On April 26, the Texas Bankers Association and Rio Bank, McAllen, Texas filed a complaint in the U.S. District Court for the Southern District of Texas challenging the Consumer Financial Protection Bureau’s (CFPB or Bureau) final rule under § 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule). As discussed here, § 1071 amended the Equal Credit Opportunity Act (ECOA) to impose significant data collection and reporting requirements on small business creditors. The plaintiffs rely heavily on the Fifth Circuit’s decision in Community Financial Services Association (CFSA) v CFPB, finding the CFPB’s funding structure unconstitutional and, therefore, rules promulgated by the Bureau invalid. The plaintiffs also argue portions of the Final Rule violate various requirements of the Administrative Procedure Act (APA).
As discussed here, the Final Rule requires a covered financial institution to collect and annually report to the CFPB data on covered applications from small businesses. The data that must be reported and collected includes: (i) the application date, the application method, the application recipient, the action taken by the financial institution, and the date the action was taken; (ii) the credit type, credit purpose, and amount of credit for which the applicant applied; (iii) the census tract of the applicant, North American Industry Classification System code, applicant’s number of workers, applicant’s time in business, and number of principal owners; and (iv) the minority-owned, women-owned and LGBTQI-owned business statuses and the ethnicity, race, and sex of principal owners.
According to the complaint, the Final Rule “requires banks to develop and implement new software and compliance mechanisms to comply with over 80 reporting requirements that have been exponentially grown by the CFPB since the [Dodd-Frank] Act requiring this Rule was passed. Unable to effectively comply with these burdensome and overreaching new reporting requirements, the Final Rule will drive smaller providers from the market, causing a decrease in the products available to all customers including minority and women-owned small businesses. While the CFPB was alerted to this concern during the pendency of the Rule, it chose to ignore such concerns and paper over the lending community’s legitimate apprehensions with the Rule as it was formulated.”
Relying on CFSA v CFPB, the plaintiffs argue the CFPB’s funding violates the Constitution because the Bureau does not receive its funding from annual congressional appropriations like most executive agencies, but instead receives funding directly from the Federal Reserve based on a request by the Bureau director. Therefore, the plaintiffs argue, “[b]ecause the ECOA Final Rule was issued with funds derived from unconstitutional sources, it violates the Constitution (and, as a result, also the APA)” and must be set aside.
The plaintiffs also argue that the Final Rule violates the APA because the CFPB: (i) acted in excess of its authority by expanding 13 data points prescribed in § 1071 of the Dodd-Frank Act to 81 in the Final Rule without any basis in the administrative record to do so; (ii) acted arbitrarily and capriciously by failing to consider and respond to significant comments raised by adversely affected parties in the notice and comment period; and (iii) promulgated the Final Rule without undertaking a proper cost/benefit analysis.
“During the notice and comment period, the overwhelming number of comments submitted by parties subject to the rule characterized it as excessively overbroad in terms of its data points, the impact it would have on the small business lending market, and the costs it would impose on banks and other small business lenders.”
We thought that something like this was going to happen. Because this case was filed in the Fifth Circuit, it seems likely that the implementation date of the Final Rule will be postponed while we await the Supreme Court’s decision in CFSA v. CFPB. Currently, the Final Rule requires lenders that originate at least 2,500 small business loans annually to collect data starting October 1, 2024. Lenders that originate at least 500 loans annually must collect data starting April 1, 2025. Lenders that originate at least 100 loans annually must collect data starting January 1, 2026. We will be watching the litigation to see if the mandatory compliance dates of the rule are stayed while the case is pending, presumably to await the Supreme Court’s decision in CFSA.