Federal Judge Voids CFPB Small Business Reporting Rule—for Some

Decision stops short of nationwide mandate that would likely have impacted credit unions.

A federal judge has issued an injunction prohibiting the CFPB from enforcing its small business lending rule for members of the American Bankers Association (ABA), its Texas affiliate and a bank in that state.

U.S. District Judge Randy Crane of the Eastern District of Texas ruled that the CFPB may not enforce the rule for plaintiffs that sued the bureau challenging the rule. Those plaintiffs are the ABA, the Texas Bankers Association (TBA) and Rio Bank, a Texas financial institution.

Crane refused to issue an injunction that would have had a nationwide impact and would presumably have affected credit unions.

Reasoning Behind the Decision

In issuing the injunction, Crane said that the Fifth Circuit Court of Appeals has ruled that the CFPB’s funding mechanism is unconstitutional because the agency is funded through the Federal Reserve System and not by annual appropriations made by Congress. He also noted that the court found the bureau’s payday lending rule was invalid since it was issued by an agency that is unconstitutionally funded.

The Fifth Circuit includes Texas.

The U.S. Supreme Court has scheduled Oct. 3 oral arguments in the case challenging the CFPB’s funding scheme.

Crane noted that the final small business reporting rule does not go into effect until Aug. 29 and that financial institutions will not have to comply with the regulation until Oct. 1, 2024, at the earliest.

However, the bankers said they already are having to begin implementation of the rule, which is costing financial institutions money.

“Therefore, the Court concludes that those compliance dates and costs are not speculative; that lead-time for compliance was built into the Final Rule does not make Plaintiffs’ claim unripe,” Crane said.

The banks are unlikely to be able to recover that money even if the small business reporting rule is voided, he added.

Plaintiff Reaction

In a joint statement, the three plaintiffs applauded the ruling.

“TBA, Rio Bank, and ABA are pleased with this immediate victory, but we remain committed to our larger case challenging the lawfulness and scope of CFPB’s over-reaching 1071 Final Rule that will only harm lending to small businesses and minority and women-owned enterprises. We look forward to the next steps in this case.”

Rebeca Romero Rainey, president/CEO of the Independent Community Bankers of America (ICBA), agreed that the ruling should apply to all banks.

“ICBA stands firm in advocating that all banks should be covered by the court’s order and is evaluating all necessary steps to protect community banks and their customers from the CFPB’s rulemaking,” she said.

What Comes Next?

Republican members of Congress also have been trying to kill the small business lending rule.

Just before leaving for their August recess, the House Financial Services Committee passed a resolution to eliminate the regulation.

However, even if that resolution were to pass both chambers of Congress, President Biden would certainly veto it and Republicans would be unlikely to have the supermajority needed to override that veto.