The CFPB Faces Challenges to the Small Business Lending Rule in Texas and Kentucky

On March 30, 2023, the Consumer Financial Protection Bureau (CFPB) issued the small business lending rule (Final Rule) which implements the small business lending data collection requirements set for in Section 1071 of the Dodd-Frank Act (Section 1071).   Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile data regarding certain business credit applications and report that data to the CFPB.

Under the Final Rule, lenders who originate at least 100 covered originations in each of the two preceding calendar years would be required to collect and report information about the small business credit applications they received, including geographic and demographic data, lending decisions and the price of credit.  These data points include:  (i) a unique identifier, (ii) the application date; (iii) the application method; (iv) the application recipient (either directly or indirectly from a third party); (v) the action taken by the covered financial institution on the application; and (vi) the action taken date.   There are additional data points for reportable applications that are denied, such as the principal reason for denial.  There are also additional data points for reportable applications that are approved but either not accepted or that do not result in an origination including, the amount approved and pricing information, including interest rate, origination charges and broker fees among others.   Additionally, the Final Rule requires a covered financial institution to report data points concerning the credit being applied for, information related to the applicant’s business, such as the gross revenue and demographic information from the application, including the principal owners’ ethnicity, race and sex.  Generally, a covered origination is a covered credit transaction that the financial institution originated to a small business and a covered transaction is an extension of business credit under Regulation B, which include loans, lines of credit, credit cards, merchant cash advances and credit products used for agricultural purposes.

The Final Rule has been criticized by financial institutions and banking trade groups in Texas and Kentucky for exponentially expanding the data points required by Section 1071.

In Texas, the Texas Bankers Association, Rio Bank, and the American Bankers Association (Plaintiffs) filed an action for declaratory and injunctive relief in the US District Court for the Southern District of Texas.   The plaintiffs allege that that Final Rule will require banks to develop and implement new software and compliance mechanisms and as a result, smaller lenders will be driven from the market, causing a decrease in the products available to small businesses.   Additionally, Plaintiffs argue that the Final Rule should not be enforced until the Supreme Court decides whether the CFPB’s funding structure violates the Appropriations Clause of the Constitution.  Community Fin. Servs. Ass’n of Am., Ltd. v. Consumer Financial Protection Bureau, 51 F.4th 616, 623 (5th Cir. 2022), cert. granted, 215 L. Ed. 2d 104, 143 S. Ct. 978 (2023).  Community Financial Services is scheduled for oral arguments in October 2023 and a decision will likely be issued in early 2024.

Plaintiffs filed a motion for a nationwide preliminary injunction (PI) to prevent the CFPB from enforcing the final rule, which was granted in part and denied in party on July 31, 2023.  The Court declined to grant the nationwide relief requested by Plaintiffs and instead granted preliminary relief that only limited to the Plaintiffs and their bank members.  Since the PI was granted, other banks and banking trade associations have moved to intervene in that action so that they too are protected under the PI.

The CFPB faces the same criticism in the US District Court of the Eastern District of  Kentucky.   A group of banks and the Kentucky Bankers Association filed a similar lawsuit on August 11, 2023 and motion for a preliminary injunction on August 21, 2023.  The CFPB’s opposition to that motion is due for filing on September 5, 2023.