Banking and Finance Law Daily Wrap Up, EQUAL CREDIT OPPORTUNITY—S.D. Tex.: Challenge to CFPB’s small business data collection rule rejected, (Aug 27, 2024)

By E. Darius Sturmer, J.D.

While it “may well be that the Final Rule proves ill-advised as a policy matter,” that possibility “does not itself make the Final Rule unlawful under the APA,” the court concluded.

The Consumer Financial Protection Bureau (CFPB) did not exceed its authority by promulgating a small business data collection rule implementing §1071 of the Dodd-Frank Act, and its resulting final rule does not violate the Administrative Procedure Act (APA), the federal district court in McAllen, Texas, has decided. The court rejected arguments by a group of bankers associations and aligned businesses that the Bureau had failed to respond to industry feedback or to conduct a proper cost-benefit analysis of the rule, and it therefore granted judgment as a matter of law to the CFPB defendants on each of the plaintiff associations’ APA claims. Accordingly, the court also denied the plaintiffs’ and intervenors’ motions to supplement the administrative record and for summary judgment. At the same time, because the court “must still rule on the Farm Credit Intervenors’ Motion to Amend the Complaint in Intervention, the resolution of which may introduce an additional claim to this case,” the court found that entry of a final judgment would be “inappropriate at this juncture” (Texas Bankers Assn. v. CFPB, No. 7:23-CV-144 (S.D. Tex. Aug. 26, 2024)).

Background. In March 2023, the CFPB issued a final rule amending Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) made by section 1071 of the Consumer Financial Protection Act of 2010 (CFPA). The new rule requires covered lenders to collect certain information from small businesses that apply for credit and to report that data annually to the CFPB. The CFBP said the rule is designed to work in concert with the Community Reinvestment Act (see Banking and Finance Law Daily, March 31, 2023). Soon afterward, the Texas Bankers Association (TBA) and other associations representing payday lenders and credit-access businesses filed a lawsuit in the federal district court in McAllen, Texas, challenging the regulations.

The Fifth Circuit later accepted the associations’ argument that CFPB funding violated the Appropriations Clause on separation of powers grounds. But on the CFPB’s appeal to the U.S. Supreme Court in a different case—CFPB v. Community Financial Services Assoc. of America, Ltd., No. 22-448 (U.S. May 16, 2024)—the high court arrived at the conclusion that the CFPB’s funding mechanism does not violate the Appropriations Clause (see Banking and Finance Law Daily, May 16, 2024). In the meantime, however, the McAllen Division district court had halted the rule’s data collection requirements and ordered that the CFPB extend the plaintiffs’ and their members’ compliance deadlines to compensate for the period stayed. The court later made that extension nationwide (see Banking and Finance Law Daily, Aug. 1, 2023).

More recently, the CFPB announced a 290-day extension to the Small Business Lending Rule compliance dates, pursuant to court orders in the case. Data collection will now begin in July 2025 for the highest volume lenders, January 2026 for moderate volume lenders, and October 2026 for the smallest volume lenders, though lenders may start collecting data earlier if they like (see Banking and Finance Law Daily, June 26, 2024).

Motion to supplement record. Before addressing the parties’ cross-motions for summary judgment, the court began by turning away the plaintiffs’ motion to supplement the administrative record with a February 2024 ABA Banking Journal article advocating that the final rule “is likely to have a significant adverse impact on smaller lenders and businesses.” The fatal flaw with their argument, the court explained, is that the article “simply is not ‘background information’ as the term is understood[.]” Rather than provide background, the article is better considered “evidence to determine the correctness or wisdom of the agency’s decision,” which “is not permitted,” said the court, citing Harris v. United States, 19 F.3d 1090 (5th Cir. 1994). Moreover, it added, “information which post-dates an agency’s decision plainly cannot be a viable basis for attacking that decision.”

Summary judgment analysis. Noting at the outset of its analysis that the Supreme Court’s decision upholding the constitutionality of the CFPB’s funding structure had eliminated the viability of the plaintiffs’ cause of action premised on that issue, the court explained that the plaintiffs could only prevail on summary judgment through their assertions of APA violations. They raised three such challenges, the court noted: first, that the CFPB promulgated the Final Rule “in excess of statutory authority and short of statutory right[;]” second, that the rule was “arbitrary and capricious for failing to consider and respond to significant comments raised by interested parties[;]” and third, that it was also arbitrary and capricious for failing to undertake a cost/benefit analysis. The court found none of these arguments persuasive.

Statutory authority. Calling the plaintiffs’ challenge to statutory scope “all over the place[,]” the court nevertheless identified two separate arguments challenging the agency’s authority under 5 U.S.C. §706(2)(C): (i) that whereas Dodd-Frank authorized the Bureau to promulgate additional rules which would aid in fulfilling the statute’s purpose, the final rule was counterproductive in that regard so it was not within that authority; and (ii) that the text of Dodd-Frank gave the CFPB authority to impose additional data points only if they constituted information already collected by lenders as part of the loan application process.

Neither held merit. The former “fundamentally misunderstands the Section 706(2)(C) inquiry, which does not consider the wisdom of a regulation’s substance[,]” by improperly conflating the inquiry into statutory authority—which the plaintiffs could not prevail on, since the Final Rule at issue here was unquestionably a “lawful extension of the statute”—with an inquiry into the rule’s effectiveness. The latter argument about additional data points was, the court quipped, “convoluted and reli[ant] on a series of inferences which clash with the substance of the statutory text.” Given that multiple of the items listed in the statute’s subsection (e)(2) included implicit collection requirements, the CFPB plainly holds the authority to demand financial institutions to collect information which it might not otherwise collect during the application process, the court found.

Arbitrary and capricious. Noting that the plaintiffs had “utterly misrepresented the breadth of the Final Rule” in their characterization of it, and had made multiple arguments as to how the rule is arbitrary and capricious under the APA, the court stated that these all boiled down to the central contention that the CFPB’s issuance of the final rule was “arbitrary and capricious because the agency failed to adequately consider its disproportionate costs and the negative effects that those costs will impose on customers and financial institutions alike.” Then, assessing the various costs associated with the final rule, as well as its benefits, the court concluded that the administrative record provided adequate support for the agency’s course of action.

Reviewing the record in detail, the court found that the agency comfortably satisfied its Prometheus Radio Project duty to “reasonably consider the relevant issues and reasonably explain the decision.” It observed that “[f]or each of Plaintiffs’ contentions that the agency ‘failed to consider’ an important aspect of the problem, what they really take issue with is the agency’s bottom-line decision.” The court cited several examples, pointing out that in each instance, the agency had evaluated the plaintiffs’ concerns and addressed them either through methodical explanation or actual accommodation in the final rule. The Bureau considered the various costs in detail, engaged with the various concerns, data, and methodologies, and ultimately based its determination on plausible justifications, stated the court.

The Bureau reasonably explained its consideration of the benefits of the final rule to both financial institutions and small businesses, as well, in the court’s view. With respect to financial institutions, the agency observed that the new requirements would lower “false positive” rates, potentially ameliorate lending risks, and help inform their products and decisions, and the record illustrated that the agency considered even those issues raised in the comments that the plaintiffs accused them of avoiding. As for small businesses, the Bureau likewise identified multiple benefits, though it acknowledged that the benefits are difficult to precisely estimate.

In sum, though, the Bureau met its obligation to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made,” the court held. Calling the administrative record voluminous and the breakdown of the agency’s decision-making comprehensive, the court concluded that the agency had reasonably assessed the effects of the final rule, including its anticipated costs versus benefits.

ABA, TBA response. In a joint statement issued following the decision, ABA and TBA announced that they are planning and preparing to appeal the decision to the Fifth Circuit Court of Appeals.

The case is Civil Action No. 7:23-CV-144.

Judge: Crane, R.

Attorneys: James J. Butera (Meeks, Butera & Israel PLLC) for Texas Bankers Association. Kevin E. Friedl for the Consumer Financial Protection Bureau.

Companies: Texas Bankers Association

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