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Recently, the U.S. Senate passed a joint resolution of disapproval (S.J. Res. 32) under the Congressional Review Act to nullify the CFPB’s small business lending rule. As previously covered on InfoBytes, the rule, which requires financial institutions to collect and report to the CFPB credit application data for small businesses, has faced opposition from various politicians and is the subject of litigation brought by financial institutions that would be subject to the rule in the U.S. District Court of the Southern District of Texas. In support of the joint resolution, Sen. John Kennedy (R-LA), who introduced the legislation, recently argued on the floor that “the CFPB is setting these small business people… up for lawsuits” because “[it] has promulgated a rule that totally perverts our intention in section 1071.” If the House of Representatives similarly passes the joint resolution, and President Biden signs it, the CFPB’s rule will be nullified under the Congressional Review Act.
The joint resolution follows the order from the U.S. District Court for the Southern District of Texas granting a nationwide preliminary injunction enjoining the CFPB from enforcing the rule (covered by InfoBytes here and here).
On September 5, the CFPB filed an opposition to a motion for a preliminary injunction made by a group of Kentucky banks (plaintiff banks) in the U.S. District Court for the Eastern District of Kentucky. As previously covered by InfoBytes, the plaintiff banks filed their motion for a preliminary injunction seeking an order to enjoin the CFPB from enforcing the Small Business Lending Rule against them for the same reasons that a Texas district court enjoined enforcement of the rule (Texas decision covered by InfoBytes here). The CFPB argues that the plaintiff banks have not satisfied any of the factors necessary for preliminary relief, including that they have not shown that their claim is likely to succeed on the merits, and they have not shown that they face imminent irreparable harm. The Bureau also argues that the plaintiff banks are factually wrong in asserting that the Rule would require lenders to compile “‘scores of additional data points’ about their small business loans,” and that the additional data requirements are consistent with the Bureau’s statutory authority to require such additional data if it assists in “‘fulfilling the purposes of [the statute].’” The CFPB argues, among other things, that the “outlier ruling of the 5th Circuit” in the Texas case does not demonstrate that the plaintiff banks are entitled to the relief they seek.
CFPB contests motions for preliminary injunctions to block enforcement of Small Business Lending Rule
On August 22, the CFPB filed an opposition to a motion made by a group of intervenors seeking to expand the scope of a preliminary injunction issued by the U.S. District Court for the Southern District of Texas, which enjoined the CFPB from implementing its Small Business Lending Rule. As previously covered by InfoBytes, the original plaintiffs in the litigation, a Texas banking association and a Texas bank, challenged the legality of the CFPB’s Small Business Lending Rule. After the American Bankers Association joined the case, the plaintiffs sought, and the court granted, a preliminary injunction enjoining implementation and enforcement of the rule against plaintiffs and their members. The intervenors, who consist of both banking and credit union trade associations, as well as individual banks and credit unions, seek a nationwide injunction that would apply beyond the parties to the case, or at least to the intervenors and their members. The CFPB’s opposition to this request for an expanded preliminary injunction argues that the intervenors fail to show that they would suffer immediate harm from enforcement of the Small Business Lending Rule.
In a related matter, on August 21, a group of Kentucky banks and a Kentucky banking association filed a motion for a preliminary injunction in the U.S. District Court for the Eastern District of Kentucky against the CFPB, seeking a preliminary injunction enjoining the CFPB from enforcing the Small Business Lending Rule against the plaintiffs and their members. Referencing the parallel Texas litigation, the Kentucky plaintiffs allege that they are entitled to an order enjoining enforcement of the Small Business Lending Rule against them for the same reasons that the Texas district court enjoined enforcement of the rule.
The most recent litigation activity follows a request from a group of trade associations to the CFPB to take administrative action to address the disparity in compliance dates that results from the district court’s injunction, a disparity that the trade associations argue is both unfair and disruptive to the market’s compliance efforts. The CFPB declined this request.
Both of these challenges to the Small Business Lending Rule point to a recent 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), as justification for why the final rule should ultimately be set aside.
On July 31, the U.S. District Court for the Southern District of Texas entered an order granting in part and denying in part a motion for a preliminary injunction against the CFPB. The injunction, filed by a bank and two trade associations (collectively “plaintiffs”), aims to prevent the CFPB from enforcing its new final rule, implementing section 1071 of the CPA, which would require financial institutions to collect and provide to the Bureau data on lending to small businesses (covered by InfoBytes here). A 2022 5th Circuit ruling (covered by an Orrick Special Alert here) in a different suit, however, deemed the CFPB’s funding structure unconstitutional.
Plaintiffs urged the 5th Circuit to enjoin enforcement of the small business lending rule pending Supreme Court resolution of the constitutionality of the CFPB’s funding structure, estimating that the burden of complying with the final rule would be $100,000 per community bank, and “the nonrecoverable costs of complying with an invalid regulation constitute irreparable harm,” among other things. The court held that the plaintiff bank had standing because its injury is imminent and not speculative based on the effective date of the final rule, and the costs of preparation for compliance. The court also held that there is a “substantial likelihood” that the plaintiffs would prevail in asserting the final rule is invalid based on the claim that the Bureau’s funding is unconstitutional. The court agreed with plaintiffs’ claim that the costs of compliance with the final rule are “more than de minimis and thus constitute irreparable harm,” despite the CFPB’s argument that the costs of compliance would not be incurred now. Finally, the court held that the CFPB failed to show any evidence that a stay of the final rule will cause harm. While the court entered an injunction, it limited it to the plaintiffs and their members, declining to enter a nationwide injunction as requested by plaintiffs, because “generic reasons such as ‘nationwide scope’ or ‘need for uniformity’ without more are insufficient.”
The final rule is scheduled to go into effect on August 29.
On June 28, the CFPB released additional guidance to help financial institutions comply with the agency’s small-business lending data collection rule. The small business lending rule, which implements Section 1071 of the Dodd-Frank Act, requires financial institutions to collect and provide to the Bureau data on lending to small businesses with gross revenue under $5 million in their previous fiscal year. As previously covered by InfoBytes, the final rule prescribes a tiered compliance date schedule, with the earliest compliance date being October 1, 2024, for financial institutions that originate at least 2,500 covered small business loans in both 2022 and 2023 (financial institutions with lower origination amounts have later compliance dates).
To aid financial institutions, the Bureau updated several frequently asked questions to provide additional clarity on who is covered by the small business lending rule and to explain that a financial institution that meets the origination threshold in each of the two immediately preceding calendar years is a covered financial institution, regardless of whether the financial institution has a branch or office in a metropolitan statistical area. The FAQs also (i) outline qualified covered credit transactions and exemptions; (ii) provide a detailed breakdown of the types of transactions a financial institution must count when determining whether it satisfies the origination threshold; (iii) discuss whether a financial institution that is not subject to HMDA reporting is required to count HMDA-reportable loans as covered originations; (iv) address how to count a covered origination if multiple financial institutions were involved in originating the covered credit transaction or when a covered credit transaction is extended to multiple borrowers but only one is a small business; and (v) explain methodologies financial institutions can use to calculate estimated covered originations. In conjunction with the FAQs, the Bureau also released a compliance aid providing additional information covered during a recent Bureau presentation.
The CFPB recently asked a district court in the 5th Circuit to deny a proposed injunction which would delay the implementation of its small-business lending data collection rule, arguing that plaintiffs have failed to establish standing or meet the requirements for preliminary relief. As previously covered by InfoBytes, plaintiffs (including a Texas banking association and a Texas bank) sued the Bureau, challenging the agency’s final rule on the collection of small business lending data. The small business lending rule, which implements Section 1071 of the Dodd-Frank Act, requires financial institutions to collect and provide to the Bureau data on lending to small businesses with gross revenue under $5 million in their previous fiscal year.
Plaintiffs explained in their complaint that the 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 also argued that the final rule is invalid because the Bureau’s funding structure is unconstitutional and that certain aspects of the final rule allegedly violate various requirements of the Administrative Procedure Act. Last month, plaintiffs filed a preliminary injunction motion asking the court to enjoin the final rule and stay the compliance deadlines.
Claiming plaintiffs failed to establish standing for preliminary relief, the Bureau argued that the Texas bank has not demonstrated that it would even have to comply with the final rule. The Bureau further maintained plaintiffs have also not satisfied all four factors required for preliminary relief, including that plaintiffs “have not shown that irreparable harm is imminent or that the balance of equities favors the requested relief,” which would lead to the postponement of reporting requirements mandated by Congress more than ten years ago. With respect to the funding structure constitutionality concerns raised by plaintiffs, the Bureau argued that “even assuming that [p]laintiffs have shown a likelihood of ultimately succeeding on the merits … that factor standing alone would not be enough to warrant preliminary relief.” The Bureau asked the court to, at a minimum, tailor any relief to apply only to plaintiffs and members who would face imminent harm absent such relief.
On June 13, CFPB Director Rohit Chopra testified before the Senate Banking Committee to discuss the Bureau’s most recent semi-annual report to Congress. Covering the period beginning April 1, 2022 and ending September 30, 2022, the semi-annual report addressed a wide range of issues, including the adoption of significant rules and orders, supervisory and enforcement actions, and actions taken by states relating to federal consumer financial law. The report also stated the Bureau received approximately 1.237 million consumer complaints, for which roughly 75 percent pertained to credit or consumer reporting. With respect to the Bureau’s mandated objectives, Chopra’s prepared statement highlighted rulemaking progress on several topics, including small business lending data collection and PACE lending. He also emphasized the agency’s heightened focus on supervising nonbank financial firms and reiterated that the Bureau will continue to shift its enforcement focus from small businesses to repeat offenders.
Committee Chair Sherrod Brown (D-OH) praised Chopra’s leadership in his opening statement, highlighting actions taken by the Bureau since Chopra’s last hearing appearance and disagreeing with the U.S. Court of Appeals for the Fifth Circuit’s decision that the agency’s funding authority violates the Constitution’s Appropriations Clause and the separation of powers. However, Ranking Member Tim Scott (R-SC) argued that Chopra “has created uncertainty in the marketplace by attempting to regulate through speeches and blog posts under the guise of ‘clarifying guidance,’” and continues to mislabel payment incentives as “junk fees” or “illegal fees.” Scott also took issue with the Bureau’s small business lending rule and asked why the agency should be trusted to collect a large amount of lending data when the agency itself experienced a data breach when an employee transferred sensitive consumer data to a personal email account without authorization.
During the hearing, Chopra addressed concerns accusing him of bypassing regulatory review by issuing policy changes through agency guidance and press announcements. “The things we hear from small firms is they really want to know how existing law applies,” Chopra said. “We have so many changes in technology, and these small firms don’t have the ability to hire so many lawyers[,] [s]o I’ve actually continued a practice of my predecessor, Director Kraninger to issue these advisory opinions and other guidance documents. They do not create any new obligations. They simply restate what the existing laws are.”
Chopra also answered questions relating to the Bureau’s proposal to limit credit card late fees and, among other things, adjust the safe harbor dollar amount for late fees to $8 for any missed payment (issuers are currently able to charge late fees of up to $41). (Covered by InfoBytes here.) Chopra explained that the proposed rule still allows recovery of costs but said the agency is trying to make the process “more rigorous and make sure it reflects market realities.” “[I]ssuers tell us is that they don’t want to profit off of late fees,” Chopra added. “That's exactly the goal here, because the law says those penalty fees are supposed to be reasonable and proportional. We’re trying to make it more clear about the way we can do that, while also making the market more competitive.”
Republican senators expressed concerns with the proposal during the hearing, with Scott commenting that no one wants to pay the late fee, but that “the truth of the matter is that fee is going to be paid just in a different form. . . .whether it’s through increased interest rates or increased cost of products, it doesn’t go away.” Senator Elizabeth Warren (D-MA) countered that “if there’s an $8 cap on credit card late fees, unless the banks can show that their costs are higher, in which case they can charge more, all that will happen, as best I can tell is that the banks will have slightly lower profit margins.”
Chopra faced similar question during a hearing held the next day before the House Financial Services Committee. Among the topics, committee members raised questions relating to technology risks presented by artificial intelligence and how existing law applies to machine learning. Chopra was also accused of overseeing an unconstitutional agency and flouting the notice-and-comment rulemaking process. Also discussed during the hearing was a recently introduced joint resolution to nullify the Bureau’s small business lending rule. (Covered by InfoBytes here.) Representative Roger Williams (R-TX) stressed that community banks are “concerned that the complicated reporting requirements will tie up loan officers and increase compliance costs plus compliance officers, which will be passed down to the consumer.”
Republicans seek to overturn CFPB small-biz lending rule; Georgia AG says rule is unnecessary and burdensome
Recently, several House Republicans introduced a joint resolution of disapproval (H.J. Res. 66) under the Congressional Review Act to overturn the CFPB’s small business lending rule. As previously covered by InfoBytes, last month the Bureau released its final rule implementing Section 1071 of the Dodd-Frank Act. Effective August 29, the final rule will require financial institutions to collect and provide to the Bureau data on lending to small businesses (defined as an entity with gross revenue under $5 million in its last fiscal year). Both traditional banks and credit unions, as well as non-banks, will be required 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 final rule prescribes a tiered compliance date schedule, with the earliest compliance date being October 1, 2024, for financial institutions that originate at least 2,500 covered small business loans in both 2022 and 2023 (financial institutions with lower origination amounts have later compliance dates).
Also opposing the final rule, Georgia Attorney General Christopher M. Carr sent a letter to CFPB Director Chopra requesting that the final rule be rescinded. Carr argued that the final rule places an unnecessary and expensive burden on financial institutions, and that “[w]ith the current uneasiness in the market and a plethora of other challenges facing community banks, now is not the time to require them to gather more information that has absolutely nothing to do with the process of evaluating which applicants are the strongest and most deserving of capital.” Carr further contended that if lending discrimination is a “rampant problem,” the Bureau should use channels already in place to address this issue. Pointing out that states already have their own consumer protection and anti-discrimination statutes in place, Carr argued that the final rule imposes redundant compliance requirements on financial institutions, particularly community banks. Carr asked the Bureau to “allow states to continue to address lending issues as they occur, rather than saddling small businesses with burdensome regulations.”
Additionally, in April, a group of plaintiffs, including a Texas banking association, filed a lawsuit against the Bureau seeking to invalidate the final rule. (Covered by InfoBytes here.) Plaintiffs argued that the final rule 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.
The CFPB recently published a letter clarifying the extent to which ECOA and Regulation B apply to franchise financing. The letter also examines how the Bureau’s small business lending rule (finalized in March and covered by InfoBytes here) applies to franchise financing. The Bureau explained that franchisees generally obtain credit either directly from the franchisor or from a third-party finance company. ECOA and Regulation B, the Bureau said, generally apply to business credit (defined as “extensions of credit primarily for business or commercial (including agricultural) purposes,” with limited exclusions), as well as to other credit extended primarily for personal, family, and household use, and that, as such, creditors, including franchisors that provide financing to franchisees are subject to ECOA and Regulation B’s core prohibitions against discrimination. The small business lending rule also covers business credit, the Bureau said, commenting that entities providing credit to franchisees “would generally be financial institutions subject to the rule’s data collection and reporting requirements to the same extent as any other provider of business credit, unless they are subject to one of the narrow exclusions from coverage.”
The Bureau added that it also “anticipates that third-party entities providing credit to franchisees that meet the origination threshold for coverage will be required to collect and report data under the small business lending rule regardless of whether that company is affiliated with the franchisor.” A possible “trade credit” exemption may apply in certain circumstances where a franchisor directly provides credit to a franchisee (trade credit is defined under the small business lending rule “as a ‘financing arrangement wherein a business acquires goods or services from another business without making immediate payment in full to the business providing the goods or services.’”). However, even if the franchisor is covered by the trade credit exemption it still must comply with ECOA and Regulation B’s prohibitions against discrimination.
The CFPB recently issued a compliance guide for its final rule implementing Section 1071 of the Dodd-Frank Act. Consistent with Section 1071, the final rule (issued at the end of March) will require financial institutions to collect and provide to the Bureau data on lending to small businesses, defined as an entity with gross revenue under $5 million in its last fiscal year (covered by InfoBytes here). The guide: (i) includes a detailed summary of the final rule’s requirements, including data reporting deadlines; (ii) provides comprehensive information on the types of data financial institutions need to collect and report on small business lending applications and decisions; and (iii) includes parameters for covered institutions and covered originations. The guide further breaks down reportable data points and explains the final rule’s “firewall” provision, which states that employees and officers of a financial institution or its affiliates “involved in making any determination” on a reportable application are generally prohibited from accessing applicant demographic information relating to ethnicity, race, sex, and status as a minority-owned, women-owned, or LGBTQI+-owned business. The guide specifies that certain exceptions may apply to situations where an employee involved in decision-making must have access to the data to fulfill their assigned job duties (e.g. a loan officer or loan processor). In these situations, financial institutions are required to provide notice to applicants that employees and officers involved in decision-making may have access to their demographic data.