While it has only been a month since the CFPB issued its final rule to implement Section 1071 of the Dodd-Frank Act, the CFPB is already facing a lawsuit challenging the rule’s validity. The lawsuit was filed last week in a Texas federal district court by the Texas Bankers Association and Rio Bank, McAllen, Texas. It is not surprising that the lawsuit was filed in the Fifth Circuit, given that it was a Fifth Circuit panel that held the CFPB’s funding is unconstitutional in Community Financial Services Association of America Ltd. v. CFPB. (The U.S. Supreme Court has agreed to review the decision in its next Term.)
On Thursday, June 15, 2023, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “An Even Deeper Dive into the CFPB’s Final Section 1071 Rule on Small Business Data Collection.” The webinar is a follow-up to our April webinar on the rule that had record-breaking attendance. We received many excellent questions from attendees and will be providing answers to those questions in the June webinar. To register for the June webinar, click here.
The complaint describes Rio Bank as a Minority Depository Institution whose Board of Directors is a majority Hispanic and whose market is approximately 90% to 95% Hispanic. The bank is further described as having approximately $900 million in total assets with 14 locations in the Rio Grande Valley and 200 employees. The bank alleges that it makes small business and agricultural loans to small businesses in the Valley and that it made 409 small business and agricultural loans in a total amount of $117 million in 2022.
The complaint alleges that the 1071 rule is invalid because the CFPB’s funding structure is unconstitutional and because portions of the rule also violate various requirements of the Administrative Procedure Act (APA). The plaintiffs’ constitutional argument is that because the CFPB’s funding structure violates the Appropriations Clause, the rule is invalid and should be vacated (citing to the Fifth Circuit ruling in the CFSA case.)
The plaintiffs make the following arguments regarding the APA:
- The CFPB abused its discretion by promulgating a rule beyond the statutory scope. While Section 1071 directs financial institutions to collect and report 13 specific data points, the final rule sets forth 81 separate data or sub-data points (representing an enlargement of the requisite data points by over 600 percent.) These additional data or sub-data points were added without any basis in the administrative record. Rather than advancing the Dodd-Frank Act’s goal of increasing the number of loans made to minority and women-owned businesses, the final rule will undermine that purpose. This is because many banks cannot afford the costs of complying with the rule’s burdensome requirements. As a result, banks will abandon small business lending and there will be fewer banks willing to participate in the small business lending space. Due to this violation, all data points in excess of the 13 specified in Dodd-Frank should be invalidated and set aside.
- The CFPB acted arbitrarily and capriciously by failing to consider comments. In comments submitted on the proposed Section 1071 rule, the CFPB was alerted to the alarming costs that the expansion of data points would impose on small and mid-sized banks. The CFPB failed to consider and respond to these comments and there is no support in the administrative record for a determination that the additional data would aid in fulfilling the purpose of Dodd-Frank to encourage additional lending. Due to this violation, the entire rule should be invalidated and set aside.
- The CFPB acted arbitrarily and capriciously by failing to undertake a proper cost/benefit analysis. The CFPB failed to account for the disproportionate cost of the final rule on small banks (which make the most small business loans) and the fact that the final rule would likely decrease the availability of loans to women and minority-owned businesses. Due to this violation, the entire rule should be invalidated and set aside.