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Financial Services Law Insights and Observations

Texas bankers seek to invalidate CFPB’s small business lending rule

Courts CFPB Small Business Lending Section 1071 Dodd-Frank Funding Structure Administrative Procedure Act

Courts

On April 26, plaintiffs, including a Texas banking association, sued the CFPB, challenging the agency’s final rule on the collection of small business lending data. As previously covered by InfoBytes, last month, the Bureau released its final rule implementing Section 1071 of the Dodd-Frank Act, which requires financial institutions to collect and provide to the Bureau data on lending to small businesses with gross revenue under $5 million in their last fiscal year. According to the Bureau, the final rule is intended to foster transparency and accountability by requiring financial institutions—both traditional banks and credit unions, as well as non-banks—to collect and disclose data about small business loan recipients’ race, ethnicity, and gender, as well as geographic information, lending decisions, and credit pricing. 

The plaintiffs’ goal of invalidating the final rule is premised on the argument that it will drive from the market smaller lenders who are not able to effectively comply with the final rule’s “burdensome and overreaching reporting requirements” and decrease the availability of products to customers, including minority and women-owned small businesses. Plaintiffs argued that the Bureau “took the original three pages of legislation and the 13 reporting data points required by [Dodd-Frank] and turned them into almost 900 pages of rulemaking—a new [f]inal [r]ule that requires banks to develop and implement new software and compliance mechanisms to comply with over 80 reporting requirements that have been exponentially grown by the CFPB since the Act requiring this [r]ule was passed.”

The plaintiffs further pointed to a decision issued by the U.S. Court of Appeals for the Fifth Circuit in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where the court found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause (covered by InfoBytes here and a firm article here), as justification for why the final rule should be set aside. The plaintiffs also pointed out certain aspects of the final rule that allegedly violate various requirements of the Administrative Procedure Act, and claimed that a recent data breach involving sensitive information on numerous financial institutions and consumers indicates that the agency is unprepared “to adequately assess the security and privacy impacts of its massive § 1071 data collection on small businesses.” The complaint seeks a court order finding the final rule to have been premised on the same unconstitutional grounds as found in CFSA, preliminary and permanent injunctions to set aside the final rule, and attorney fees and costs.