Federal judge halts CFPB's small-business data collection rule

Bloomberg News

A federal judge agreed to halt the Consumer Financial Protection Bureau's small-business data collection rule until after the Supreme Court decides next year on whether the bureau's funding is constitutional. 

On Monday, U.S. District Court Judge Randy Crane granted a preliminary injunction to members of two trade groups and a private bank that had sued the CFPB to keep a rule that required lenders to collect data on small businesses from going into effect. 

The Texas Bankers Association, the American Bankers Association and Rio Bank, an $814.7 million-asset private bank in McAllen, Texas, had argued that they should not have to comply with the rule because the 5th Circuit Court of Appeals found last year that the CFPB's funding is unconstitutional.

"The 5th Circuit disagreed with the decisions of other courts that found the Bureau's funding structure was constitutionally sound," wrote Judge Crane in the 17-page order.

However, the judge did not grant a nationwide injunction, which means that nonbanks are not covered. The vast majority of banks that are members of the two trade groups will not have to comply with the rule pending a Supreme Court decision in mid-2024 on the constitutionality of the CFPB. 

Banks and lenders oppose the rule because the data can be used to identify which financial institutions are doing a poor job of lending to Black and Hispanic-owned small businesses. CFPB Director Rohit Chopra has called the rule a "small-business loan census" that will "ensure that banks and nonbanks are serving small businesses fairly." 

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Rio Bank had argued that it would cost $250,000 to comply with the rule, which was mandated by Congress in 2010. 

"We believe the injunction is a recognition of the complexity of the 1071 Final Rule and the significant costs and burdens it places on our members, particularly community banks which provide much of the country's small-business lending," the Texas Bankers Association, Rio Bank and the ABA said in a statement. 

The CFPB issued the rule, also known as the 1071 rule for its section in the Dodd-Frank Act, in March. The rule requires that lenders start collecting data on how many small-business applicants are approved or denied loans. The data collection covers a wide range of credit products, including term loans, lines of credit, business credit cards, online credit products and merchant cash advances. 

In March, the Supreme Court agreed to hear a separate case, CFPB vs. Community Financial Services Association of America, after a three-judge panel of the U.S. Court of Appeals for the 5th Circuit ruled last year that the CFPB's funding violates the Constitution's separation of powers. CFFA, a trade association for the payday lending industry, had challenged whether the CFPB's funding through the Federal Reserve System is constitutional. Oral arguments are expected to be heard on Oct. 3 with a decision expected by mid-2024, experts said. 

The CFPB dragged its feet for more than a decade and ultimately was forced to finalize a rule after it was sued in 2019 by a consumer advocacy group. The 1071 rule was one of the last remaining mandates of the Dodd-Frank Act. 

Because of the substantial time it would take for entities to comply with the rule, the CFPB set a staggered compliance deadline for the 1071 rule based on the number of small-business loans that a lender originates. Financial institutions with 2,500 small-business loans or more would have to comply with the rule by October 2024, while banks with between 500-2,500 covered loans would have until April 2025 to comply. Banks with between 100 and 500 covered loans would have until January 2026 to comply, and banks with fewer than 100 small-business loans are exempted from the rule. 

Though the CFPB has a busy rulemaking agenda ahead, experts now say that no new major regulatory requirements are going to take effect because industry can file an injunction in Texas to stop the CFPB from implementing rules until the Supreme Court makes a decision on its constitutionality.