Monticello Banking Company v. Consumer Financial Protection Bureau
Date: Sept. 14, 2023
Issue: Whether the Consumer Financial Protection Bureau’s (CFPB) 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: A Kentucky federal court granted a nationwide injunction enjoining CFPB from enforcing the 1071 rule until the U.S. Supreme Court rules on the constitutionality of the bureau’s funding structure.
In August, the Kentucky Bankers Association (KBA) and several Kentucky-based banks sued CFPB in Kentucky federal court over the 1071 final rule. The 1071 final rule requires a covered financial institution to collect and annually report to CFPB data on covered applications from small businesses. KBA brought its lawsuit after a Texas federal court granted ABA, Rio Bank, and Texas Bankers Association (TBA) a preliminary injunction in their lawsuit over the 1071 final rule. ABA urged the court to grant a nationwide injunction, but at CFPB’s request, the court limited the injunction only to ABA and TBA members.
In its lawsuit, KBA argued the Texas preliminary injunction should be extended to Kentucky Banks who are not TBA or ABA members. KBA also argued a preliminary injunction is warranted because they likely to succeed on the merits of their Appropriations Clause claim; irreparable harm would occur without a stay; an injunction would not cause other substantial harm; and the public interest is served by issuance of a preliminary injunction.
Judge Karen K. Caldwell granted KBA’s motion for a preliminary injunction. First, Judge Caldwell determined the likelihood of success on the merits is uncertain. According to the court, the Fifth Circuit previously ruled CFPB’s funding mechanism is unconstitutional, while the Second Circuit ruled finding structure is constitutional. The court posited the Supreme Court could rule either way when it decides Community Financial Services Association v. CFPB. Second, Judge Caldwell determined irreparable harm could occur without a stay. In the court’s view, KBA’s members are already incurring expenses to prepare for enforcement of the 1071 Final Rule and will not recover these costs if the Supreme Court rules CFPB’s funding structure is unconstitutional.
Finally, Judge Caldwell emphasized the remaining factors—substantial harm to others if the preliminary injunction is granted and public interest in the matter—carried little weight in her decision to grant the injunction. Judge Caldwell explained the 1071 rule does not go into effect until Oct. 1, 2024, and the Supreme Court will have issued its decision on the issue well before then. Judge Caldwell explained CFPB could not enforce the 1071 rule in the absence of a preliminary injunction since compliance is not yet required. Judge Caldwell concluded a preliminary injunction will create no harm to the CFPB nor the public. To preserve the status quo until the Supreme Court decides the constitutionality of CFPB, Judge Caldwell granted the injunction.
Bottom Line: The Supreme Court is expected to decide Community Financial in May or June of 2024. This injunction is not limited to the plaintiffs in the case and enjoins CFPB broadly from enforcing the 1071 final rule.