On September 14th, the Federal District Court for the Eastern District of Kentucky granted the plaintiff’s motion to preliminarily enjoin the CFPB from implementing the Small Business Lending Rule (“Rule”) promulgated under section 1071 of the Consumer Financial Protection Act. As a reminder, the plaintiffs in the Kentucky lawsuit are the Kentucky Bankers Association and several Kentucky banks. Importantly, the order does not limit the beneficiaries of the injunctive relief to just the named plaintiffs and their members as happened in the earlier case challenging the 1071 Rule brought by the American Bankers Association, Texas Bankers Association in Federal District Court for the Eastern District of Texas. In the Texas case, the court stipulated that the only beneficiaries of the preliminary injunction would be the members of the plaintiff’s trade associations (American Bankers Association and Texas Bankers Association). As a result of the Texas court limiting the beneficiaries of the injunction to just the plaintiffs trade associations, several other trade associations intervened in the Texas lawsuit and filed motions for preliminary injunctions which are still pending before the court.
The Kentucky opinion is welcome news for those financial institutions who were not members of the American Bankers Association or Texas Bankers Association and, therefore could not avail themselves of the relief granted by the Texas court. This order places all financial institutions on an equal footing and should moot all pending motions in the Texas court (and the flurry of motions to intervene in the Texas case).
The CFPB is enjoined from enforcing the Rule until the Supreme Court issues an opinion in the case regarding the agency’s constitutionality. The Kentucky opinion differs from the Texas case in that the Texas court enjoined the CFPB from implementing and enforcing the Rule until the Supreme Court reverses the decision in Cmty. Fin. Servs. Ass’n of Am., Ltd. v. CFPB, a trial on the merits of the action, or until further order from the Texas court. The Kentucky opinion does not indicate that any further action from the Court may be taken. The Court could make the injunctive relief coterminous with the Texas injunction; however, that would require another court order. As another reminder, the Supreme Court will hear oral arguments in the case challenging the funding mechanism of the CFPB as being unconstitutional on October 3, 2023. The Court granted the motion for preliminary injunctive relief for the following reasons:
- Given the circuit split regarding the CFPB’s constitutionality, the likelihood of success on the merits is uncertain at this time. Therefore, this did not “tip the scale in either direction” with regard to whether a preliminary injunction should be issued.
- The plaintiffs have suffered irreparable harm in that the compliance costs incurred in preparation for complying with the Rule are unlikely recoverable even in the event the Supreme Court holds the CFPB’s funding structure is unconstitutional.
- The CFPB will not suffer any harm from the injunction, as they are not able to enforce the Rule until October 2024 (which is the initial compliance date for small business lenders with higher volumes of lending). Moreover, the CFPB will not lose any benefit with the issuance of the injunction. The court noted that because “the Supreme Court’s decision will be issued by June 2024 at the latest, the CFPB will suffer no harm and the public will not lose any benefit by the issuance of the preliminary injunction.”
While we believe that there is no longer any need for the Texas Court to rule on any motions for injunctive relief, before popping the cork on the champagne we must await the CFPB’s reaction to the Kentucky opinion and whether the Court agrees with us that all pending motions in the Texas case are now moot. Stay tuned!