The Consumer Financial Protection Bureau’s (CFPB) new rule requiring lenders to collect demographic data – one it was required to issue under the Dodd-Frank Act as well as a court order – has been blocked by a federal judge in Texas while the bureau waits to make its funding structure argument before the Supreme Court.
The injunction in the Southern District of Texas barred the CFPB from requiring Rio Bank of McAllen, Texas, and members of the Texas Bankers Association (TBA) and American Bankers Association (ABA) to comply with the Section 1071 small-business lending rule until the Supreme Court (SCOTUS) rules on the bureau’s funding.
“The stay is not unusual given it comes out of a Texas federal court,” Francis “Trip” Riley, partner at Saul Ewing, LLP and co-chair of the firms’ Consumer Financial Services Group, told Dodd Frank Update. “I wouldn’t say it is a start of a trend, as more conservative judges have been willing to enter stays based on the pending SCOTUS review and decision. However, other courts, like the SDNY [Southern District of New York] and NDCA [Northern District of California] have not.”
Along with the creation of the bureau, the Dodd-Frank Act required the CFPB to promulgate a rule to collect demographic data on small-business lending, similar to what is collected for home loans under the Home Mortgage Disclosure Act. On July 11, 2022, the court for the NDCA gave the bureau a deadline for the rule – March 31, 2023.
The bureau issued the rule on March 30, implementing Section 1071 of the Dodd-Frank Act and amending Regulation B in addition to implementing changes to the Equal Credit Opportunity Act (ECOA). The largest lenders (those originating at least 2,500) are expected to implement these changed requirements first, with a collection start date of Oct. 1, 2024.
The order issued by the Texas district court directed the CFPB to immediately cease all implementation or enforcement of the rule against Rio Bank or the members of the plaintiff trade organizations and stays all deadlines for compliance with the rule’s requirement for the plaintiffs and their members until after SCOTUS issues its final decision. Moreover, should SCOTUS reverse the Fifth Circuit’s determination that the CPFB’s funding structure is unconstitutional, the CFPB is directed to extend the deadlines for compliance to compensate for the period stayed.
“The Texas Bankers Association, Rio Bank, and the American Bankers Association welcome this decision by the Southern District of Texas granting immediate and injunctive relief on CFPB’s 1071 final rule,” the plaintiffs stated in a joint release. “We believe the injunction is a recognition of the complexity of the 1071 final rule and the significant costs and burdens it places on our members, particularly community banks which provide much of the country’s small business lending.
“While we sought an injunction covering all institutions covered by the rulemaking, this ruling spares TBA and ABA members across the country from being forced to incur unrecoverable expenses while the Supreme Court is considering whether the CFPB has the authority to promulgate the 1071 final rule at all,” they continued. “TBA, Rio Bank, and ABA are pleased with this immediate victory, but we remain committed to our larger case challenging the lawfulness and scope of CFPB’s over-reaching 1071 final rule that will only harm lending to small businesses and minority and women-owned enterprises. We look forward to the next steps in this case.”
In an email to Dodd Frank Update, Richard Horn, co-managing partner of Garris Horn LLP and former senior counsel & special advisor in the CFPB’s Office of Regulations, said, “The fact that the court has blocked the rule even temporarily while the appropriations question is being decided is a win that, like the Townstone case, shows the CFPB can be challenged. The larger question about the rule still needs to be decided. But hopefully the recent wins challenging the bureau show other groups and targets that it’s worth considering a challenge or defense.”