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Update on state laws on lending to businesses

In the run-up to the 2008 financial crisis, federal banking regulators took numerous steps to undermine state regulators and enforcers. For example, the Office of the Comptroller of the Currency and the now-defunct Office of Thrift Supervision took steps to nullify state laws protecting the public from predatory mortgage lending. This proved to be catastrophic.

When Congress passed the Consumer Financial Protection Act in 2010, it significantly restricted the ability of federal banking regulators to broadly preempt state consumer financial protections.

Recently, a number of states have enacted laws to require improved disclosure of information in commercial financing transactions. This can include, for example, loans to small businesses. Many of these laws were passed in response to concerns about predatory small business lending and to provide transparency in the market for small business financing.

The CFPB received a request from an industry trade association to determine whether New York’s commercial financing disclosure law is preempted by the federal Truth in Lending Act. Congress has expressly authorized the CFPB to determine whether state laws are preempted by the Truth in Lending Act. The public can request such a determination, or the CFPB can raise the issue on its own. The Truth in Lending Act’s implementing regulations require the CFPB to request public comment before determining whether a state law is preempted.

After carefully considering the request, the CFPB’s preliminary determination is that the New York law is not preempted by the Truth in Lending Act because the New York law regulates commercial financing transactions rather than consumer-purpose transactions. The CFPB is requesting comment on whether it should finalize its preliminary determination that the New York law – as well as potentially similar laws in California, Utah, and Virginia – are not preempted.

The CFPB’s request for comment reflects the important role that public participation in preemption determinations plays in safeguarding state consumer protection efforts and the need for the federal government to follow such requirements where applicable.

Read Notice of Intent to Make Preemption Determination under the Truth in Lending Act. The deadline for submitting comments is January 20, 2023.

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