CFPB Makes Preemption Determination of Virginia Law

CFPB Makes Preemption Determination of Virginia Law

Today the CFPB issued a determination that commercial financing disclosure laws in four states, including Virginia, are not preempted by the Truth In Lending Act (TILA). What is preemption? What laws were they looking at? Does this impact credit unions in Virginia? Let's dive in.

Background

Last year, the CFPB announced that, at the request of a trade association, they were looking into a New York law for a possible conflict with federal law. The concern was that if the disclosure requirements of the state law conflicted with those of federal laws, and that creditors couldn't write their disclosures to follow both laws. The CFPB issued a Notice of Intent to determine if this New York law, as well as similar laws in California, Utah and Virginia, were preempted by federal law.

Federal Disclosure Law: TILA

TILA aims to "assure a meaningful disclosure of credit terms" so consumers can meaningfully compare credit options. The law requires creditors to use specified formulas to determine credit costs and provide disclosures to consumers on items like finance charges and annual percentage rate before they obtain credit. TILA applies to consumer credit transactions, such as personal loans, auto loans, mortgages, and credit cards, but generally does not apply to credit extended for business purposes.

The issue at hand for the CFPB was preemption, which is where federal law overrides state law because the two laws are inconsistent. TILA says that it does not alter or affect the laws of any state relating to disclosures unless they are inconsistent with TILA. So, if TILA says you must disclose certain terms and calculate them a certain way, and a state law requires either different calculations for those same terms or different terms using the same calculations, the CFPB could find that the state law is preempted by the federal law because they are inconsistent.

State Disclosure Law: Title 6.2, Chapter 22.1 - Sales-based Financing

The law in question in Virginia is Chapter 22.1 of Title 6.2 of the Code of Virginia. This section of the code applies to "sales-based financing," which is a type of loan made to a business where the re-payment terms can vary based on the amount of revenue generated by the business. This code section requires the disclosure of "finance charges," as does TILA.

The CFPB analyzed the Virginia law and found that there was no preemption. They reasoned that this law only applies to business lending transactions, not consumer lending transactions, so there was no conflict with TILA. They went on to state that even if these sales-based financing transactions could be for consumer credit, there would still be no inconsistency because the state law defines "finance charge" in the same manner as TILA.

Impact to Virginia's Credit Unions

Does this determination have any impact on credit unions? In short, no. The section of law that the CFPB reviewed does not apply to credit unions. Part of that law - Va. Code 6.2-2229 - states that nothing in this chapter places any additional requirements or obligations on financial institutions. Credit unions do not engage in sales-based financing as described in the chapter. Finally, the CFPB's determination of no preemption means the state law remains in place.

You can find the full CFPB determination here with analysis of the Virginia law starting on page 17.