CFPB 1071 Litigation
Texas Bankers Association, et al. v. Consumer Financial Protection Bureau
Date: May 15, 2023
Issue: Whether the Consumer Financial Protection Bureau’s final rule implementing section 1071 of the Dodd-Frank Act is unconstitutional under the appropriations clause and violates the Administrative Procedure Act (APA).
Case Summary: The American Bankers Association joined the Texas Bankers Association and Rio Bank lawsuit to block the CFPB from implementing its 1071 final rule.
The 1071 final rule requires a covered financial institution to collect and annually report to the CFPB data on covered applications from small businesses. The data that must be reported and collected includes: the application date, the application method, the application recipient, the action taken by the financial institution and the date the action was taken; the credit type, credit purpose and amount of credit for which the applicant applied; the census tract of the applicant, North American Industry Classification System code, applicant’s number of workers, applicant’s time in business and number of principal owners; and the minority-owned, women-owned and LGBTQI-owned business statuses and the ethnicity, race and sex of principal owners.
In the amended complaint, the associations alleged the 1071 final rule would overly burden and drive small lenders from the market. The associations emphasized the CFPB “took the original three pages of legislation with only 13 reporting data points required by the statute and turned them into almost 900 pages of rulemaking.” In effect, the associations noted the 1071 final rule requires banks to develop and implement new software and compliance mechanisms to address over 80 reporting requirements the CFPB expanded since Dodd-Frank passed.
The associations also urged the court to invalidate the final rule because it is unconstitutional under the Fifth Circuit’s decision in Community Financial Services Association v. CFPB, which ruled that the CFPB’s funding structure is unconstitutional. The associations argue CFPB’s funding violates the Constitution because the bureau does not receive its funding from annual congressional appropriations like most executive agencies. Instead, the bureau receives funding directly from the Federal Reserve based on a request by the bureau director. In effect, the CFPB promulgated the 1071 final rule with funds derived from unconstitutional sources, and, thus, the 1071 final rule is invalid, according to the associations.
The associations also alleged CFPB abused its discretion by promulgating a final rule beyond the statutory scope. While Section 1071 directs financial institutions to collect and report 13 specific data points, the 1071 final rule sets forth 81 separate data or sub-data points. In the associations’ view, the CFPB included more data points without any basis in the administrative record. The associations also emphasized the 1071 final rule undermines the Dodd-Frank Act’s goal of increasing loans made to minority- and women-owned businesses. The amended complaint explained many banks cannot afford the compliance costs associated with the rule’s burdensome requirements. As a result, the associations stressed banks will abandon small-business lending.
Additionally, the associations alleged the 1071 final rule is arbitrary and capricious because it did not address comments relevant to the statute’s purpose. The APA requires federal agencies such as CFPB to respond to relevant and significant issues raised by interested parties. According to the associations, CFPB acted arbitrarily and capriciously by dodging significant comments raised by adversely affected parties.
The associations also claimed the rule is arbitrary and capricious because its cost/benefit analysis is improper. Federal agencies are required to consider the costs and benefits of certain regulations which are expected to have large economic effects to ensure the benefit of a regulatory initiative justifies its costs. According to the associations, the CFPB ignored both the disproportionate cost of the 1071 final rule on small banks—which make the most loans to small businesses—and the likelihood the final rule would decrease loan availability to women- and minority-owned businesses.
The associations seek declaratory and injunctive relief against the CFPB. The associations seek a declaration asserting the 1071 final rule relies on the same unconstitutional grounds as CFSA and was also adopted in substantial non-compliance. The associations also urge the court to enter a preliminary and permanent injunction and set aside the 1071 final rule.
Bottom Line: On May 26, 2023, the associations moved for a preliminary injunction. The associations argued the 1071 final rule is invalid under Fifth Circuit law, and without an injunction, the associations’ member “would be forced to spend millions of dollars preparing to comply with an invalid rule—such unrecoverable costs constitute irreparable harm.” Also, an initial case conference is scheduled for July 5, 2023.
Documents: First Amended Complaint