The plaintiffs and intervenors in the lawsuit filed in a Texas federal district court challenging the CFPB’s final small business lending rule implementing Section 1071 of Dodd-Frank (Rule) have filed a consolidated motion for summary judgment.  The plaintiffs in the lawsuit are the Texas Bankers Association, Rio Bank, McAllen, Texas, and the American Bankers Association.  The intervenors are: Texas First Bank, Independent Bankers Association of Texas, Independent Community Bankers of America, Texas Farm Credit, Farm Credit Council, Capital Farm Credit, XL Funding, LLC, Equipment Leasing and Finance Association, Rally Credit Union, America’s Credit Union (formerly Credit Union National Association), and Cornerstone Credit Union League

After initially entering a preliminary injunction that was limited to the plaintiffs and their members, the Texas court extended its preliminary injunction to apply on a nationwide basis.  The order extending the preliminary injunction was entered following the intervention of several additional plaintiffs in the lawsuit.  The court’s extended preliminary injunction (1) stays all deadlines for compliance with the Rule for the plaintiffs and their members, parties that intervened in the lawsuit after the initial ruling and their members, and all covered financial institutions until after the Supreme Court’s decision in CFSA v. CFPB, and (2) requires the CFPB, if the Supreme Court rules that its funding is constitutional, to extend the deadlines for compliance with the Rule to compensate for the period stayed.  (On October 3, 2023, the U.S. Supreme Court heard oral argument in  CFSA v. CFPB, and a ruling is not expected until as late as June 2024.)

In their summary judgment motion, the plaintiffs and intervenors only seek summary judgment on their non-constitutional claims.  They do not seek summary judgment on their claim that the Rule is invalid because the CFPB’s funding structure is unconstitutional.  They indicate that they will seek leave to amend their filings consistent with any applicable direction provided by the Supreme Court when it rules in CFSA v. CFPB.

The plaintiffs and intervenors argue that summary judgment should be entered in their favor for the following reasons:

  • The CFPB exceeded its statutory authority in imposing the additional data points that are not mandated by Dodd-Frank because:
    • While Section 1071 directs financial institutions to collect and report 13 specific data points, the Rule massively expands the data points that must be collected.  This massive expansion of data points will not facilitate fair lending or otherwise advance the purposes of Section 1071 because the data that lenders will have to collect and submit to regulators under the Rule will not capture the factors that lenders legitimately consider when underwriting and pricing small business loans.  Even if the expanded data did capture the actual factors considered by lenders, the anticipated low response rates to demographic questions means that the expanded data will not be reliable, as there is no reason to believe that the loans with demographic data will be representative of all loans.  While Congress in Dodd-Frank specified certain required data points, it authorized the CFPB in Section 1071(e)(2)(H) to require “any additional data that the Bureau determines would aid in fulfilling the purposes of . . . section [1071].”  In Dodd-Frank, Congress took the same approach with the Home Mortgage Disclosure Act (HMDA) by specifying new data points and authorizing the CFPB to add “such other information as the Bureau may require.”  In the 2015 final rule implementing the HMDA amendments, the CFPB more than doubled the data fields added by Congress.
    • Rather than expand access to credit for women-owned and minority-owned small businesses, the exponentially increased compliance costs of the Rule will result in less credit being available to all small businesses, thus harming the businesses Congress sought to help through Section 1071.  The Rule rests on the faulty assumption that the CFPB had authority to require lenders to collect information other than the information that Section 1071 specifically requires them to collect which they would not otherwise collect as part of the loan application process.  For this assumption, the CFPB relies on the language in Section 1071(e)(2)(H) which refers to “any additional data that the Bureau determines would aid in fulfilling the purposes of…section 1071].”  However, in reading this language to provide authority for the CFPB to require the Rule’s expanded data points, the CFPB disregards the text of Section 1071 which only allows the CFPB to require lenders to disclose information already obtained by the lender from the application process (along with 13 mandated data points).
  • The CFPB acted arbitrarily and capriciously in violation of the Administrative Procedure Act (APA) by failing to consider the significant real world costs of compliance.  Rather than give adequate consideration to the warnings from the regulated community on the effects of expanding data collection requirements exponentially, the CFPB “papered over the issue and failed to consider the concerns.”  Specifically, the CFPB provided no meaningful response to concerns expressed by commenters on its proposed Section 1071 rule that the exponential increase in compliance costs resulting from the expanded data collection requirements would drive lenders, particularly community banks and non-depository lenders, from the market and thereby injure small business borrowers.
  • The CFPB’s cost/benefit analysis of the final rule was arbitrary and capricious in violation of the APA because:
    • The CFPB underestimated the costs of the Rule by failing to collect the relevant cost information from lenders, relying instead on a flawed cost survey and on cost estimates that were based on its 2015 HMDA final rule cost estimates.  Reliance on the cost estimates was misplaced because the Section 1071 data relates to a more diverse and complex set of products than the mortgage loans for which HMDA requires data collection and much of the information that must be reported under HMDA is already collected and disclosed by  mortgage lenders pursuant to the Truth in Lending Act.  The CFPB also did not consider the additional costs related to increased fair lending supervision and enforcement (resulting from the false positives suggested by the data) and the reputational injuries to lenders nor did it adequately consider the impact of the Rule on small business borrowers in rural areas.
    • The CFPB failed to justify the costs in comparison to any supposed benefits of the Rule.  Instead, it acknowledged that quantifying and monetizing the benefits of the “enhanced transparency” provided by the Rule “presents substantial challenges” and would require “identifying all possible uses of the data collected under this rule, establishing causal links to the resulting public benefits, and then quantifying the magnitude of those benefits.”

The Rule is also being challenged in two other cases filed in federal district court, one in Kentucky and one in Florida.  The plaintiffs in the Kentucky lawsuit are the Kentucky Bankers Association and several Kentucky banks.  In January 2024, the court stayed the Kentucky case until the Supreme Court issues its decision in CFSA v. CFPB.  The plaintiff in the Florida lawsuit is the Revenue Based Finance Coalition, a trade group whose members include non-banks that provide sales-based financing to businesses.  The Florida court has ordered that any dispositive motions must be filed by March 15, 2024.

An attempt by Congress last year to overturn the Rule failed when in late December 2023 President Biden vetoed the joint resolution adopted by the House and Senate to override the Rule under the Congressional Review Act.  The vote in the House was 221-202 and the vote in the Senate was 53-44.  A Senate effort to override the President’s veto failed by a vote of 54-45, falling short of the necessary two-thirds vote required in both the House and Senate to override a Presidential veto.