On Monday, the Texas federal district court hearing the lawsuit challenging the validity of the CFPB’s final rule implementing Section 1071 of the Dodd-Frank Act (Rule) issued an order that preliminarily enjoins the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court.”  However, to the great disappointment of many observers including myself, the court denied the plaintiffs’ request for nationwide injunctive relief and granted injunctive relief only to the plaintiffs and their members.  The plaintiffs are the Texas Bankers Association (TBA), the American Bankers Association (ABA), and Rio Bank, McAllen, Texas.  Thus, in addition to Rio Bank, the relief granted by the court extends only to the TBA, ABA, and members of TBA or ABA.

In limiting the injunctive relief, the court accepted the CFPB’s alternative argument that if the court were to grant the preliminary injunctive relief requested by the plaintiffs, such relief should be limited to the plaintiffs and their members.  As the plaintiffs’ argued in their reply brief, the CFPB’s argument failed to address the controlling precedent in the CFSA case.  In that case, the Fifth Circuit panel vacated the CFPB’s payday lending rule once it determined that the CFPB is unconstitutionally funded and that the payday lending rule would not have been issued were it not for the unconstitutional funding.  Given that the court found a substantial likelihood that the plaintiffs would prevail in asserting that the Rule is invalid because it was promulgated using the CFPB’s unconstitutional funding, it does not make sense for the court to have granted anything less than nationwide injunctive relief.  As the plaintiffs asserted, an invalid rule would have no force of law anywhere. 

The plaintiffs also argued that limiting the injunctive relief as argued by the CFPB would create the potential for unequal enforcement of the Rule.  The court stayed the deadlines for compliance with the Rule’s requirements pending the Supreme Court’s decision in CFSA and extended the deadlines for compliance in the event of a reversal in CFSA but also limited that relief to the plaintiffs and their members.  Thus, entities subject to the Rule but not covered by the preliminary injunction have no choice (except at their peril) other than to continue to spend significant sums preparing to comply with the Rule.  Given that the court recognized as to Rio Bank that such expenditures constitute irreparable harm, the limited scope of the relief granted means entities not covered by the preliminary injunction order will suffer irreparable harm that could be avoided through an order that provides nationwide relief.   

Hopefully, the CFPB will quickly recognize that, despite having argued for a limited injunction, the relief granted by the court is fraught with problems.  Because of those problems, the CFPB should act without further court order to eliminate the disparate treatment that results from the court’s order and agree to extend to all other entities affected by the Rule the same relief that the court granted to the plaintiffs and members of the ABA or TBA.  After all, why would the CFPB want to determine which banks are covered by the injunction and which are not?  That would be an administrative headache.  And since non-banks, credit unions, and small community banks are unlikely to be members of the ABA or TBA, treating non-members differently would run counter to Director Chopra’s mantra of maintaining a thriving competitive market and a level playing field.

The illogic of a limited injunction is further evidenced by the uncertainty of how it would even be applied.  For example, does the court’s order cover banks that join the ABA or TBA after the injunction issued or does it only cover members as of the date of the injunction?  Does it cover affiliate members of the ABA or TBA?  How would the CFPB even determine who is a member of the ABA or TBA in light of the natural reluctance of those trade associations to disclose who their members are?  I am sure that those associations will not release their membership lists to the CFPB.  Why should a member, as a condition of being covered by the injunction, need to disclose to the CFPB, or anyone else, that it is a member of the ABA or TBA?

All of these problems could easily be avoided by the CFPB doing the right thing here — namely extending the relief to everyone covered by the Rule, regardless of whether they are members of the ABA or TBA.