Section 1071 litigation
Texas Bankers Association v. Consumer Financial Protection Bureau
Date: Oct. 30, 2024
Issue: Whether the Consumer Financial Protection Bureau’s (CFPB) final rule implementing Section 1071 of the Dodd-Frank Act violates the Administrative Procedure Act (APA).
Case Summary: The American Bankers Association and a coalition of trade associations (collectively ABA) filed their opening brief in the Fifth Circuit, appealing a Texas federal court decision that ruled CFPB’s Section 1071 final rule did not exceed the bureau’s authority or violate the APA.
Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to collect and report thirteen data points to CFPB regarding credit applications by women-owned, minority-owned, and small businesses. Section 1071 also authorizes CFPB to require additional data collection, but only if such data “would aid in fulfilling the purposes” of Section 1071. ABA challenged the final rule in the Southern District of Texas, urging the court to vacate the final rule.
On Aug. 26, 2024, Judge Randy Crane denied ABA’s motion for summary judgment and granted CFPB’s motion for summary judgment. Judge Crane ruled that CFPB did not exceed its authority under the Dodd-Frank Act, and the 1071 rule is not arbitrary and capricious under the APA. ABA filed a notice of appeal on Oct. 25, 2024, and also moved the Fifth Circuit for a stay pending appeal. In its motion for a stay, ABA claimed their arguments that the 1071 rule exceeds CFPB’s statutory authority and the 1071 rule is arbitrary and capricious are likely to succeed on the merits. ABA also argued their members would be irreparably harmed absent a stay, the balance of equities heavily favors a stay, and a temporary stay is warranted while the Fifth Circuit considers the motion.
In its opening brief, ABA made three main arguments. First, ABA argued nothing in the ECOA suggests that lenders would be required to collect and make public confidential information on loan pricing. Under the plain language of the ECOA, CFPB has the authority to collect limited information contained within the loan application and the underwriting decision on that loan application but not pricing information. Further, the ECOA specifies that this data must be “itemized.” ABA emphasized that Congress mandated lenders to “itemize” each data element concerning the loan application and its underwriting decision. Congress did not include pricing information or other information unrelated to the loan application and the underwriting decision in its list.
Still, CFPB invoked the final catch-all provision, subsection (e)(2)(H), as authority to collect pricing information. This provision permits CFPB to obligate lenders to include in the “itemized” list of information “any additional data that CFPB determines would aid in fulfilling the purposes of this section.” But ABA contended this provision is not the blank check CFPB makes it out to be, as the provision only grants the CFPB authority to require lenders to “itemize” additional information “compiled and maintained,” which is further limited to information “provided by any loan applicant.”
ABA also highlighted that the statutory context reinforces the conclusion that CFPB exceeded its statutory authority in requiring the collection and disclosure of pricing information. The ECOA grants CFPB the power to make public the information it collects. ABA contended that Congress would not have provided for such unfettered public disclosure if it intended to include small-business loan pricing information in the information disclosed because this information is competitively sensitive. ABA also noted that Congress knows how to ask lenders to collect pricing information, which was done in the Home Mortgage Disclosure Act. However, Congress notably failed to make the same request in this case.
Second, ABA argued the final rule impermissibly requires lenders to ask small-business applicants for personal information on the LGBT status of their owners. ABA asserted that the plain text and structure of the ECOA confirm that Congress did not authorize CFPB to require the collection and public disclosure of such private information about the business owners. Congress directed lenders taking business credit applications to inquire whether the business is a “women-owned” or “minority-owned business.” The brief pointed out that nowhere does it mention or authorize CFPB to mandate the collection and public disclosure of the LGBT status of the business owners applying for the loan. If Congress wanted CFPB to collect such information, which CFPB must make available to the public, it would have said so clearly and mandated privacy protections.
Third, ABA argued the final rule is arbitrary and capricious because CFPB conducted an improper cost-benefit analysis. An agency’s rule is arbitrary and capricious when it fails to “reasonably consider the relevant issues” or “reasonably explain its decision.” Here, CFPB blinded itself to accurate cost data by thwarting efforts to collect and submit such data, choosing instead to rush through the finalization of its rule with inaccurate and admittedly incomplete data. What is more, ABA argued that CFPB overlooked substantial costs the final rule will impose. These costs include the increased costs associated with unfair lawsuits and the reputational costs that lenders will incur from data that inaccurately portrays them as discriminating in their small-business lending. ABA argued these errors infected CFPB’s entire cost-benefit analysis and, accordingly, the final rule must be vacated.
Bottom Line: CFPB’s response brief is due Jan. 6, 2025.
Documents: Brief
