In a tentative win for the CFPB, a federal judge in Texas ruled on August 26, 2024, that the agency did not exceed its authority when it issued its final Section 1071 small business lending rule. The court also rejected other Administrative Procedure Act (APA) challenges to the rule. However, the court did not issue a final judgment, as it still has to rule on the motion of certain intervenors to amend their complaint to add a claim focused on the legality of the CFPB being funded by the Federal Reserve Board, when since September, 2022, the combined earnings of the Federal Reserve System has been negative. That is contrary to the language of the Dodd-Frank Act.
Addressing the claim that the Section 1071 rule is beyond the authority of the CFPB, Judge Randy Crane of the U.S. District Court for the Southern District of Texas determined that “[t]he Final Rule was promulgated in accordance with the CFPB’s authority to do so, and the agency enacted the rule with the intent of furthering the purposes of Section 1071.”
The CFPB’s final rule implementing Section 1071 requires financial institutions to collect and report certain data in connection with credit applications made by small businesses, including whether the businesses are women-, minority- or LGBTQI+-owned, and the race and ethnicity of the principal owners of the businesses.
Banking trade groups, including the American Bankers Association had filed suit, arguing that the CFPB’s funding mechanism was unconstitutional based on the Fifth Circuit’s opinion in the CFSA case and that the CFPB had violated the APA in promulgating the rule.
Judge Crane noted that the U.S. Supreme Court has decided the funding question and ruled that the agency’s funding does not have to go through the annual congressional appropriations process.
On August 26, he ruled that the agency did not violate the APA when it issued the rule. In addition to asserting that the Section 1071 rule was beyond the statutory authority of the CFPB, the banking groups also argued that the agency relied on flawed calculations to determine the costs and benefits of the rule. However, Judge Crane ruled that the bureau had considered the costs and benefits and had done so at length.
Judge Crane also found that the CFPB has the authority to demand financial institutions collect information that it otherwise might not collect during the loan application process. Judge Crane noted that Section 1071 of Dodd-Frank, which amended the Equal Credit Opportunity Act to provide for the small business lending data collection and reporting requirements, not only sets forth specific items of data to be collected, but also authorizes the CFPB to require that lenders compile and maintain “any additional data that the Bureau determines would aid in fulfilling the purposes of this section.”
The judge said he was not passing judgment on the rule and noted“[i]t may well be that the Final Rule proves ill-advised as a policy matter, but that possibility does not itself make the Final Rule unlawful under the APA.”
However, as noted above, Judge Crane did not close the case. Intervenors from the farm credit industry have raised a new issue following the Supreme Court decision on the CFPB’s funding structure. Those groups, including the Farm Credit Council, Texas Farm Credit and Capital Farm Credit (the “Farm Credit Intervenor/Plaintiffs”) contend, as discussed above, that the CFPB was unlawfully funded since September, 2022 because of combined losses of the Federal Reserve System after September 2023,
This is not a final judgment, and is not appealable unless: (1) the Farm Credit Intervenor-Plaintiffs withdraw their motion to amend the complaint to include a separate claim that the rule was unlawfully funded by virtue of the fact that the CFPB used funds obtained from the Fed when the “combined earnings of the Federal Reserve System was and continues to be negative; (2) the partial judgment is certified for interlocutory appeal; or (3) the plaintiffs file a petition for writ of mandamus and the Fifth Circuit entertains it.
Judge Crane issued two additional orders. In the first order, he stayed indefinitely any obligation of the CFPB to respond to the motion for judgment on the pleadings filed by the Farm Credit Intervenor-Plaintiffs. Second, he issued an order scheduling a status conference for September 24th.
The CFPB filed an opposition to the Farm Credit Intervenor-Plaintiff’s motion to amend the complaint stating that the issue raised could have been raised at any time, relies on facts predating the original complaint, and such delay is egregious. In addition, the CFPB asserts that the Intervenor-Plaintiffs failed to show that their delay resulted from oversight, inadvertence, or excusable neglect. This argument seems off base since the new argument would have been unnecessary if the Supreme Court had affirmed the Fifth Circuit in the CFSA case.