On August 26, 2024, the United States District Court for the Southern District of Texas issued a decision upholding the legality of the CFPB Small Business Lending Rule (the “Rule”) (designed to implement section 1071 of the Dodd-Frank Act) in a lawsuit filed by plaintiff trade associations challenging the CFPB’s authority in promulgating the Rule. TEXAS BANKERS ASSOCIATION, et al., vs. CONSUMER FINANCIAL PROTECTION BUREAU, et al., CIVIL ACTION NO. 7:23-CV-144 (D STX, Aug. 26, 2024)
The Rule, issued in March 2023, requires financial institutions, including banks, credit unions, and non-banks, to collect and report several types of data from commercial loan applications. This includes data about a loan recipients’ race, ethnicity, and gender, as well as geographic information, lending decisions, and credit pricing. It also creates the first comprehensive database of small business credit applications in the U.S.
The challenge was made on two grounds:
- The Rule is outside the agency’s authority, allegedly because it did not advance Section 1071’s purpose (i.e., to facilitate the enforcement of fair lending laws, and enable the identification of business and community development needs and opportunities of women and minority-owned small businesses.) The court rejected the plaintiffs’ argument, holding that the allegations attacked the Rule’s effectiveness and not its purpose and were accordingly misplaced.
- The Rule was arbitrary and capricious because the CFPB failed to adequately consider the disproportionate costs it will impose on customers and financial institutions. The court disagreed, noting that the agency engaged in a detailed analysis of the costs and benefits associated with the Rule, utilizing available data and economic principles to make informed predictions about its impact.
The court delayed entry of a final judgment to consider additional motions. So while the decision appears to be final, it is not yet ready for appeal.
