Fifth Circuit halts CFPB small-business data rule  — again

Bloomberg News

An appeals court has again temporarily halted the Consumer Financial Protection Bureau's small-business lending rule after the CFPB declined to argue against the stay, an about-face that gives a reprieve to large banks from upcoming reporting requirements.

On Friday, a three-judge panel of the 5th Circuit Court of Appeals granted a partial stay to two Texas banks and members of four bank trade groups that sued the CFPB to stop the data collection on small-business loan applicants from going into effect. 

The rule, mandated by Congress under section 1071 of the Dodd-Frank Act, requires small-business lenders to collect and report the race, ethnicity, gender and LGBTQ status of small-business loan applicants. The information is meant to enhance transparency in small-business lending, promote economic development and combat unlawful discrimination, much the way the Home Mortgage Data Act requires similar data to be collected by mortgage lenders for similar purposes. 

The 1071 rule went into effect in August 2023 and is not subject to the Trump administration's regulatory freeze or to the acting CFPB directors' orders putting a halt to rulemakings, because that order only applies to rules that have not yet gone into effect. 

"I think it's fair to say that just an email or a public statement [from the CFPB] saying, 'We're staying everything, we're not doing anything,' is probably not sufficient to effectuate the stay of this rule," said Chris Friedman, a partner at the law firm Husch Blackwell.

The stay is the second time the 1071 rule has been put on hold by a federal court. The first stay was granted which was lifted last May when Justice Clarence Thomas upheld the CFPB's funding in a 7-2 opinion. In 2023, the CFPB agreed to delay the original compliance date deadlines by 290 days. Lawyers representing banks said the stay creates additional uncertainty in the industry.

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Counsel for the CFPB told the court just before oral arguments on Feb. 3 that the bureau had been instructed by then-acting CFPB Director Scott Bessent not to make any appearances in litigation except to ask for a pause in legal proceedings. The shift in the CFPB's legal stance raises further questions about whether the 1071 rule will be enforced, even as large small-business lenders are preparing for its implementation deadline in July.

With the CFPB no longer opposed to a stay, the court ordered a tolling of the compliance dates, which now have been put on hold for 90 days. The stay applies to all members of the bank trade groups that sued, but not to the entire financial services industry. Nonbanks — including fintechs and alternative commercial finance companies — are still required to comply with the compliance deadlines. 

The panel's judges made no determination about the merits of the case and left the door open to potentially modifying its order.  

"Nothing in this opinion is to be construed as a comment on the ultimate merits of the underlying litigation," said the order.  

The bank trade groups have requested that pricing and small-business loan applicants' LBGTQ status be vacated from the rule. 

Stephen Hayes, a partner at the law firm Relman Colfax, said he thinks the stay of the compliance dates is improper.

"There is no party before the Court in a position to explain that it is an improper circumvention of the Administrative Procedure Act for an agency to collude with a party challenging a rule," Hayes said. "That said, I remain hopeful that the court will address the merits quickly to remove uncertainty about the rule." 

Many financial institutions "anticipate significant benefits from transparency in the market," said Hayes, who filed an amicus brief in the case on behalf of various entities, including the Responsible Business Lending Coalition, the Fresno Community Development Financial Institution and Texas Association of Community Development Corporations, among others. 

A regulation that has been finalized can only be changed in a few ways, said Friedman. The CFPB could take the position that because there is ongoing litigation, there is "good cause" to change the rule, he said. The bureau also could initiate a new rulemaking under the Administrative Procedure Act to extend or modify the date of the rule. 

"The CFPB could claim that they have good cause to stay the rule without a rulemanking," said Friedman. "Or if they wanted a cleaner way to do it, they could go down the path of initiating a pause of the rule under a new rulemaking."

Last year, a federal judge rejected challenges raised by banks that the 1071 rule was "arbitrary and capricious" and that the CFPB failed to consider the costs the rule would impose on lenders. The judge rejected banks' claims, saying that the CFPB had engaged in a detailed cost-benefit analysis. That ruling marked a significant win for the CFPB, reinforcing its authority to enforce fair lending practices for small and minority-owned businesses. 

Separately, the chairman of the House Small Business Committee, Rep. Roger Williams, R-Texas, introduced a bill last week to repeal section 1071 of Dodd-Frank to get rid of the data collection.

Last year, Congress passed a Congressional Review Act resolution on a 221-202 vote to kill the 1071 rule, but it was vetoed by then-president Biden. The Senate failed to override the veto. 

The 1071 rule is similar to the Home Mortgage Disclosure Act, which requires mortgage lenders collect data on home loan applicants. Banks have been collecting HMDA data since 1975. The lack of information on small businesses was a critical problem during the Covid-19 pandemic because the government had very little information on small-businesses lending. 

The largest lenders are supposed to start collecting data in mid-July 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. 

The CFPB dragged its feet for more than a decade on the rule because no CFPB director wanted to issue and finalize it. The CFPB was sued in 2019 by the California Reinvestment Coalition, a consumer advocacy group, forcing the bureau under a court-ordered settlement to finalize the rule by March 31, 2023.