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.
Troutman Pepper Consumer Financial Services Team
Stefanie takes a holistic approach to working with clients both through compliance counseling and assessment relating to consumer products and services, as well as serving as a zealous advocate in government inquiries, investigations, and consumer litigation.
Chris represents clients in regulatory, civil and criminal investigations and litigation. In his practice, Chris regularly employs his prior regulatory experience to benefit clients who are interacting with and being investigated by state attorneys general.
Caleb is an associate in the firm’s Consumer Financial Services Practice Group. He focuses his practice on helping federal and state-chartered banks, fintech companies, finance companies, and licensed lenders navigate regulatory risks posed by state and federal laws aimed at protecting consumers and small businesses in the credit and alternative finance products industry.
Troutman Pepper State Attorneys General Team
|Ashley Taylor – Co-leader and Firm Vice Chair
Ashley is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. He focuses primarily on federal and state government regulatory and enforcement matters involving state attorneys general, the Consumer Financial Protection Bureau (CFPB), and the Federal Trade Commission (FTC). Drawing upon his experience as a deputy attorney general, Ashley has developed an extensive consumer practice with regard to the consumer financial services industry.
|Clay Friedman – Co-leader
Clay is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. Informed by nearly a decade in a state attorneys general office, and more than 25 years in private practice, Clay spends much of his time representing clients in singular or multistate regulatory actions. Clay has repeatedly led teams before all 50 state attorneys general and also handles matters with the Federal Trade Commission, the Consumer Financial Protection Bureau, and other local, state and federal agencies.
Stephen represents clients interacting with, and being investigated by, state attorneys general and other enforcement bodies, including the CFPB and FTC, as well as clients involved with litigation, particularly in heavily regulated industries.
Michael handles high-profile state attorneys general, FTC, and CFPB investigations by advising clients through these complex government inquiries. He assists clients through the entire life cycle of investigations, from regulatory enforcement through formal litigation.
As a former government official at the state and federal level, Ketan leverages extensive experience in the public and private sectors to skillfully represent client interests.
A former deputy attorney general of New York, Avi applies his experience in bet-the-company matters, representing clients in criminal and civil investigations and enforcement actions before state and federal regulators, prosecutors and enforcement agencies.
Natalia is an associate in the firm’s business litigation practice. She recently received her J.D from the University of California, Davis School of Law.
Namrata is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, based in the Washington, D.C. office. Her work includes advising clients in regulatory investigations and compliance matters, in addition to representing clients in civil litigation matters.
Susan is an associate in the firm’s Consumer Financial Services Practice Group, and focuses her practice on consumer financial services matters. She has defended several of the nation’s largest and most influential financial institutions in individual and class action litigation involving the Telephone Consumer Protection Act (TCPA), Fair Credit Reporting Act (FCRA), Fair Debt Collection Practices Act (FDCPA), and other consumer privacy statutes. Susan also represents banks, fintechs, and financial services companies in connection with regulatory examinations and investigations brought by the CFPB, state attorneys general, and the California Department of Financial Protection and Innovation.
Whitney is an attorney in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group. She represents clients facing state and federal regulatory investigations and enforcement actions, as well as related civil litigation.
Trey is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement practice. His experience includes serving as a summer associate at the firm in 2021.
An experienced litigator, Daniel advises and represents regional, national and international companies, financial institutions and insurers in all facets of business, complex commercial and insurance coverage litigation. He is committed to working with his clients to find creative solutions to meet their needs.
Stephanie is Troutman Pepper’s senior government relations manager in the state attorneys general department.