Commercial financing products, such as small business loans and merchant cash advances, have become the target of state legislatures nationwide. In a move that could empower or halt these efforts, the Consumer Financial Protection Bureau recently decided to initiate a proceeding to determine if the New York Commercial Financing Disclosure Law (CFDL), and potentially similar laws in California, Utah, and Virginia, are preempted by the Truth in Lending Act (TILA). Its initial determination that the laws are likely not preempted could pave the way for even more states to take similar action.
In 2018, California became the first state to enact consumer-like disclosure requirements for certain commercial lending transactions with the passage of the California Consumer Privacy Act of 2018. The regulations enforcing the law became effective on December 9, 2022. In December 2020, New York followed suit and enacted a similar law, the Commercial Financing Disclosure Law (CFDL). However, regulations enforcing the CFDL have yet to take effect. Since then, Virginia enacted a law that took effect November 1, 2022, and Utah enacted a law that took effect January 1, 2023. Legislatures nationwide have also introduced similar bills, including Connecticut, Missouri, New Jersey, North Carolina, and Maryland.
The stakeholders requesting CFPB's determination expressed concern that the CFDL defined key terms, including "financing charge" and "annual percentage rate," in a manner that contradicts TILA's definitions. Such definition could lead to inconsistent disclosures and create confusion among borrowers, including small business owners, who may use both consumer credit and commercial financing products to fund their business expenses.
However, the CFPB recently issued its preliminary decision that the CFDL and similar laws in California, Utah, and Virginia are not preempted by TILA because they only apply to certain commercial transactions. In contrast, TILA applies to consumer credit transactions. Notably, the CFPB did not take issue with the CFDL's differing definitions of terms like "financing charge" and "annual percentage rate."
The CFPB is soliciting comments from the public through January 20, 2023, before making its final determination. If the preliminary determination stands, we may see even more state legislatures begin to pass similar laws with differing definitions of critical terms.
