Section 1071 litigation
Revenue Based Finance Coalition v. CFPB
Date: Feb. 17, 2025
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: A Florida federal magistrate judge recommended granting CFPB summary judgment and denying the Revenue Based Finance Coalition’s (RBFC) motion for summary judgment in a lawsuit challenging the bureau’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 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. The 1071 final rule did not seek to exclude Merchant Cash Advances (MCAs) from the collection and reporting requirements.
On December 26, 2023, RBFC sued CFPB, alleging it exceeded its authority in promulgating the 1071 final rule because MCAs are not “credit” under the ECOA. RFC also claimed that the 1071 final rule is arbitrary and capricious under the APA because the bureau only chose to regulate MCAs to “level the playing field” for competitors of MCA providers and failed to consider RBFC’s public comments during the rulemaking process properly.
Judge Eduardo Sanchez of the Southern District of Florida ruled that the bureau did not exceed its authority by adopting the 1071 final rule. Judge Sanchez noted that the 1071 final rule follows the governing statutory definition of credit when it defines the scope of covered transactions. Judge Sanchez also pointed out that the 1071 final rule does not claim MCAs are “covered credit transactions.” Instead, the 1071 final rule defines a covered credit transaction as an extension of business credit that does not fall under the exclusion in paragraph (b) of Section 1071. Judge Sanchez emphasized that because the 1071 final rule applies to the credit transactions governed by the ECOA — which mandates that the bureau “prescribe such rules … as may be necessary to carry out, enforce, and compile data”— the bureau did not overstep its statutory authority by defining the score of the credit transactions covered by the rule.
Additionally, Judge Sanchez noted that the ECOA allowed CFPB to classify MCAs within its definition’s scope. Judge Sanchez explained that under the ECOA, the bureau may adopt exceptions or exempt any financial institution from the section’s requirements if it deems such actions necessary to achieve the law’s purposes. According to Judge Sanchez, CFPB’s interpretation, counting MCAs as credit transactions under the 1071 final rule, aligns with the ECOA and stays within CFPB’s statutory authority. Congress defined “credit” in the ECOA as the right a creditor grants a debtor to defer debt repayment in order to incur additional debt and postpone payment. Judge Sanchez pointed out that MCAs qualify as credit because they involve debt and give merchants the right to defer payment.
Finally, Judge Sanchez determined that the 1071 final rule is not arbitrary or capricious. Judge Sanchez concluded that CFPB did not act with improper motives, adequately considered RBFC’s comment letter, conducted an appropriate cost analysis, and reasonably considered any reliance interests.
Bottom Line: The parties’ objections to Judge Sanchez’s recommendation are due on March 3, 2025. Failing to object will constitute a waiver of a party’s right to challenge on appeal and will only allow appellate review.
Documents: Recommendation
