Banks urge CFPB to halt small-business rule pending high court decision

Bloomberg News

The banking industry is asking the Consumer Financial Protection Bureau to relieve all banks from complying with its small-business lending rule until after the U.S. Supreme Court decides whether the bureau's funding is constitutional.

The Texas Bankers Association and the American Bankers Association sent a letter Wednesday to CFPB Director Rohit Chopra asking for all banks to get a reprieve from complying with the rule, which requires that lenders collect data on small-business loan applicants. 

On Monday, U.S. District Court Judge Randy Crane halted compliance with the rule by granting a preliminary injunction to members of the two trade groups and a private Texas bank. The CFPB's small-business data collection rule has long been controversial because the data can be used by government and state regulators to determine if lenders are discriminating against borrowers. Bankers want to hold off compliance for as long as possible, experts say.

The bankers had argued that they should not have to comply with the rule because the 5th Circuit Court of Appeals decided last year that the CFPB's funding is unconstitutional. The trade groups and Rio Bank, an $814.7 million-asset private bank in McAllen, Texas, sued the CFPB earlier this year in the U.S. District Court for the Southern District of Texas to block the rule.

However, the judge did not extend the injunction nationwide. Because not all banks are members of the two trade groups, the groups are now asking the CFPB to release the entire banking industry from complying with the rule.

In the letter to Chopra, the bankers said the carve-out just for banks "would simplify things for both your agency and the regulated community."

"We recognize the Bureau's desire to continue pressing forward with certain covered institutions and so are only asking for your consideration of extending the stay to the banking industry," wrote Chris Furlow, president and CEO of the Texas Bankers Association and Rob Nichols, president and CEO of the American Bankers Association. "While most FDIC-insured banks fall within our membership, there are some that do not."

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

In the lawsuit the bankers said the injunction should be nationwide to avoid creating "patchwork rulings that would undermine the injunction and create unequal enforcement of an agency Rule that is invalid."

Some nonbank trade groups said they are considering asking for similar relief. Experts said the CFPB should grant relief to all lenders covered by the data collection rule, also known simply as 1071 for its section in the Dodd-Frank Act.

"It doesn't make sense to have one group that is going to comply and one group that doesn't comply," said Alan Kaplinsky, senior counsel at the law firm Ballard Spahr. "The injunction should apply broadly as a nationwide injunction."

The 1071 rule is one of the CFPB's long languishing rulemakings. The bureau was sued in 2019 by a consumer advocacy group, the California Reinvestment Coalition, for failing to complete the rule after nearly a decade. The bureau was forced under a court-supervised settlement to issue the rule by March 31. 

The Supreme Court is scheduled to hear oral arguments on Oct. 3 in a separate case challenging the CFPB's  constitutionality. A decision on that case is expected by June 2024 at the latest. 

"With oral argument in Community Financial in 60 days and a decision likely within six to eight months, we believe the CFPB extending the relief already provided to numerous banks nationwide would be prudent and ameliorate confusion," the bank trade groups said in the letter. 

Because of the substantial time it would take for entities to comply with the rule, the CFPB set a staggered compliance. Financial institutions that originate 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.