserve Board] decisions, including that state laws are preempted only to the extent of actual conflict and that state laws requiring additional disclosures—or disclosures in transactions not addressed by TILA—are not preempted.”
CFPB says TILA does not preempt NY law on commercial disclosures
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.”
FTC, CFPB weigh in on servicemembers’ right to sue under the MLA
On November 22, the FTC and CFPB (agencies) announced the filing of a joint amicus brief with the U.S. Court of Appeals for the Eleventh Circuit seeking the reversal of a district court’s decision that denied servicemembers the right to sue to invalidate a contract that allegedly violated the Military Lending Act (MLA). (See corresponding CFPB blog post here.) The agencies countered that the plain text of the MLA allows servicemembers to enforce their rights in court. Specifically, the agencies argued that Congress made it clear that when a lender extends a loan to a servicemember that fails to comply with the MLA, the loan is rendered void in its entirety. Moreover, Congress amended the MLA to unambiguously provide servicemembers certain legal rights, including an express private right of action and “the right to rescind and seek restitution on a contract void under the criteria of the statute.”
The case involves an active-duty servicemember and his spouse who financed the purchase of a timeshare from the defendants. Plaintiffs entered into an agreement with the defendants, made a down payment, and agreed to pay the remaining balance in monthly installments carrying an interest rate of 16.99 percent, in addition to annual assessments and club dues. None of the loan documents provided to the plaintiffs discussed the military annual percentage rate, nor did the defendants make any supplemental oral disclosures. Additionally, the agreement contained a mandatory arbitration clause (the MLA prohibits creditors from requiring servicemembers to submit to arbitration) and purportedly waived plaintiffs’ right to pursue a class action and their right to a jury trial. Plaintiffs filed a putative class action lawsuit alleging the agreement violated the MLA on several grounds, and sought an order declaring the agreement void. Plaintiffs also sought recission of the agreement, restitution, statutory, actual, and punitive damages, and an injunction requiring defendants to comply with the MLA going forward.
Defendants moved to dismiss, countering “that the plaintiffs lacked standing because they had not suffered any concrete injury and, even if they had, whatever injury they suffered was not traceable to the alleged MLA violations.” Defendants also argued that the loan was exempt under the MLA’s exemption for residential mortgages, and claimed that the MLA does not authorize statutory damages, nor did the plaintiffs state a claim for declaratory or injunctive relief. Further, defendants stated the court lacked jurisdiction to hear the case. The district court dismissed the lawsuit for lack of standing, agreeing with the magistrate judge that, among other things, plaintiffs “failed to allege ‘that the inclusion of the arbitration provision impacted [their] decision to accept the contract,’ and that they could not ‘seek[] relief based on a mere technicality that has not impacted them in any way.’”
Disagreeing with the district court’s ruling, the agencies argued that plaintiffs have a legal right to challenge the contract in court because (i) they made a down payment on an illegal and void loan; (ii) the injuries are traceable to the challenged conduct since “their monetary losses are the product of the illegal and void loan"; and (iii) their injuries “are redressable by an order of the court awarding restitution for the amounts that plaintiffs have already paid on the loan, and by a declaration confirming that the loan is void and that the plaintiffs have no obligation to make additional payments going forward.” The agencies asserted that courts have recognized that economic injury is exactly the sort of injury that courts have the power to redress.
Moreover, the agencies pointed out that the district court’s ruling “risks substantially curtailing private enforcement of the MLA and limiting servicemembers’ ability to vindicate their rights under the statute. It does so by reading the MLA’s voiding provision out of the statute and reading into the statute an atextual materiality requirement. But it may be very difficult, if not impossible, for servicemembers to demonstrate that certain MLA violations had a direct effect on their decision to procure a financial product or caused them to pay money they would not otherwise have paid.”
New NYDFS proposal to implement Commercial Finance Disclosure Law
On September 14, NYDFS published a notice of proposed rulemaking under New York’s Commercial Financing Disclosure Law (CFDL) related to disclosure requirements for certain providers of commercial financing transactions in the state. As previously covered by InfoBytes, the CFDL was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which include persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less. Last December, NYDFS announced that providers’ compliance obligations under the CFDL will not take effect until the necessary implementing regulations are issued and effective (covered by InfoBytes here).
The newest proposed regulations (see Assessment of Public Comments for the Revised Proposed New Part 600 to 23 NYCRR) introduce several revisions and clarifications following the consideration of comments received on proposed regulations published last October (covered by InfoBytes here). Updates include:
- A new section stating that a “transaction is subject to the CFDL if one of the parties is principally directed or managed from New York, or the provider negotiated the commercial financing from a location in New York.”
- A new section requiring notice be sent to a recipient if a change is made to the servicing of a commercial financing agreement.
- An revised definition of “recipient” to now “include entities subject to common control if all such recipients receive the single offer of commercial financing simultaneously.”
- Clarifying language stating that the “requirements pertaining to the statement of a rate of finance charge or a financing amount, as that term appears in Section 810 of the CFDL, shall be in effect only upon the quotation of a specific commercial financing offer.”
- Provisions allowing providers to perform calculations based upon either a 30-day month/360-day year or a 365-day year, with the acknowledgment that different methods of computation may lead to slightly different results.
- An amendment stating that “a ‘provider is not required to provide the disclosures required by the CFDL when the finance charge of an existing financing is effectively increased due to the incurrence, by the recipient, of avoidable fees and charges.’”
- An acknowledgement of comments asking that 23 NYCRR Part 600 be identical to California’s disclosure requirements (covered by InfoBytes here) “or as consistent as possible.” In response, NYDFS said that while it generally agrees, and has consulted with the California Department of Financial Protection and Innovation (DFPI), the regulations cannot be identical because the CFDL differs from the California Consumer Financial Protection Law and the Department cannot anticipate any future revisions DFPI may make to its proposed regulations.
Comments on the proposed regulations are due October 31.