CFPB’s Small Biz Loan Data Rule Halted For MyriadBanks

CFPB’s Small Biz Loan Data Rule Halted For MyriadBanks

By Jon Hill

Law360 (July 31, 2023, 6:42 PM EDT) — A Texas federal judge put a hold Monday on the Consumer Financial Protection Bureau’s recently finalized small business lending reporting requirements for numerous banks across the country while the U.S. Supreme Court considers the constitutionality of the agency’s funding.

In an order, U.S. District Judge Randy Crane entered a preliminary injunction that sidelines those requirements at the behest of banking industry representatives that had sued to block them, including the Texas Bankers Association and American Bankers Association, the nation’s largest bank trade group.

The CFPB adopted the reporting requirements earlier this year with its so-called Section 1071 rule, which calls for banks and nonbank lenders to provide data to the agency on their applications for small business credit, including applicant demographic details, approval decisions and pricing information.

But Monday’s injunction for now bars the CFPB from implementing or enforcing the rule against banks that are members of the TBA or ABA, whose lawsuit challenges the agency’s contemplated reporting regime as excessive and illegitimately issued with unconstitutional funding.

According to court filings, the TBA is the largest state-level bank trade group and counts 400 banks among its members. The ABA did not provide an equivalent member count, but it includes banks of all sizes across the country and describes itself as the “voice of the nation’s $23.6 trillion banking industry.”

Judge Crane said the injunction will remain in effect pending a forthcoming U.S. Supreme Court decision on the CFPB’s funding, which the agency is statutorily authorized to draw independently from the Federal Reserve System rather than having to rely on regular appropriations bills passed by Congress.

The Fifth Circuit, which covers Texas, held last fall that this funding arrangement unconstitutionally insulates the CFPB from congressional oversight and voided another one of its rules. That decision is now on appeal at the Supreme Court in CFPB v. Community Financial Services Association of America Ltd. et al. , which is set to go to oral argument in October and could be decided by as late as next June.

“In the event of a reversal in that case, [CFPB officials] are ordered to extend plaintiffs and their members’ deadlines for compliance with the requirements of the final rule to compensate for the period stayed,” Judge Crane wrote in his order.

The CFPB crafted the small business lender reporting requirements to carry out a more than decade- old data collection mandate in Section 1071 of the Dodd-Frank Act. Insights generated from the data are supposed to aid in fair lending enforcement and addressing gaps in credit access for entrepreneurs.

But many in the banking industry have chafed at the final product that the CFPB released in late March, arguing that it seeks much more data than is necessary and will drive lenders to exit the small business market rather than put up with the costs and burdens of compliance.

This frustration boiled over into litigation in April, when the Texas Bankers Association and Rio Bank, a minority depository institution based in McAllen, Texas, filed a lawsuit challenging the CFPB’s Section 1071 rule in southern Texas federal court.

The American Bankers Association joined as a named plaintiff the following month, shortly before the trio collectively moved for a preliminary injunction against the rule. Monday’s order granting an injunction provides that it will also cover Rio Bank.

In a joint statement, the trio said Monday that they “welcome” the decision by Judge Crane.

“We believe the injunction is a recognition of the complexity of the 1071 Final Rule and the significant costs and burdens it places on our members, particularly community banks which provide much of the country’s small business lending,” they said.

The court-ordered halt notably will not apply to nonbank lenders that would otherwise be covered by the CFPB’s reporting requirements, nor to banks that are not members of either trade group. That narrows the injunction’s scope somewhat from what the plaintiffs had originally proposed.

“While we sought an injunction covering all institutions covered by the rulemaking, this ruling spares TBA and ABA members across the country from being forced to incur unrecoverable expenses while the Supreme Court is considering whether the CFPB has the authority to promulgate the 1071 Final Rule at all,” the trade groups said in their statement.

Monday’s injunction order also comes many months before the CFPB expects any small business lenders to even begin complying with the reporting requirements.

Although the CFPB estimated that potentially thousands of banks and nonbanks would eventually have to report data under the rule, the agency set a series of rolling compliance deadlines to phase in implementation gradually over a period of more than a year, starting with larger lenders first next year.

As a smaller lender, for example, Rio Bank would likely have until Jan. 1, 2026, to begin collecting reportable data. But the bank groups argued that it and other banks would still have to “spend significant sums preparing to comply with this illegitimate rule” in the meantime without an injunction in place.

In his order, Judge Crane noted that Rio Bank’s relatively distant compliance deadline did raise a question about whether it face sufficiently imminent harm to warrant a preliminary injunction. But the judge found its potential injury to be more than speculative, pointing to the existence of definite compliance deadlines and to the bank’s estimates of compliance costs kicking in for it this year.

“That leadtime for compliance was built into the final rule does not make plaintiffs’ claim unripe,” Judge Crane wrote, finding that Rio Bank, at a minimum, had established standing to seek an injunction.

The judge also said a “substantial likelihood exists that plaintiffs would prevail in asserting that the final rule is invalid,” given the Fifth Circuit’s previous rejection of the CFPB’s funding structure.

In their Monday statement, the ABA, TBA and Rio Bank said they “remain committed to our larger case challenging the lawfulness and scope of CFPB’s over-reaching 1071 Final Rule that will only harm lending to small businesses and minority and women-owned enterprises.”

“We look forward to the next steps in this case,” they added. A CFPB spokesperson declined to comment.

The ABA, TBA and Rio Bank are represented by John C. Sullivan of SL Law PLLC as well as by James

J. Butera and Ryan Israel of Meeks Butera & Israel PLLC. The CFPB is represented by its own Kevin E. Friedl.

The case is Texas Bankers Association et al. v. Consumer Financial Protection Bureau et al., case number 7:23-cv-00144, in the U.S. District Court for the Southern District of Texas.

–Editing by Emily Kokoll.