[Federal Register Volume 87, Number 240 (Thursday, December 15, 2022)]
[Rules and Regulations]
[Pages 76551-76553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27059]



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 Rules and Regulations
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  Federal Register / Vol. 87, No. 240 / Thursday, December 15, 2022 / 
Rules and Regulations  

[[Page 76551]]



BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2022-0070]


Intent To Make Preemption Determination Under the Truth in 
Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Notification of intent to make preemption determination; 
request for comment.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) has received a 
written request to make a determination that the Truth in Lending Act 
(TILA) preempts a New York State commercial financing law with respect 
to certain provisions. The CFPB is publishing this notification of 
intent to make a preemption determination about that law and has made a 
preliminary conclusion that this law is not preempted by TILA. The CFPB 
is also providing notice that it is considering whether to make a 
preemption determination regarding State laws in California, Utah, and 
Virginia that are potentially similar to the New York law. The CFPB is 
soliciting public comment pursuant to Regulation Z.

DATES: Comments must be received on or before January 20, 2023.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2022-
0070, by any of the following methods:
    1. Federal eRulemaking Portal: https://www.regulations.gov. Follow 
the instructions for submitting comments.
    2. Email: [email protected]. Include Docket No. CFPB-
2022-0070 in the subject line of the message.
    3. Mail/Hand Delivery/Courier: Comment Intake--TILA Preemption 
Determination, c/o Legal Division Docket Manager, Consumer Financial 
Protection Bureau, 1700 G Street NW, Washington, DC 20552.
    Because paper mail in the Washington, DC area and at the CFPB is 
subject to delay, commenters are encouraged to submit comments 
electronically.
    Instructions: The CFPB encourages the early submission of comments. 
All submissions must include the document title and docket number. 
Commenters are encouraged to submit comments electronically. In 
general, all comments received will be posted without change to https://www.regulations.gov. Comments will be available for public inspection 
and copying at 1700 G Street NW, Washington, DC 20552, on official 
business days between the hours of 10 a.m. and 5 p.m. Eastern time. You 
can make an appointment to inspect the documents by telephoning 202-
435-7275.
    All submissions in response to this notification, including 
attachments and other supporting materials, will become part of the 
public record and subject to public disclosure. Proprietary information 
or sensitive personal information, such as account numbers or Social 
Security numbers, or names of other individuals, should not be 
included. Submissions will not be edited to remove any identifying or 
contact information.

FOR FURTHER INFORMATION CONTACT: Joel Singerman, Senior Counsel, Office 
of Regulations, or Christopher Shelton or Anand Das, Senior Counsels, 
Legal Division, at 202-435-7700. If you require this document in an 
alternative electronic format, please contact 
[email protected].

SUPPLEMENTARY INFORMATION:

Background on TILA and Reg Z Preemption Provisions

    The CFPB has received a request to make a preemption determination 
involving certain disclosure provisions in TILA. Congress enacted TILA 
in 1968 because it found that ``competition among the various financial 
institutions and other firms engaged in the extension of consumer 
credit would be strengthened by the informed use of credit.'' \1\ TILA 
is designed to ``assure a meaningful disclosure of credit terms so that 
the consumer will be able to compare more readily the various credit 
terms available to him and avoid the uninformed use of credit.'' \2\ 
TILA requires creditors to use specified formulas to determine credit 
costs and to provide cost disclosures to consumers before consummation 
of ``consumer credit'' transactions,\3\ which is credit that is 
``offered or extended . . . primarily for personal, family, or 
household purposes.'' \4\ Regulation Z implements TILA.\5\
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    \1\ 15 U.S.C. 1601(a).
    \2\ Id.
    \3\ See 15 U.S.C. 1637(a), 1637a, 1638(a) (requiring disclosures 
for ``consumer credit'' transactions); but see 12 CFR 1026.12(a) 
(prohibiting the issuance of credit cards in certain circumstances, 
even if the credit card is to be used primarily for a business 
purpose).
    \4\ See 15 U.S.C. 1602(i) (defining ``consumer'' credit to mean, 
in part, credit ``primarily for personal, family, or household 
purposes''); see also 12 CFR 1026.2(a)(12).
    \5\ See generally, 12 CFR 1026.1, et seq.
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    TILA does not ``annul, alter, or affect the laws of any State 
relating to the disclosure of information in connection with credit 
transactions, except to the extent that those laws are inconsistent 
with the provisions of [TILA], and then only to the extent of the 
inconsistency.'' \6\ TILA authorizes the CFPB to determine whether any 
inconsistency exists between chapters 1, 2, and 3 of TILA and State 
laws.\7\ Regulation Z provides that ``[a] State law is inconsistent if 
it requires a creditor to make disclosures or take actions that 
contradict the requirements of the Federal law.'' \8\
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    \6\ 15 U.S.C. 1610(a)(1).
    \7\ Id.
    \8\ 12 CFR 1026.28(a)(1).
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    Accordingly, TILA does not preempt the field, and State disclosures 
are entirely compatible with Federal disclosures under TILA and 
Regulation Z, with the narrow exception of when they are 
``contradictory.'' The Board of Governors of the Federal Reserve System 
(Board), which formerly administered Regulation Z, framed the standard 
as follows: ``A state law is contradictory, and therefore preempted, if 
it significantly impedes the operation of the federal law or interferes 
with the purposes of the federal statute.'' \9\ The Board noted that 
Regulation Z articulated two categories of ``contradictory'' State 
laws: ``A state law is contradictory if it requires the use of the same 
term to represent a different

[[Page 76552]]

amount or a different meaning than the Federal law, or if it requires 
the use of a term different from that required in the Federal law to 
describe the same item.'' \10\ At the same time, the Board noted that 
these two categories were not entirely exhaustive, because they would 
not be apt in a context where the preemption issue at hand does not 
``deal with disclosures of terms and amounts.'' \11\ The CFPB is 
considering whether it should clarify the Board's articulation of the 
applicable preemption standard, and it requests comment on how the CFPB 
should articulate the standard for preemption in this and future 
determinations.
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    \9\ 48 FR 4454, 4455 (Feb. 1, 1983); 50 FR 25068 (June 17, 
1985); 53 FR 3332 (Feb. 5, 1988); 55 FR 13282 (Apr. 10, 1990); 55 FR 
42025, 42026 (Oct. 17, 1990).
    \10\ 12 CFR 1026.28(a)(1).
    \11\ 48 FR 4454, 4455 (Feb. 1, 1983). Additionally, the Board 
articulated the following principles: (1) for purposes of making 
preemption determinations, State law is deemed to require the use of 
specific terminology in the State disclosures if the State statute 
uses certain terminology in the disclosure provision; (2) a State 
disclosure does not ``describe the same item'' under Regulation Z, 
Sec.  1026.28(a)(1) if the State disclosure ``is not the functional 
equivalent of a Federal disclosure;'' and (3) preemption occurs only 
where an actual inconsistency exists between the State and Federal 
laws. See 48 FR 4454, 4455 (Feb. 1, 1983). The Board did not 
explicitly mention these principles in every preemption 
determination, but it did reference them from time to time. See, 
e.g., 50 FR 8737 (Mar. 5, 1985); 55 FR 13282 (Apr. 10, 1990).
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    TILA authorizes the CFPB to make a determination of whether a State 
law requirement is preempted, upon its own motion or upon the request 
of a creditor, State, or other interested party.\12\ Regulation Z 
implements this provision in TILA.\13\ Requests for preemption 
determinations must be submitted in accordance with appendix A to 
Regulation Z.\14\ Appendix A also sets forth processes the CFPB must 
follow in issuing preemption determinations, either on request or on 
its own motion.\15\
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    \12\ 15 U.S.C. 1610(a)(2).
    \13\ See 12 CFR 1026.28(a)(1).
    \14\ 12 CFR part 1026, app. A.
    \15\ See id.
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    In addition, section 554(e) of the Administrative Procedure Act 
authorizes any agency, in its sound discretion, to issue a declaratory 
order to terminate a controversy or remove uncertainty.\16\ Section 
554(e) of the Administrative Procedure Act provides an additional, 
independent source of authority for this proceeding.
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    \16\ 5 U.S.C. 554(e).
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The Preemption Request

    The CFPB received a request from a business trade association 
asking it to determine that TILA preempts certain provisions in New 
York State's Commercial Financing Law, sec. 801 et seq. (the New York 
law).\17\ The request is available as supporting and related material 
for this proceeding on Regulations.gov. Similar to TILA, the New York 
law requires financial disclosures before consummation of covered 
transactions, although it applies to ``commercial financing'' instead 
of consumer credit. It requires providers \18\ to issue disclosures 
when ``extending a specific offer'' for various types of commercial 
financing.\19\
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    \17\ Letter from Stephen Denis, CEO of the Small Business 
Finance Association, to Jocelyn Sutton, Executive Secretary of the 
Consumer Financial Protection Bureau (Jan. 15, 2021). The New York 
law is available at https://www.nysenate.gov/legislation/laws/FIS/A8.
    \18\ The New York law defines ``provider'' to mean, in part, ``a 
person who extends a specific offer of commercial financing to a 
recipient'' and, unless otherwise exempt, ``a person who solicits 
and presents specific offers . . . on behalf of a third party.'' See 
N.Y. Comm. Fin. Law, sec. 801(h).
    \19\ See generally, N.Y. Comm. Fin. Law, secs. 803 (sales-based 
financing disclosures), 804 (closed-end commercial financing 
disclosures), 805 (open-end commercial financing disclosures), 806 
(factoring transaction disclosures), and 807 (disclosures for other 
forms of commercial financing).
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    The request asserted that TILA preempts the New York law with 
respect to its use of the terms ``finance charge'' and ``annual 
percentage rate'' (APR), notwithstanding that the statutes govern 
different categories of transactions. Both statutes require these 
disclosures: TILA requires creditors to disclose information about 
``finance charges'' and ``APRs'' before consummation of open- and 
closed-end consumer credit transactions,\20\ while the New York law 
requires providers to disclose information about ``finance charges'' 
and ``APRs'' or ``estimated APRs'' for various types of commercial 
financing.\21\
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    \20\ See, e.g., 15 U.S.C. 1637(a), 1637a, 1638(a) (setting forth 
requirements for open-end transactions, open-end transactions 
secured by a principal dwelling, and closed-end transactions, 
respectively); see also 12 CFR 1026.6, 1026.40 (open-end 
transactions), and 1026.18, 1026.37(l), 1026.38(o) (closed-end 
transactions).
    \21\ See generally, N.Y. Comm. Fin. Law, secs. 803 (sales-based 
financing disclosures), 804 (closed-end commercial financing 
disclosures), 805 (open-end commercial financing disclosures), 806 
(factoring transaction disclosures), and 807 (disclosures for other 
forms of commercial financing).
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    In addition to acknowledging that, unlike TILA, the New York law 
governs commercial transactions, the request focused on what it alleged 
are material differences between how the State and Federal law use the 
terms ``finance charge'' and ``APR,'' and alleged that these 
differences make the New York law inconsistent with Federal law for 
purposes of preemption.\22\ For example, the request noted that the New 
York law defines ``finance charge'' to include any charge imposed by a 
``provider,'' which includes ``a person who solicits and presents 
specific offers of commercial financing on behalf of a third party.'' 
\23\ The request stated that the definition is broader than the Federal 
definition, under which the requester asserted a ``finance charge'' for 
non-mortgage transactions includes certain broker fees only if the 
creditor requires the use of the broker.
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    \22\ The request also acknowledged similarities between the 
State and Federal law. Both Regulation Z and the New York law state 
that ``finance charge'' means ``the cost of [financing] as a dollar 
amount. It includes any charge payable directly or indirectly by the 
[recipient] and imposed directly or indirectly by the [issuer] as an 
incident to or a condition of the extension of [financing].'' See 
Regulation Z, 12 CFR 1026.4(a); N.Y. Comm. Fin. Law, sec. 801(e). 
Further, the New York law specifically refers to Regulation Z in 
defining ``finance charge'' and ``APR.'' It states that the term 
finance charge ``includes all charges that would be included under 
12 CFR 1026.4 as if the transaction were subject to'' that 
provision. N.Y. Comm. Fin. Law, sec. 801(e). And it states that the 
terms ``APR'' and ``estimated APR'' must, among other things, be 
calculated in accordance with the Federal Truth in Lending Act and 
Regulation Z, ``regardless of whether such act or such regulation 
would require such a calculation.'' See N.Y. Comm. Fin. Law, secs. 
803(c), 806(c) (governing ``estimated APR'' disclosure for sales-
based commercial financing and factoring transactions, 
respectively); secs. 804(c), 805(c), and 807(c) (governing ``APR'' 
disclosure for closed-end commercial financing, open-end commercial 
financing, and other commercial financing not covered by categories, 
respectively).
    \23\ See N.Y. Comm. Fin. Law, sec. 801(e), (h) (sec. 801(e) 
defines ``finance charge,'' and sec. 801(h) defines ``provider'').
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    Additionally, the request asserted that the ``estimated APR'' 
disclosure that the New York law requires for certain transactions is 
less precise than the APR calculation under TILA and Regulation Z, and 
that the New York law requires certain assumptions about payment 
amounts and payment frequencies in order to calculate APR and estimated 
APR, whereas TILA does not require similar assumptions. The request 
also asserted that the New York law requires providers to calculate 
APRs for open-end transactions using TILA's closed-end APR requirements 
instead of TILA's open-end APR requirements.
    The request stated that these types of differences could lead to 
variances in the disclosures required under State and Federal law. The 
request asserted that the Federal law and regulation therefore preempt 
the New York law. The request pointed to administrative precedent \24\

[[Page 76553]]

and Regulation Z commentary \25\ to support this conclusion.
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    \24\ The request pointed to a TILA preemption determination that 
the Board issued in 1982, in which the Board stated that State laws 
requiring finance charge or APR disclosures will face greater 
scrutiny because the terms are so significant under TILA. As the 
request noted, the Board stated in that publication, ``since these 
disclosures are particularly significant, any contradiction in of 
the corresponding federal disclosure would interfere with the intent 
of the federal scheme.'' See 47 FR 16202 (Apr. 15, 1982).
    \25\ The request referred to comment 28(a)-2, which clarifies 
that ``a State law'' is inconsistent for purposes of preemption if 
it uses ``finance charge'' to include fees beyond Federal law or 
requires a different label for ``APR.'' The request asserted that 
the reference to ``a State law'' was intentionally broad--that, 
because ``finance charge'' and ``APR'' are central to TILA and 
Regulation Z's disclosure regime, the commentary was intended to 
clarify the limitations of finance charges and APRs without 
limitation to any particular type of State law. The request asserted 
that this was intended to protect the value of the terms under 
Federal law.
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    The request also asserted that the New York law impedes the 
operation of Federal law or interferes with the intent of the Federal 
scheme, even if it does not contradict TILA in the specific manner 
described in Regulation Z. The request asserted that failing to enforce 
TILA's definitions of ``finance charge'' and ``APR,'' even across 
different financing types, would impede and degrade the benefits of 
ensuring uniform disclosures, which aid consumer understanding and 
enable consumers to effectively compare financing options. The request 
asserted that the inconsistencies between TILA and the New York law 
could lead to confusion or misunderstanding among borrowers, including 
small business owners who may use both consumer credit and commercial 
financing to fund business expenses.

Preliminary Preemption Analysis

    The CFPB has decided to initiate a proceeding to make a preemption 
determination regarding the New York law in response to the request. In 
evaluating the request concerning the New York law, the CFPB also 
became aware of similar laws in other States. The CFPB is, on its own 
motion, providing notice that it may make preemption determinations 
regarding potentially similar State laws in California,\26\ Utah,\27\ 
and Virginia \28\ as part of this proceeding.
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    \26\ Cal. Fin. Code secs. 22800 to 22805; Cal. Code Regs. tit. 
10, ch. 3, subch. 3.
    \27\ Utah Code Ann. secs. 7-27-101 to 7-27-301.
    \28\ Va. Code Ann. secs. 6.2-2228 to 6.2-2238; 10 Va. Admin. 
Code secs. 5-240-10 to 5-240-40.
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    Beginning with the New York law, the CFPB's preliminary view is 
that TILA does not preempt the New York law on the grounds the request 
asserts. That is, the State and Federal laws do not appear 
``contradictory'' for preemption purposes.
    The Bureau notes that the statutes govern different transactions, 
so the New York law appears to be far afield of a law that contradicts 
TILA and Regulation Z. TILA requires creditors to disclose the finance 
charge and APR only for ``consumer credit'' transactions, which the 
statute defines as credit that is ``primarily for personal, family, or 
household purposes.'' \29\ The New York law, on the other hand, 
requires the disclosures only for ``commercial financing,'' 
specifically defined as financing ``the proceeds of which the recipient 
does not intend to use primarily for personal, family, or household 
purposes.'' \30\
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    \29\ See 15 U.S.C. 1602(i) (defining ``consumer'' credit to 
mean, in part, credit ``primarily for personal, family, or household 
purposes''); see also 15 U.S.C. 1637(a), 1637a, 1638(a) (requiring 
disclosures for ``consumer credit'' transactions); but see 12 CFR 
1026.12(a) (prohibiting the issuance of credit cards in certain 
circumstances, even if the credit card is to be used primarily for a 
business purpose).
    \30\ N.Y. Comm. Fin. Law, sec. 801(b) (emphasis added). The 
request does not argue that any single transaction can be subject to 
both New York and TILA disclosure requirements, and the New York 
Department of Financial Services has proposed a regulatory provision 
that would explicitly provide that commercial financing ``does not 
include any transaction that is subject to the [Federal TILA], for 
which a disclosure is provided that is compliant with such Act.'' 
Revised Proposal by the New York Department of Financial Services to 
add 23 NYCRR 600 (Aug. 26, 2022).
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    The Bureau preliminarily disagrees with the request that the New 
York law significantly impedes the operation of TILA or interferes with 
the purposes of the Federal scheme. As relevant here, a primary purpose 
of TILA is to assure a meaningful disclosure of credit terms so that 
the consumer will be able to compare more readily the various credit 
terms available to the consumer and avoid the uninformed use of 
credit.\31\ The differences between the New York and Federal disclosure 
requirements do not frustrate these purposes because lenders are not 
required to provide the New York disclosures to consumers seeking 
consumer credit. 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.
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    \31\ See 15 U.S.C. 1601(a).
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    Based on the foregoing, the CFPB's preliminary interpretation is 
that TILA does not preempt the New York law's use of the terms 
``finance charge,'' ``APR,'' or ``estimated APR.''
    As noted above, the CFPB is also considering making determinations 
regarding whether TILA preempts State laws in California,\32\ Utah,\33\ 
and Virginia \34\ that prescribe disclosures in certain commercial 
transactions. The CFPB has conducted a preliminary review of these 
laws, which are similar in relevant respects to the New York law 
because they do not apply to consumer credit transactions that are 
within the scope of TILA. Accordingly, the CFPB's preliminary 
conclusion is that TILA does not preempt these State laws. As an 
additional potential basis--but not necessary to the Bureau's 
preliminary conclusion--the Bureau notes that several of these laws do 
not appear to require use the terms ``finance charge'' or ``APR'' in a 
manner that would be different than TILA and Regulation Z if they were 
applicable. The CFPB encourages commenters to provide information about 
any relevant differences in these State laws that would affect the 
CFPB's preemption analysis and final determination with respect to 
them. The Bureau's focus on and preliminary conclusion about these 
State laws is not intended to indicate or imply anything about the laws 
of any other States.
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    \32\ Cal. Fin. Code secs. 22800 to 22805; Cal. Code Regs. tit. 
10, ch. 3, subch. 3.
    \33\ Utah Code Ann. secs. 7-27-101 to 7-27-301.
    \34\ Va. Code Ann. secs. 6.2-2228 to 6.2-2238; 10 Va. Admin. 
Code secs. 5-240-10 to 5-240-40.
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Conclusion

    In light of the foregoing, the CFPB is publishing this notification 
of its intent to make a preemption determination and solicit comment 
from the public. After the comment period closes, the CFPB will 
consider any comments and publish a notification of final determination 
in the Federal Register.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2022-27059 Filed 12-14-22; 8:45 am]
BILLING CODE 4810-AM-P