1071 Litigation
Texas Bankers Association v. Consumer Financial Protection Bureau
Date: March 1, 2024
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, Texas Bankers Association, Rio Bank, and eleven intervenors (the associations) moved for summary judgment in their lawsuit challenging the Consumer Financial Protection Bureau (CFPB)’s 1071 final rule.
Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to collect and report to CFPB 13 data points regarding applications for credit by women-owned, minority-owned and small businesses. Section 1071 also authorizes the CFPB to require the collection of additional data, but only if such data “would aid in fulfilling the purposes” of Section 1071 to: “facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
On May 18, 2023, the associations filed an amended complaint in the Southern District of Texas, alleging the CFPB exceeded its statutory authority and violated the APA. The associations also moved the court for a preliminary injunction on May 26, 2023, arguing the final rule is invalid under the Fifth Circuit’s decision in Community Financial Services Association v. CFPB, and without an injunction, plaintiffs’ members will be irreparably harmed. In Community Financial, the Fifth Circuit ruled that the CFPB is unconstitutionally funded under the U.S. Constitution’s Appropriation Clause. Afterward, the Supreme Court agreed to review this case. On July 31, 2023, Judge Randy Crane granted the associations’ motion for preliminary injunction. The injunction timeframe ends if the Supreme Court reverses the Fifth Circuit in Community Financial. The parties agreed to brief the merits of the APA claims until the Supreme Court issues its decision.
In its motion for summary judgment, the associations made three main arguments urging the court to vacate the final rule. First, the associations argued the CFPB exceeded its statutory authority by imposing additional data collection requirements beyond the 13 data points specified in the Dodd-Frank Act.
According to the associations, the expanded data points will not advance Section 1071’s purpose because the information sought has little benefit in the commercial lending context. As explained in the brief, CFPB mistakenly presumed the expanded data would fulfil the purposes of Section 1071 in the same way Home Mortgage Disclosure Act (HMDA) data advances that statute’s similar purposes. But commenters persistently warned the CFPB that no data collection regime could possibly capture the complexity of small-business lending.
What is more, the associations argued the expanded data points will undermine Section 1071’s purpose because the final rule will decrease credit availability for women-owned and minority-owned small businesses. Commenters noted the final rule’s increased costs would “reduce competition in the small business credit market” and “attack relationship banking.” The associations emphasized CFPB failed to consider that each new data point would substantially increase the burden on all institutions, especially community banks responsible for a disproportionate share of small-business lending.
The associations also argued the expanded data points disregards the textual restraints of Dodd-Frank. Under the final rule, lenders must inquire about the sexuality and gender identities of their potential borrowers’ owners. The CFPB justifies this expansion as facilitating “fair lending laws” or under its “exception authority.” But the associations stressed Section 1071’s purpose is promoting nondiscriminatory lending to women-owned and minority-owned and small businesses, and there is no mention of businesses owned by the LGBTQI+ community in Dodd-Frank.
Second, the associations argued that the CFPB’s exercise of its discretionary authority was arbitrary and capricious because it failed to consider the real-world costs to the regulated community. Commenters warned the bureau that exceeding the parameters set by Congress would contravene the statute’s purpose by decreasing lending to small businesses and protected communities. The associations claimed the CFPB failed to address the fact that small banks make the largest percentage of small-business loans, and small banks will be affected most by the ongoing compliance costs.
Third, the associations argued the CFPB’s cost-benefit analysis of the final rule was arbitrary and capricious. The cost-benefit analysis was flawed because the bureau failed to collect actual cost data from the regulated community on real implementation or ongoing costs, while also relying on a flawed “one-time” cost survey based on the 2015 HMDA rule. According to the associations, CFPB failed to justify the costs in comparison to any supposed benefit of the Final Rule. The Bureau overestimated the final rule’s benefits by assuming the expanded data would allow it to enforce fair lending laws more efficiently. However, the associations noted the data collection would allow for a marginal benefit that does not justify the enormous compliance costs that the CFPB underestimated. Even more, the CFPB cannot account for any ongoing costs to expand the final rule. The associations reiterated “even if CFPB could fairly account for the price tag being foisted upon lenders, the hypothetical marginal benefits cannot justify the costs.”
Bottom Line: CFPB’s cross motion and response is due March 15, 2024.
Documents: Motion
