Texas Judge Expands Hold On CFPB’s Small-Biz Lending Rule

Texas Judge Expands Hold On CFPB’s Small-Biz Lending Rule

By Jon Hill

Law360 (October 26, 2023, 8:14 PM EDT) — A Texas federal judge has broadened a preliminary injunction pausing the Consumer Financial Protection Bureau’s data collection rule on small business lending to cover all lenders who are potentially subject to the rule after previously limiting it to certain banks.

U.S. District Judge Randy Crane granted the expanded relief Thursday after a flurry of requests from trade groups for credit unions, community banks and other lenders not covered by his original injunction order, which paused the CFPB rule only for those in the American Bankers Association and Texas Bankers Association.

The rule calls for a wide range of lenders to begin reporting demographic data and other information to the CFPB on the applications they receive for small business credit. The rule, which was required by the Dodd-Frank Act’s Section 1071, is intended to support fair lending oversight and credit access initiatives.

In an order, Judge Crane said the CFPB is now preliminary barred from implementing or enforcing this Section 1071 rule against “all covered financial institutions,” at least until the U.S. Supreme Court issues a decision on whether the agency is constitutionally funded.

The high court is reviewing the CFPB’s funding mechanism in CFPB v. Community Financial Services Association of America , which could have implications for the validity of many CFPB rulemakings. The justices heard oral arguments earlier this month and are expected to rule in the first half of next year.

If the CFPB prevails, Judge Crane said Thursday that the agency must then push back its deadlines for compliance with the Section 1071 rule “to compensate for the period stayed.”

As written, the rule’s earliest compliance deadline was not set to arrive until Oct. 1, 2024, and applied only to larger lenders. Other lenders had until as late as Jan. 1, 2026, to start collecting data under the rule, which was finalized in March but came almost immediately under industry challenge in Texas federal court.

Thursday’s order from Judge Crane, who is overseeing this challenge, comes in the wake of another preliminary injunction that already broadly forbids the CFPB from enforcing the rule. That injunction was entered last month in Kentucky federal court, where different banking industry interests have also sued to overturn the rule.

In a statement, Credit Union National Association president and CEO Jim Nussle applauded Judge Crane’s move to expand his injunction, saying it “levels the playing field when it comes to implementing the CFPB’s rule, which is very important for credit unions facing large compliance costs due to this rule.”

CUNA was one of the trade groups that had sought a broader injunction in the Texas case.

“The burdensome requirements of this rule — combined with the significant questions about the constitutionality of the CFPB’s funding — created too much uncertainty in the marketplace, especially when credit union products and services are needed by members and businesses more than ever,” Nussle added.

Although consumer advocates and some Democrats have praised the rule’s reporting requirements as critical for bringing transparency to the $1.7 trillion small business lending market, Republicans and industry critics have slammed the requirements as too costly, invasive and complicated.

Those criticisms underpin both the Texas and Kentucky lawsuits, but they have also informed Republican-led efforts in Congress to legislatively repeal the Section 1071 rule using the Congressional Review Act, which gives lawmakers a way to nullify newly issued agency rulemakings.

Last week, a CRA measure that would scrap the rule passed in the U.S. Senate with narrowly bipartisan support. The U.S. House has not yet voted on the measure, but the Biden administration has threatened to veto it if it reaches the president’s desk.

Representatives for the CFPB did not immediately return a request for comment Thursday.

CUNA and other credit union intervenors are represented by Christopher O. Murray and Julian R. Ellis Jr. of Brownstein Hyatt Farber Schreck LLP.

The community bank intervenors are represented by James W. Bowen, Jennifer L. Clyde, Elbert Lin and Erica Peterson of Hunton Andrews Kurth LLP.

Other intervenors are represented by Alan B. Padfield, Owen C. Babcock and Kelsey N. Linendoll of Padfield & Stout LLP, among others.

The ABA and TBA are represented by John C. Sullivan of SL Law PLLC and James J. Butera and Ryan Israel of Meeks Butera & Israel PLLC.

The CFPB is represented by its own Kevin E. Friedl and Karen S. Bloom.

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 Caitlin Wolper.