The U.S. District Court for the Southern District of Texas, McAllen Division considered motions for summary judgment from the Texas Bankers Association (TBA) and the Consumer Financial Protection Bureau (CFPB) in a case where the trade organization asserted the bureau’s rule related to the data points financial institutions were required to collect from the small business to which they lend was not properly promulgated in accordance with the Administrative Procedures Act (APA).
The new rule, which the bureau was required to do under Section 1071 of the Dodd-Frank Act (DFA) and was compelled by a court order, was released in March 2023, along with a 168-page compliance guide.
Check out Dodd Frank Update’s Section 1071 Compliance Guide here.
The case is Texas Bankers Ass’n, et al., v. Consumer Financial Protection Bureau, et al., No. 7:23-CV-144, 2024 WL 3939598 (S.D. Tex. Aug. 26, 2024).
The facts
The Texas Bankers Association challenged the rule implementing Section 1071, and the court granted an injunction directing the CFPB to “immediately cease all implementation or enforcement of the rule” against Rio Bank or the members of the trade organizations, and stayed all deadlines until after the U.S. Supreme Court ruled on CFPB v Community Financial Services Associations of America, which called into question the constitutionality of the CFPB’s funding structure.
Once the CFPB prevailed and the Supreme Court determined its structure to be constitutional, the bureau extended compliance deadlines to allow regulated financial institutions time to implement the new regulations. The stay on TBA’s case ended, and the court was fully briefed on all parties’ motions for summary judgment.
The ruling
In cases alleging violations of the APA, the court stated summary judgment is an appropriate procedure, but “stands in a somewhat unusual light, in that the administrative record proves the complete factual predicate for the court’s review.” In these types of cases, “summary judgment merely serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA standard of review.”
Before reviewing the motions for summary judgment, the court first addressed TBA’s motion to add an article published in the ABA Banking Journal this past February stating the final rule is likely to have a significant adverse impact on smaller lenders and business. It argued the article was background material demonstrating the CFPB’s failure to consider all of the relevant factors in implementing its final rule, therefore meeting the criteria to be admitted.
“The fatal flaw with plaintiffs’ argument is that the ABA article simply is not ‘background information,’ as the term is understood – that is, to help understand what the relevant issues are,” the court explained in denying TBA’s motion. “To satisfy this exception, ‘the documents in question must do more than raise nuanced points about a particular issue; it must point out an entirely new general subject matter that the agency failed to consider.’ But here, no one doubts, and the court finds, that the bureau considered the expected costs and benefits of the final rule, and in fact did so at length.
“In offering the ABA article, plaintiffs seek to provide, in their own words, a ‘more comprehensive picture of the costs’ of the final rule,” it continued. “But by making the argument that the agency erroneously evaluated costs in the final rule – not the argument that the agency did not consider costs at all – the entirety of the ABA article’s purported utility goes to the wisdom of the rule itself. The ABA article is, at heart, being invoked not to show that the agency ‘failed to consider’ costs, but that the agency considered those costs poorly. Rather than provide background, the ABA article is better considered ‘evidence to determine the correctness or wisdom of the agency’s decision,’ which ‘is not permitted.’…
“The court also observes that there is otherwise no justification for its inclusion in the record. A basic tenet of judicial review is that it is to be based on the full administrative record that was before the agency at the time of its decision. Accordingly, information which post-dates an agency’s decision plainly cannot be a viable basis for attacking that decision.”
The court declined to opine on TBA’s first cause of action, which was premised on the CFPB’s funding structure being ruled unconstitutional at the time the rule was promulgated. For TBA to prevail on its motion for summary judgment at all, the court added, the violations must be premised on assertions of APA violations.
TBA argued the Section 1071 rule violated APA in three ways:
- The CFPB promulgated the final rule “in excess of [its] statutory authority and short of statutory right[.]”
- The final rule was arbitrary and capricious for failing to consider and respond to significant comments raised by interested parties.
- The final rule was also arbitrary and capricious for failing to undertake a proper cost/benefit analysis.
The court characterized TBA’s first argument as “all over the place.” It started with alleging a violation of 5 USC §706(2)(C), which stated an agency action is unlawful if it is “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” TBA then argued the final rule should be set aside as an abuse of agency discretion, and the final rule was promulgated without any basis in the administrative record to do so.
Moreover, TBA contended the DFA authorized the bureau to promulgate additional rules which “would aid in fulfilling the purpose of the statute,“ and since the final rule is counterproductive to the purpose of said statute, the agency did not have the authority to issue it, and the text of the DFA itself gave the CFPB authority to impose additional data points only if those data points constituted information already collected by lenders as part of the loan application process.
The court stated the purpose of Section 1071 is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses. TBA claimed the final rule does not advance these purposes because small-business loans are not standardized and cannot be reduced to the factors in the rule, the potential for low response rates could render the data unreliable, and the rule will result in fewer choices and higher prices for small business.
The court then stated this line of persuasion “fundamentally misunderstands the §706(2)(C) inquiry, which does not consider the wisdom of a regulation’s substance.”
“[T]he ‘core inquiry’ of §706(2)(C) asks whether the rule in question is a ‘lawful extension of the statute under which the agency purports to act,’ or whether the agency has indeed exceeded its ‘statutory jurisdiction, authority, or limitations,’’ the court stated. “In this case, the final rule is unquestionably a ‘lawful extension of the statute[.]’
“Plaintiffs do not actually dispute, nor could they, that the [DFA] expressly entrusted the CFPB with promulgating regulations, including those imposing additional data reporting requirements, to facilitate the purposes of the statute with respect to small businesses,” the court explained. “The agency here has done exactly that, and even plaintiffs do not question the final rule’s intentions. The final rule was promulgated in accordance with the CFPB’s authority to do so, and the agency enacted the rule with the intent of furthering the purposes of Section 1071. The rule thus does not run afoul of §706(2)(C), and that is the end of the matter.”
With TBA’s argument under §706(2)(C) as it related to statutory authority rejected, the court turned to the assertion that the additional data requirements imposed by the Section 1071 rule are unlawful because, aside from the information that the DFA explicitly requires the CFPB to collect, the agency cannot require reporting data financial institutions would not otherwise collect as part of the loan application process.
To come to its decision, the court engaged in statutory interpretation, stating it was required to read relevant sections of Section 1071 contextually and with a view to their place in the overall statutory scheme. Of relevance were Section 1071(b)’s edict for financial institutions to inquire where the applicant is a woman-owned, minority-owned, or small business, and subsection (e)’s mandate that each financial institution shall compile and maintain, in accordance with the CFPB’s regulations, a record of the information provided by any loan applicant pursuant to a request under subsection (b).
Section 1071(e) also lists specific data points the institutions must collect and report.
“Particularly relevant to this case,” the court noted, was subsection (e)(2)(H), the provision under which the CFPB acted in promulgating the additional reporting requirements that TBA challenged. Within subsection (e)(2), subsection (e)(2)(A) through (G) contains various substantive statutory reporting requirements for financial institutions, and the final item, subsection (e)(2)(H), provides for “any additional data that the bureau determines would aid in fulfilling the purposes of this section.”
TBA advanced the notion that item H “is constrained to the information in [subsection (e)(1)],” which refers to “information provided by any loan applicant” and back to subsection (b), i.e., the “information gathering” provision, which seeks to know whether the applicant “is a women-owned, minority-owned, or small business[.]”
“Essentially, their argument is that because subsection (e) – namely (e)(2) – refers only to ‘disclos[ure]’ and not collection, item H cannot collect information that is not either mandated by subsection (b) or that the financial institution must already collect as part of the application process….” the court stated. “Plaintiffs’ argument is convoluted and relies on a series of inferences which clash with the substance of the statutory text.
“Specifically, they argue that subsection (b) cabins the authority conferred to the agency under subsection (e) because the latter, entitled ‘forms and manners of information,’ concerns only what information financial institutions should disclose, whereas the former, entitled ‘information gathering,’ is where the statute sets forth what information financial institutions must collect, i.e., inquire about. By their logic, subsection (e) does not confer onto the CFPB the authority to direct financial institutions to ‘collect’ additional data; and since subsection (e) requires reporting but confers no authority to collect, the data that the agency directs financial institutions to report must be data that is already collected as part of the loan application process. This argument is perhaps creative; it is also substantively incorrect.”
The court explained that while it could be argued that, based on the titles of the sections, it sounded like subsection (e) sets forth only data reporting requirements, TBA “far” overstated the probative value of a title. Headings and titles of a particular section cannot limit the plain meaning of the text and are only used to shed light on an ambiguous word or phrase, the court stated, but they cannot undo or limit what the text makes plain.
“Here, the operative text is unambiguous and belies the plaintiffs’ argument,” the court stated. “It is true that subsection (e)(2) refers to data that the agency ‘shall ... clearly and conspicuously disclose[.]’ But a review of its substance reveals that multiple of these ‘reporting’ requirements also have ‘collecting’ requirements unmistakably built in.”
Accordingly, the court determined there was no textual basis to support a relevant distinction between the items listed in the subsection. The court referenced the canon of statutory interpretation known as noscitur a sociis, meaning “a word is known by the company it keeps” to hold that the reporting requirements implicitly created collecting requirements as well.
TBA’s next two arguments were related to the APA’s prohibition against agency decisions and regulations that are “arbitrary and capricious,” as defined by statute. Before analyzing the CFPB’s explanation of the rule for these factors, the court took the opportunity to state that TBA had “utterly misrepresented” the breadth of the final rule and “grossly exaggerate[d]” the size of it.
“As the court noted already, the final rule only imposes nine additional data points compared to the statute itself,” the court stated. “By repeatedly pointing to ‘81 separate pieces of information,’ plaintiffs conflate – likely intentionally so – the number of data fields with the number of data points, since each data point might have a multitude of data fields. The real ‘jump’ is from 13 to 22 data points, not from 13 data points to 81 data fields; plaintiffs’ argument is akin to saying that by adding one additional car to a set of three, there is a jump from three cars to 16 wheels.”
The court also pointed out that TBA’s repeated references to the rule’s physical length as almost 900 pages wasn’t quite accurate – the court stated the final rule is only 7 pages, and the remaining hundreds of pages TBA is lumping in is the explanations for the rule. The court further stated TBA was attempting to portray the final rule as “much more imposing than it actually is.”
“[W]hatever its lawfulness, the final rule is much more modest than plaintiffs would lead the court to believe,” the court stated.
Under the APA, an agency action is arbitrary and capricious when the agency has acted outside of its zone of reasonableness and failed to reasonably consider relevant issues and/or failed to reasonably explain the decision. Courts may not substitute its own policy judgment for that of an agency and is differential to the agency in question.
The court stated TBA’s multiple arguments pared down to the assertion that the CFPB’s issuance of the final rule was arbitrary and capricious because the agency failed to adequately consider disproportionate costs and the negative effects those costs will impose on customers and financial institutions alike. TBA argued the CFPB’s cost evaluation was flawed and inadequate, and the purported benefits were overstated.
The court analyzed the costs of the final rule and after reviewing the administrative record, held the CFPB “comfortably” satisfied its duty to reasonably consider the relevant issues and reasonably explain the decision.
“For each of plaintiff’s contentions that the agency ‘failed to consider’ an important aspect of the problem, what they really take issue with is the agency’s bottom-line decision,” the court stated. “…Similarly, plaintiffs argue that the final rule did not account for the fact that small banks were the ones extending the largest percentage of small business loans and most impacted by compliance costs.
“But the final rule did precisely that; the bureau did not only address those concerns, it in fact accommodated them by extending relief to smaller financial institutions.”
The court was unpersuaded by the TBA’s additional argument that the one-time costs survey the bureau considered was flawed. Instead, the court referred to its circuit’s recognition that no model is perfect, and for it to be considered a flaw in a rulemaking process, the model’s shortcomings must be significant. Here, the record showed the bureau adequately considered the relevant issues, including those raised in the comments the TBA accused the CFPB of avoiding.
“[A]n agency does not fail to ‘consider’ a concern or suggestion simply because it reached a different conclusion,” the court stated. “The bureau considered the various costs in detail, engaged with the various concerns, data, and methodologies, and ultimately based its determinations on plausible justifications. The court therefore finds that the agency has reasonably considered the costs of the relevant portions of the final rule, i.e., the nine additional data points at issue.”
The court then used the administrative record to determine whether the CFPB’s explanation overstated the benefits of the rule in comparison with the cost. The bureau acknowledged that the nature of the benefits made them difficult to readily quantify. The court found the bureau identified multiple benefits for financial institutions, such as reducing burdens on institutions with lower fair lending risk and providing them the opportunity to better assess their own lending risks and proactively avoid potential liability.
For small businesses, the bureau said the data collected under this new rule will provide newfound insight and transparency, facilitating fair lending enforcement as well as increased and better-tailored credit access.
“Plaintiffs claim that the bureau overestimated the benefits of data collection and reached its ‘optimistic conclusion’ despite comments which claimed that the data would bring only marginal-at-best benefits,” the court explained. “But plaintiffs ignore that an assortment of stakeholders also praised the final rule and identified tangible, meaningful benefits that they anticipate. Indeed, applying plaintiffs’ logic, had the agency decided that the data would bring marginal-at-best benefits, that finding would also be arbitrary and capricious for ‘ignoring’ comments which attested to the final rule’s benefits. The bottom line is that the record before the agency simply did not paint the wholly one-sided picture that the record would require for the court to hold that the agency did not act reasonably.
“Moreover, the bureau’s invocation of ‘difficult-to-quantify, intangible benefits’ is not the dagger to the heart of the final rule as plaintiffs would believe, as courts have stressed ‘the deferential nature of our review in this context.’”
Based on the above reasonings, the court denied TBA’s motion for summary judgment and granted the CFPB’s. In its conclusion, it stated that it expressed no opinion on the wisdom of final rule, only that it was enacted properly under the APA.