Compliance Blog

Does your credit union offer small business loans? Perhaps you began serving businesses after the NCUA changed its commercial lending and member business loan rules several years ago, or perhaps the Paycheck Protection Program spurred your credit union to get into the small business lending game. Maybe you’re well versed in SBA loan programs and know that assisting small businesses in your community can further your credit union’s mission of helping your community to thrive. Whatever the reason, NAFCU has been hearing from more and more credit unions in recent years that are getting involved with commercial lending activity.

If your credit union does engage in small business lending, filling out this month’s Economic & CU Monitor survey can assist NAFCU with our advocacy efforts on this topic – but hurry, as responses are due today (April 12^th, 2023).

If your credit union does offer small business loans, then your job as a compliance officer may have just gotten more complicated thanks to two recent developments from the Consumer Financial Protection Bureau (CFPB).

The first is the release of the Final Rule implementing section 1071 of the Dodd-Frank Act. This rule was already discussed in length in another post in the Compliance Blog, so I’ll refrain from describing it in great detail. Instead, here’s a quick summary: the rule will require credit unions which made 100 or more “covered loans” in each of the two preceding calendar years to collect and report on certain data points relating to loans they make to small businesses (i.e., businesses with annual gross revenue of $5 million or less). Implementation will be phased-in depending on the credit union’s volume of small business lending activity, beginning in October 2024, and reaching full implementation by January 2026. In many ways, the reporting requirements under this new rule will be similar to HMDA reporting, but for business loans.

The second development relates to disclosures for commercial loans. As you might know, Regulation Z implements the Truth in Lending Act (TILA) and is the primary federal regulation that addresses the disclosure requirements for extensions of credit – including both open-end credit (such as credit cards), as well as closed-end credit (such as vehicle loans and mortgages). However, section 1026.3(a) explicitly exempts commercial and business purpose credit from the regulation’s coverage – meaning that business credit cards or loans are not required to comply with Regulation Z’s requirements regarding advertising, initial disclosures, periodic statements, and more. Thus, at the federal level there are generally no disclosure requirements for business loans.

However, several states have decided that business owners who take out a loan should be provided with disclosures that are similar to those provided to consumer borrowers. As of this writing, California, New York, Utah and Virginia have passed such laws, which would require commercial lenders to provide consumer-esque disclosures to commercial borrowers.

Back in December 2022, the CFPB published a notification of its intent to make a determination regarding whether New York’s law on this topic is preempted by TILA (and Regulation Z). The agency announced a preliminary determination that the New York law is not preempted by TILA, but also solicited comment about this topic from interested parties. On March 28^th, 2023, the bureau followed up on that original notification by publishing a Preemption Determination, which discusses whether the commercial lending disclosure laws in the state listed above – California, New York, Utah and Virginia – are preempted by TILA.

According to the CFPB, the text of TILA states that it will only preempt a state law to the extent that the state law is inconsistent with TILA. The bureau explain that “inconsistency” would mean that the state law would serve as an “obstacle” to the execution of TILA and/or that compliance with both the state law and TILA would be “impossible.” Over the course of nearly 20 pages, the CFPB explains that, in their opinion, the four state commercial disclosure laws in question are not inconsistent with TILA, and therefore are not preempted. The CFPB’s analysis notes that the California, New York, Utah and Virginia laws specifically focus on business and commercial purpose transactions, which are excluded from the scope of TILA and Reg Z, and therefore would not result in a situation in which disclosures are required under both TILA and these state laws. The CFPB also considered the question of whether the fact that the state laws use similar terms as those used in TILA – such as APR and finance charge – would create a preemption issue, but determined nevertheless that such a fact does not make the state laws inconsistent with TILA. Notably, a federal district court in California considering litigation over the California law reached the opposite conclusion several days after the CFPB’s determination was published, denying a motion to dismiss from the California Department of Financial Protection and Innovation because the state laws might be preempted by TILA for that reason.

So, what does this mean for credit unions? Do they need to start complying with these state-level laws requiring disclosures for commercial and business-purpose loans? Not exactly. All four of the state laws in questions exclude credit unions from their coverage. For example, the New York law in question specifically provides an exemption for financial institutions, which is defined to include both federal and state-chartered credit unions. Similarly, the Virginia law in question also exempts financial institutions. Both the California and Utah laws include exemptions for depository institutions. Thus, it would seem that credit unions are exempt from the scope of the four state laws that the CFPB considered when making its preemption determination.

However, this preemption question could still be important to credit unions for two reasons: first, these state-level disclosure requirements may still apply to third parties that work with credit unions and which do not fit into an exemption. For example, if a CUSO originates commercial loans and does not fit into any of the exceptions listed in a particular state’s statutes, then that CUSO may be required to provide these commercial loan disclosures. Secondly, CUs are only exempted because of the ways in which these particular state laws are written – it is conceivable that some state could eventually pass a law requiring commercial or business loan disclosures which does not exempt financial institutions or depository institutions. If that scenario were to occur, and if those state laws were not preempted by TILA (which is the CFPB’s conclusion here), then credit unions could be required to provide those state-level commercial lending disclosures. Thus, as more states adopt laws on this topic, it is possible that credit unions may be swept up in these requirements at some point.

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