Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
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 30, the U.S. Supreme Court issued a 6-3 decision in Biden v. Nebraska, striking down the Department of Education’s (DOE) student loan debt relief program (announced in August and covered by InfoBytes here) that would have provided between $10,000 and $20,000 in debt cancellation to certain qualifying federal student loan borrowers making under $125,000 a year.
The Biden administration appealed an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibited the Secretary of Education from discharging any federal loans under the agency’s program. (Covered by InfoBytes here.) Arguing that the universal injunction was overbroad, the administration contended that the six states lack standing because the debt relief plan “does not require respondents to do anything, forbid them from doing anything, or harm them in any other way.” Moreover, the secretary was acting within the bounds of the Higher Education Relief Opportunities for Students Act of 2003 (HEROES Act) when he put together the debt relief plan, the administration claimed.
In considering whether the secretary has authority under the HEROES Act “to depart from the existing provisions of the Education Act and establish a student loan forgiveness program that will cancel about $430 billion in debt principal and affect nearly all borrowers,” the Court majority (opinion delivered by Chief Justice Roberts, in which Justices Thomas, Alito, Gorsuch, Kavanaugh, and Barrett joined) held that at least one state, Missouri, had Article III standing to challenge the program because it would cost the Missouri Higher Education Loan Authority (MOHELA), a nonprofit government corporation created by the state to participate in the student loan market, roughly $44 million a year in fees. “The harm to MOHELA in the performance of its public function is necessarily a direct injury to Missouri itself,” the Court wrote.
The Court also ruled in favor of the respondents on the merits, noting that the text of the HEROES Act does not authorize the secretary’s loan forgiveness plan. While the statute allows the Secretary to “waive or modify” existing statutory or regulatory provisions applicable to student financial assistance programs under the Education Act in connection with a war or other military operation or national emergency, it does not permit the Secretary to rewrite that statute, the Court explained, adding that the “modifications” challenged in this case create a “novel and fundamentally different loan forgiveness program.” As such, the Court concluded that “the HEROES Act provides no authorization for the [s]ecretary’s plan when examined using the ordinary tools of statutory interpretation—let alone ‘clear congressional authorization’ for such a program.”
In dissent, three of the justices argued that the majority’s overreach applies to standing as well as to the merits. The states have no personal stake in the loan forgiveness program, the justices argued, calling them “classic ideological plaintiffs.” While the HEROES Act bounds the secretary’s authority, “within that bounded area, Congress gave discretion to the [s]ecretary” by providing that he “could ‘waive or modify any statutory or regulatory provision’ applying to federal student-loan programs, including provisions relating to loan repayment and forgiveness. And in so doing, he could replace the old provisions with new ‘terms and conditions,”’ the justices wrote, adding that the secretary could provide whatever relief needed that he deemed most appropriate.
The Court also handed down a decision in Department of Education v. Brown, ruling that the Court lacks jurisdiction to address the merits of the case as the respondents lacked Article III standing because they failed to establish that any injury they may have suffered from not having their loans forgiven is fairly traceable to the program. Respondents in this case are individuals whose loans are ineligible for debt forgiveness under the plan. The respondents challenged whether the student debt relief program violated the Administrative Procedure Act’s notice-and-comment rulemaking procedures as they were not given the opportunity to provide feedback. (Covered by InfoBytes here.)
President Biden expressed his disappointment following the rulings, but announced new actions are forthcoming to provide debt relief to student borrowers. (See DOE fact sheet here.) The first is a rulemaking initiative “aimed at opening an alternative path to debt relief for as many working and middle-class borrowers as possible, using the Secretary’s authority under the Higher Education Act.” The administration also announced an income-driven repayment plan—the Saving on a Valuable Education (SAVE) plan—which will, among other things, cut borrowers’ monthly payments in half (from 10 to 5 percent of discretionary income) and forgive loan balances after 10 years of payments rather than 20 years for borrowers with original loan balances of $12,000 or less.
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 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.
On January 10, the Department of Education (DOE) announced a notice of proposed rulemaking (NPRM) to reduce the cost of federal student loan payments. According to the DOE, the regulations fulfill President Biden’s plan to provide student debt relief for approximately 40 million borrowers and to make the student loan system more manageable for student borrowers. As previously covered by InfoBytes, the three-part debt relief plan was announced in August to provide, among other things, up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE, and up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples. Plaintiffs, whose loans are ineligible for debt forgiveness under the program, sued the DOE and the DOE secretary claiming the agency violated the Administrative Procedure Act’s notice-and-comment rulemaking procedures and arbitrarily decided the program’s eligibility criteria. Plaintiffs further contended that the DOE secretary does not have the authority under the HEROES Act to implement the program. Specifically, the NPRM would establish that those making less than $30,577 as an individual or a family of four making less than $62,437 would have their monthly payments reduced to $0.
According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan. The NPRM noted that the DOE is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income Contingent Repayment (ICR) and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrowers otherwise make their monthly payments. Additionally, the NPRM would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed. The DOE released a Fact Sheet on increasing college accountability, which clarifies information on identifying the lowest-financial-value programs, protecting students and delivering value through greater accountability, increasing collaboration with accreditors, and building a record of action.
The DOE also released a request for information (RFI) to solicit comments on identifying the best ways to calculate the metrics that may be used to identify low-financial-value programs and inform technical considerations. Finally, the DOE released a Fact Sheet on transforming IDR. Among other things, the Fact Sheet discusses decreasing undergraduate loan payments, stopping unpaid interest accumulation, and lowering the number of monthly payments required to receive forgiveness for borrowers with smaller loan balances. Comments are due 30 days after publication in the Federal Register.
On December 16, the U.S. District Court for Eastern District of Virginia vacated and remanded the Department of Education’s (DOE) decision that a student loan servicer (plaintiff) had improperly collected $22 million in student loan-related subsidies from 2002 to 2005. According to the opinion, the plaintiff alleged that the DOE acted arbitrarily and capriciously in violation of the Administrative Procedure Act when it determined that the plaintiff erroneously claimed over $22 million in student loan-related subsidies. The plaintiff contended that in claiming those subsidies, it reasonably relied on two 1993 “Dear Colleague Letters” (DCL) from the DOE authorizing it to collect subsidies for student loans funded in whole or in part by tax-exempt obligations. According to the plaintiff, the DOE issued a new DCL in 2007 which disavowed the guidance in the DOE’s two 1993 DCLs, but nonetheless stated that the DOE would not collect past erroneous subsidies if the plaintiff prospectively followed the DOE’s revised interpretation set forth in the 2007 DCL. Nevertheless, the DOE initiated administrative proceedings seeking over $22 million in past subsidies collected by the plaintiff pursuant to the 1993 DCLs. The DOE’s acting secretary ruled in January 2021 that the plaintiff erred when it claimed those subsidies and must pay it back.
The plaintiff appealed, arguing that the DOE’s decision in 2021 failed to consider its reliance on the previous policy statements in the 1993 and 2007 letters. However, the DOE argued it was “unreasonable” for the plaintiff to rely on the DCLs, saying that the loan company should have known that the 1993 letters contradicted the Higher Education Act. Siding with the plaintiff, the court relied on the U.S. Supreme Court’s decision in Department of Homeland Security v. Regents of the University of California, which found that when an agency alters existing policy, it must assess “whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.” The court further held that it is DOE's job to “weigh the strength of those reliance interests,” and it failed to do so.
On December 12, the U.S. Supreme Court granted a petition for certiorari in a student debt relief challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit. As previously covered by InfoBytes, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas concerning whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. In a brief unsigned order, the Supreme Court deferred the DOE’s application for a stay, pending oral argument. The Supreme Court said it will treat the application as a “petition for a writ of certiorari before judgment,” and announced a briefing schedule will be established to allow the case to be argued in the February 2023 argument session to resolve the legality of the program. Oral arguments are scheduled for February 28, 2023.
The Supreme Court said it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan, as covered by InfoBytes here) have Article III standing to bring the challenge. The Supreme Court will also consider whether the DOE’s plan is “statutorily authorized” and “adopted in a procedurally proper manner.”
This is the second case concerning the Biden administration’s student debt relief plan that the Supreme Court has agreed to hear. On December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit, which temporarily prohibits the Secretary of Education from discharging any federal loans under the DOE’s student debt relief plan. (Covered by InfoBytes here.)
Supreme Court asked to stay judgment holding that HEROES Act does not authorize the creation of the DOE’s student debt relief plan
Recently, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas in an action related to whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. As previously covered by InfoBytes, the district court held that while the HEROES Act expressly exempts the APA’s notice-and-comment obligations, the district court stressed that the HEROES Act “does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program,” and, moreover, does not mention loan forgiveness. On December 1, the U.S. Court of Appeals for the Fifth Circuit denied the DOE’s motion for stay pending appeal.
In its application, the DOE argued that the plaintiffs never asserted that the debt relief plan exceeded the education secretary’s statutory authority. Instead, the DOE argued, the plaintiffs alleged only that they were improperly denied the opportunity to comment on the plan, stressing that while the district court recognized that the HEROES Act expressly exempts the APA’s notice-and-comment obligations, it went further by holding that the plan went beyond the secretary’s authority. “The district court profoundly erred by raising and deciding a claim that respondents did not assert and could not have asserted,” the DOE stressed, further adding that the plaintiffs did not claim that providing debt relief to other borrowers would inflict injury on them. Beyond this, the secretary’s plan “falls squarely within the plain text of his statutory authority,” the DOE asserted. The DOE requested that the Supreme Court stay the district court’s judgment, or in the alternative, defer the application pending oral argument and treat it as a petition for certiorari before judgment, grant the petition, and hear the case along with a second separate action, discussed below, involving a challenge to an injunction that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan.
As previously covered by InfoBytes, on December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit. The 8th Circuit held that “the equities strongly favor an injunction considering the irreversible impact the Secretary’s debt forgiveness action would have as compared to the lack of harm an injunction would presently impose,” and pointed to the fact that the collection of student loan payments and the accrual of interest have both been suspended. (Covered by InfoBytes here.) The 8th Circuit’s opinion followed a ruling issued by the U.S. District Court for the Eastern District of Missouri, which dismissed an action filed by state attorneys general from Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina for lack of Article III standing after concluding that the states—which attempted “to assert a threat of imminent harm in the form of lost tax revenue in the future”— failed to establish imminent and non-speculative harm sufficient to confer standing. In an unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Oral arguments are scheduled for February 28, 2023.