The Consumer Financial Protection Bureau (CFPB) headquarters in Washington, DC, USA, Sunday, May 22, 2022. The Federal Reserve raised interest rates by 50 basis points earlier this month, and its chairman signaled he plans to raise rates by a similar amount at its June and July meetings. Photo by Joshua Roberts/Bloomberg
Bloomberg News
A federal court has dismissed a lawsuit brought by two banking trade associations and private banks challenging the Consumer Financial Protection Bureau’s data collection rules on small business lending, marking a major victory for the bureau and giving it greater authority to enforce fair lending practices for small businesses and minority-owned businesses.
But the justices stopped short of issuing a final ruling, leaving the matter to consider whether agricultural groups can intervene in the case with a new constitutional challenge to the department’s funding.
U.S. District Judge Randy Crane on Monday dismissed all three challenges brought by the Texas State Bankers Association, the American Bankers Association and the $864 million-asset Rio Bank of McAllen, Texas, under the Administrative Procedure Act, which outlines how government agencies can be challenged for actions when issuing regulations that are typically deemed “arbitrary, capricious, an abuse of discretion, or otherwise in violation of law.”
The judge sharply criticized the banks’ arguments that the rule was arbitrary and capricious because the CFPB lacked legal authority to issue the rule, failed to consider and address significant comments raised by banks, and failed to conduct a proper cost-benefit analysis.
“Plaintiffs’ arguments are complex and rely on a series of reasonings that are at odds with the substance of the statutory text,” Crane wrote. “The CFPB clearly has the authority to require financial institutions to collect information they may not otherwise collect during the application process.”
Banks and lenders have opposed the rule, called 1071 after a provision of the Dodd-Frank Act, because the data could be used to identify financial institutions that under-lend to women-, black- and Hispanic-owned small businesses. The rule was put on hold last year pending a May decision by the Supreme Court, in which Justice Clarence Thomas wrote in a 7-2 ruling that the CFPB’s funding was constitutional.
The judge said the CFPB had “reasonably considered” the issue and met its obligation to explain its decision.
“These cases reveal a simple proposition that plaintiffs appear to have failed to grasp: that simply because an agency reaches a different conclusion does not mean that it did not ‘consider’ concerns or suggestions,” Crane wrote in a 28-page brief filed in the U.S. District Court for the Southern District of Texas.
The judge also criticized the banking groups for inflating their data by claiming the CFPB was requesting “81 pieces of information,” when in fact the rule called for 22 data points, 13 of which were required by law and 9 of which were added by the CFPB.
“For each category, the administrative record adequately supports the agency’s course of action,” the judge wrote.
The plaintiffs’ argument explained that the seven-page rule extends to 900 pages.
“The final rule is far more modest than plaintiffs would have the Court believe,” Crane wrote. “Plaintiffs attempt to portray the final rule as much more stringent than it actually is. In short, the record before the Agency does not paint the fully ex parte picture necessary for a Court to find that the Agency’s actions were unreasonable.”
The CFPB in June gave big banks and financial institutions additional time to comply with the rule, which is now due to go into effect for the largest lenders by July 18, 2025. The preliminary injunction will remain in effect until Crane issues a decision on the new funding challenges.
