We recently reported that a federal district court in Kentucky enjoined the CFPB from implementing the small business data collection and reporting rule, also referred to as the 1071 rule based on the Dodd-Frank section requiring the rule (the “Rule”). Unlike a similar injunction against the rule issued by a federal district court in Texas, the preliminary injunction issued by the Kentucky court is not limited to the members of the plaintiff trade associations and the plaintiff banks. As we have reported, the limitation of the Texas court preliminary injunction to the members of the plaintiff trade associations and plaintiff bank has resulted in other trade associations seeking to intervene in the case in order to expand the scope of the injunction to their members. You can find more on this here, here, and here.
However, unlike the Texas court order, the order by the Kentucky court does not expressly provide for a delay of the implementation dates under the Rule for the period that the stay is in effect. The order of the Kentucky court simply enjoins the CFPB from enforcing the Rule “until the Supreme Court issues an opinion ruling that the funding structure of the CFPB is constitutional.” Thus, without subsequent action by a court, Congress or even of the CFPB, lenders not covered by the Texas court order may not receive any relief from the implementation dates of the Rule if the Supreme Court finds the funding structure of the CFPB to be constitutional. Additionally, even though lenders covered by the Texas court order will benefit from a delay in the implementation dates for the period of time that the stay is in effect, the first two implementation dates are not reasonable in the first place. Thus, lenders subject to the Rule face a dilemma with regard to implementation efforts.
The CFPB posted the Rule on its website on March 30, 2023. The October 1, 2024 implementation date for Tier One lenders (lenders that originated at least 2,500 small business loans in 2022 and 2023) is too aggressive. The April 1, 2025 implementation date for Tier Two lenders (lenders that originated at least 500, but less than 2,500, small business loans in 2023 and 2024) also is aggressive. The January 1, 2026 implementation date for Tier Three lenders (lenders that originated at least 100, but less than 500, small business loans in 2024 and 2025) is more reasonable.
A good comparison for the appropriateness of the implementation dates is the revisions to Regulation C, the rule implementing the Home Mortgage Disclosure Act (HMDA), released by the CFPB on October 15, 2015 (the revised rule appeared in the October 28, 2015 Federal Register). The revised rule was based on amendments to HMDA made by Dodd-Frank. As is the case with the Rule, Congress specified new HMDA data categories and also provided for the collection and reporting of “such other information as the Bureau may require.” The CFPB added significantly more data categories, with the result being that the 23 pre-existing HMDA data categories were more than doubled, and there were modifications to many of the pre-existing data categories.
In addition to the changes that the mortgage industry needed to make to comply with the new rule, the CFPB advised it would build an electronic portal and institutions would submit HMDA data online via the portal. Thus, not only did institutions have to revise their operations and systems to comply with the revised HMDA rule, their systems had to be designed in a manner that would provide for communication with the CFPB portal. Recognizing the significant task facing the mortgage industry, the CFPB provided for a primary implementation date of January 1, 2018, a period of more than 26 months, with the revised data first being reported by March 1, 2019. In the preamble to the final HMDA rule, the CFPB observed as follows:
“The Bureau believes that these effective dates, which provide an extended implementation period of over two years, is appropriate and will provide industry with sufficient time to revise and update policies and procedures; implement comprehensive systems change; and train staff. In addition, the implementation period will assist in facilitating updates to the processes of the Federal regulatory agencies responsible for supervising financial institutions for compliance with the HMDA rule.”
With regard to the Rule, in Dodd-Frank Congress specified 13 data categories plus “any additional data that the Bureau determines would aid in fulfilling the purposes of this section.” Based on additions made by the CFPB, the Rule has over 30 main data categories, with many categories having subcategories that increase the compliance burden. Additionally, lenders will report the small business loan data to the CFPB through an electronic portal being built by the CFPB. In contrast with the revised HMDA rule, the Rule does not require only modifications of operations and systems, it requires the creation of operations and systems from scratch. In short, the burden to implement the Rule is more significant than the burden to implement the revised HMDA rule. Yet, with the Rule the CFPB provided for implementation periods of approximately 18, 25 and 33 months for Tier One, Two and Three lenders, respectively. The first two implementation periods are too short. Thus, Tier One and Tier Two lenders not covered by the Texas court order could be facing the need to implement the rule in an unreasonably short period of time. While Tier One and Tier Two lenders covered by the Texas court order will benefit from delayed implementation dates, the delay simply may provide for a reasonable implementation period.
In short, even with the Texas and Kentucky court orders, Tier One and Tier Two lenders need to carefully assess the speed of their implementation efforts.