A federal magistrate judge has recommended upholding the Consumer Financial Protection Bureau's small business lending data collection rule, rejecting a challenge by merchant cash advance lenders.
On Tuesday, U.S. Magistrate Judge Eduardo I. Sanchez of the U.S. District Court for the Southern District of Florida recommended that the CFPB be granted summary judgement and that a motion by a merchant cash advance trade group be denied.
In a 24-page opinion, Judge Sanchez wrote that the bureau did not exceed its authority by including merchant cash advance lenders from the data collection. The CFPB's final rule is not arbitrary and capricious and the bureau conducted an appropriate cost-benefit analysis, he found.
The report and recommendation comes a week after a three-judge panel of the 5th Circuit Court of Appeals granted a partial stay to two Texas banks and four bank trade groups that sued the CFPB to
The CFPB's small business lending rule is vigorously opposed by many small business lenders who want the Trump administration to overturn the rule outright — despite the fact that the rule was mandated more than a decade ago by Congress under section 1071 of the Dodd-Frank Act. The rule requires that small-business lenders collect and report the race, ethnicity and gender of small-business loan applicants. The data is used to enforce fair lending laws and identify the community development needs of small businesses, much the way the Home Mortgage Disclosure Act informs enforcement actions for mortgage lending.
Because the rule went into effect in August 2023, it
A Florida trade group, the Revenue Based Finance Coalition, challenged the rule under the Administrative Procedure Act, which governs how federal agencies create and issue regulations. The trade group wanted merchant cash advances excluded from the rule.
The judge shot down the group's challenges — including that merchant cash advances should not be regulated as credit transactions. The judge wrote that an "extension of credit" means "the granting of credit in any form." A merchant cash advance, or MCA, is a contract whereby a merchant advances a cash sum with the promise that the borrower will repay it with their future revenues.
"The only commenters that supported the exclusion of [merchant cash advances] from the rule were [merchant cash advance] providers or trade associations representing [merchant cash advance] providers," Sanchez wrote.
The trade group said it is determining its next steps.
In a footnote, the judge also summarily rejected the group's argument that the rule is invalid because the CFPB is
"The Supreme Court has rejected that argument," Sanchez wrote.
The judge also cited the Supreme Court's
The CFPB's small business data collection rule spans only seven pages in the Federal Register, but has more than 400 pages of commentary explaining the final rule including comments from stakeholders.
It is unclear how the CFPB will respond.
Vought, the Trump administration's acting CFPB director, who also is head of the Office of Management and Budget, has ordered all CFPB employees "not make or approve filings or appearances by the Bureau in any litigation, other than to seek a pause in proceedings."
Some lawyers suggest that ordering attorneys to stop working may be a violation of their ethical duties of competence and diligence, and a violation of the rules of legal conduct. Vought has
