Laws in four states that require certain borrower disclosures on small-business loans do not run afoul of federal law, according to a preliminary determination by the Consumer Financial Protection Bureau.
The CFPB said that the laws — in New York, California, Virginia and Utah — do not appear to violate the longstanding principle of preemption, which may be used to override state laws that contradict a federal statute.
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The laws in California and New York require certain small-business lenders to calculate and disclose an annual percentage rate, similar to what the federal Truth in Lending Act requires in the consumer lending realm.
The CFPB's preliminary assessment came in response to a request from an industry group, the Small Business Finance Association, to determine whether certain aspects of the New York law are preempted by the Truth in Lending Act.
Because the New York law and the Truth in Lending Act have different definitions of terms such as APR, small business owners and consumers will become confused, the Small Business Finance Association contended.
But the CFPB rejected that argument, noting that the New York law does not apply to consumer loans.
"Consumers applying for consumer credit should continue receiving only TILA disclosures, which, as normal, will assure meaningful disclosure of credit terms and allow the consumers to compare like products when shopping for financing options," the bureau wrote in a notice published on its website.
Steve Denis, executive director of the Small Business Finance Association, expressed disappointment with the bureau's determination, saying that it allows states to invent their own definitions of APR.
"Call it something different," he argued in an interview.
The Small Business Finance Association represents non-bank lenders whose products include merchant cash advances, which give businesses money upfront in exchange for a percentage of their future sales. The group has been fighting the New York and California laws on different fronts.
Last week, the group filed a lawsuit against Clothilde Hewlett, commissioner of the California Department of Financial Protection and Innovation,
In the suit, the Small Business Finance Association argued that the California regulations will cause businesses to receive inaccurate information that misstates the costs of financing.
Consequently, the lawsuit argues, the regulations violate the First Amendment of the U.S. Constitution by compelling companies to make commercial speech that is false, misleading and controversial.
Mark Leyes, a spokesman for the California Department of Financial Protection and Innovation, did not provide comment on the lawsuit.
The CFPB said that it plans to accept public comments on the issues until Jan. 20, and it subsequently plans to publish its final determination.
