On December 4, a federal district court for the Central District of California granted summary judgment in favor of the Commissioner of the California Department of Financial Protection and Innovation (DFPI) finding that regulations adopted last year under California’s Commercial Financing Disclosures Law (CFDL) do not violate the plaintiff’s First Amendment rights and are not preempted by the Truth in Lending Act (TILA). Under the CFDL, providers are required to give certain disclosures similar to consumer transactions, such as the amount of funding the small business will receive, the APR, a payment amount (if applicable), the term, details related to prepayment policies, and (for products without a monthly payment) an average monthly cost.

As discussed here, the plaintiff in Small Business Financial Association (SBFA) v. Hewlett, is a trade association of small business finance companies. Its members offer a variety of small business financing products, including merchant cash advances and open-end financing products. The SBFA claims the CFDL presents a significant problem for its members, namely in requiring the use of uniform terms for very different products. The SBFA filed suit alleging: 1) the CFDL compels commercial speech in a manner that violates the First Amendment; and 2) the CFDL is preempted in part by TILA. In March, the court denied the Commissioner of the DFPI’s motion to dismiss, leaving open both issues. Recently, the Commissioner moved for summary judgment. The court granted that motion.

As for the SBFA’s First Amendment claim, the Commissioner argued the regulations satisfy the Zauderer test as a matter of law because they are purely factual and uncontroversial. The SBFA argued the disclosures were “wildly inaccurate” because they make transactions like sales-based financings (SBFs) and open-end lines of credit (OECs) appear like traditional loans, and the estimated fees, duration, and APR are inaccurate. The court disagreed. It found that the record showed that the regulations would help small businesses understand the cost of SBFs and OECs and do comparison shopping. The court also found that the evidence fell short of showing that the SBFs and OECs estimates are misleading. “The difference between the actual and estimated figures is due to the difference between what transpires in real life versus what occurs in the hypothetical scenarios assumed in the disclosures. However, the fact that they are assumptions is explicitly stated … Any reasonable person receiving the disclosures would be on notice that the calculations are based on the assumptions stated. If assumptions change, results will to.” The court further found that the disclosures were not subjectively controversial or unduly burdensome.

The SBFA’s second claim was that because the CFDL defines the terms APR and finance charge differently than TILA, the law is preempted. The court noted that Congress authorized the Consumer Financial Protection Bureau (CFPB) to determine whether state law conflicts with federal law and on March 31, the CFPB issued its decision that the regulations at issue (and similar laws enacted by New York, Utah, and Virginia) do not conflict with TILA. The court would not disturb the CFPB’s interpretation unless it was “demonstrably irrational,” which the court found it was not.

As a result, the court granted the Commissioner’s motion.