/>iI have devoted several posts to a California commercial loan disclosure law that was enacted in 2018 - SB 1235 (Glazer). Although the bill became effective on January 1, 2019, lenders were not obligated to comply until the Department of Financial Protection & Innovation adopted implementing regulations. Those regulations took effect last December.
Shortly before the DFPI's regulations took effect, the Small Business Financial Association filed a lawsuit alleging that the regulations violate the First Amendment and are preempted by the federal Truth in Lending Act (aka TILA). Small Bus. Fin. Assoc. v. Hewlett, U.S. Dist. Ct. (C.D. Cal.) Case No. 2:22-cv-08775-RGK-PLA. Last Thursday, Judge R. Gary Klausner refused to grant Commissioner Hewlett's motion to dismiss both of these claims.
Judge Klausner applied the test enunciated by the U.S. Supreme Court in Zauderer v. Office of Disciplinary Counsel of Sup. Ct. of Ohio, 471 U.S. 626 (1985) to the plaintiff's First Amendment claim. That tripartite test requires the government to show that mandated commercial disclosures is (i) purely factual; (ii) noncontroversial; and (iii) not unjustified or unduly burdensome. At the pleading stage, it is enough if the DFPI's regulations allegedly fail at least one of these three parts. Judge Klausner concluded that in light of the plaintiff's unique products, the plaintiff had plausibly pled that the regulations compel speech that is not purely factual.
Judge Klausner also found that the plaintiff had adequately pled that the DFPI's regulations obstructed the purpose of TILA because the regulations fail to define "APR" and "finance charge" in the same manner as TILA. Thus, commercial borrowers may confused when comparing loan products that are subject to TILA with those that are not. Interestingly, two days before Judge Klausner's ruling, the Consumer Financial Protection Bureau announced its determination that California's commercial disclosure statute was not preempted. However, the CFPB's dismissal of concerns about borrower confusion was long on conclusion and short on analysis:
Commenters advocating for preemption had a number of complaints about how businesses might be confused by the California and New York disclosures. However, these concerns about the merits of the State laws are properly addressed to State legislators or regulators. It is not appropriate to use TILA preemption to override States’ judgments regarding how best to disclose information to businesses, which is not part of TILA’s purposes.
For more on the multi-year saga of California's commercial loan disclosure legislation, see the following posts: DBO Seeks Comments On Commercial Loan Disclosure Rules; Watch Out, Small Commercial Lending Might Soon Become A lot More Complicated!; DBO Proposes Commercial Loan Disclosure Rules; OAL Approves DFPI Commercial Financing Disclosure Rules - But Who Got Stuck With The Check?; OAL May Soon Decide Fate Of California's Proposed Commercial Financing Rules; California Will Soon Require Novel Disclosure Requirements Providers Of Commercial Financings; and California Commercial Loan Disclosure Rules Proposed For Comment.
