The CFPB (or “Bureau”) filed a cross-motion for summary judgment in the lawsuit regarding the small business lending data collection and reporting rule, also known as the 1071 rule based on the Dodd-Frank section that requires the CFPB to adopt the rule (the “Rule”). Last month, the plaintiffs and intervenors in the lawsuit challenging the Rule filed a consolidated motion for summary judgment. In their summary judgment motion, the plaintiffs and intervenors requested summary judgment on their non-constitutional claims, and made substantive arguments regarding the CFPB’s authority to implement the Rule as adopted by the CFPB. Plaintiffs and intervenors do not seek summary judgment on their claim that the Rule is invalid because the CFPB’s funding structure is unconstitutional, but have indicated 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. Currently, the CFPB is enjoined from 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.” As explained in our previous blog on the case, 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. In its reply and cross-motion for summary judgment, the CFPB defends its authority to implement the Rule and the validity of its cost-benefit analysis.

In its cross-motion, the CFPB makes the following arguments:

  • The CFPB’s authority to include additional data points was expressly mandated by Dodd-Frank. In addition to gathering information about ownership and other data points listed in the Act, Section 1071 authorized the Bureau to identify additional data points “that the Bureau determines would aid in fulfilling the purposes of” Section 1071. The CFPB argues that the data points included in the Rule are either expressly listed in the Act or were added to further the purpose of the Act, and were thus authorized by Congress. The CFPB also addresses plaintiffs’ argument that the expanded data points are not authorized because they are not information already obtained by lenders during the application process. The CFPB argues that there is no limitation within the text of the Act that would limit the data collection and reporting to information already obtained by lenders, and in fact, the majority of the data points listed in the Act for collection and reporting are not data already obtained by lenders.
  • The CFPB acted reasonably in including the additional data points. The Bureau argues that the plaintiffs and intervenors did not make substantive challenges to any of the individual data points or make a showing that any of the data points is unreasonable. The Bureau noted that in its rulemaking process, it described the reasons for adding each data point and explained how each piece of data “would aid in fulfilling the statutory purposes.” As an example, the CFPB notes that additional data points include information about pricing because it “offers useful insights into underwriting disparities,” and collection of this information facilitates enforcement of fair lending laws. The CFPB also argues that the plaintiffs “disagree that any collection of small business data is justified,” which is a challenge to the Act itself, not the Rule. The CFPB challenges the plaintiffs’ argument that the Rule’s data collection requirements that are similar to Home Mortgage Disclosure Act (HMDA) data collection requirements for residential mortgage loans are inappropriate in the small business lending industry because small business lending processes are “non-standardized” and “complex.” The Bureau argues that this assertion is an attack on the Act, and not an argument to be made against the Rule, which only implements the Act. Further, the Bureau argues the plaintiffs’ assertion of the potential for low response rates on the demographic data points is no reason to remove any of the data points, especially considering that the Rule requires financial institutions to maintain procedures “reasonably designed to obtain responses,” which can be assessed and improved if necessary.
  • The CFPB reasonably considered the costs and benefits of the Rule. The CFPB argues that it considered feedback from financial institutions and small businesses with regard to the cost to comply with the Rule. The CFPB argues that it included numerous exceptions from the Rule in order to lighten the expected cost of compliance, especially for smaller entities. The Bureau notes that in an attempt to alleviate potential burden, it raised the small business loan volume threshold at which financial institutions would be covered. The Bureau adopted a threshold of at least 100 covered transactions in each of the two preceding calendar years. The Bureau also convened a SBREFA panel, after which it conducted an analysis of potential costs for financial institutions, varying the model for differences in size and complexity. The CFPB argues it is unlikely that the Rule will lead to a decrease in availability of credit to small businesses, as asserted by the plaintiffs. The CFPB stated that financial institutions will continue to receive revenue from small business lending, such that the cost of compliance with the Rule will not be prohibitive, but “have only a limited impact on the availability and affordability of small business credit.” The Bureau explains that the main benefit of the Rule is that “it will create the most comprehensive dataset on credit availability for small businesses, which will provide important insight into lending patterns in this market.” The CFPB did not attempt to quantify this benefit. Additionally, the CFPB argues that the plaintiffs failed to show that the CFPB didn’t consider any specific data regarding costs and that the plaintiffs simply disagree with the CFPB’s determinations.

The plaintiffs’ response and reply is due by May 10, 2024, and CFPB’s reply to plaintiffs is due by June 7, 2024.

As a reminder, the Rule is also being challenged in two other cases filed in federal district court, one in Kentucky and one in Florida. The Kentucky case has been stayed until the Supreme Court makes a decision in CFSA v. CFPB. The posture of the Florida case is similar to that of the Texas case, in that the plaintiffs have filed a motion for summary judgment and the CFPB has filed response and a cross-motion for summary judgment. Response to the CFPB’s cross-motion in the Florida case is due by April 26, 2024. All CFPB rule challenges will be affected by any ruling made by the Supreme Court in CFSA v. CFPB regarding the constitutionality of the CFPB’s funding structure. On October 3, 2023, the U.S. Supreme Court heard oral arguments in the case, and we will continue to monitor developments and provide updates through both the Consumer Finance Monitor blog and podcast. A ruling is not expected until as late as June 2024.

We note, Dodd-Frank also expanded the data reporting requirements under HMDA by specifying additional data categories and authorizing the CFPB to require the reporting of “such other information as the Bureau may require.” In October 2015, the CFPB issued a final rule to implement the HMDA amendments, and pursuant to such authority added many data collection categories beyond those specified in Dodd-Frank. Although industry commenters objected to the significant expansion of data reporting requirements, the final rule mainly became effective in January 2018. The inclusion of the additional data collection categories was not challenged in court.