By Rose Oswald Poels
Through an order issued earlier this week, a federal judge in the U.S. District Court, Southern District of Texas, McCallen Division enjoined implementation and enforcement of the Bureau of Consumer Financial Protection’s (CFPB) Section 1071 Small Business Data Collection and Reporting Rule while the United States Supreme Court hears a challenge to CFPB’s funding structure. This enjoinment however does not apply to all banks.
The American Bankers Association (ABA), Texas Bankers Association (TBA), and Rio Bank of McAllen, Texas (collectively, the plaintiffs) had jointly filed a lawsuit against CFPB earlier this spring seeking an injunction for all lenders covered by the rule. The plaintiffs requested the court enjoin the Section 1071 rule nationwide until the U.S. Supreme Court resolves the constitutionality of CPFB’s funding structure.
In 2022, the Fifth Circuit held CFPB’s funding structure unconstitutional because Congress funded CFPB directly from the Federal Reserve; such funding contradicts the Constitution’s Appropriations Clause. CFPB appealed the Fifth Circuit’s decision. See CFPB v. Community Financial Services Association of America. The U.S. Supreme Court agreed to take up the case; however, the Supreme Court is not scheduled to hear arguments until October. A decision by the Supreme Court could be released any time before the end of June 2024. These dates are very close to mandatory implementation of the Section 1071 rule — which for some banks begins as soon as October 2024.
As mentioned above, the federal Texas judge enjoined implementation and enforcement of CFPB’s Section 1071 rule. Unfortunately, however, the court denied the plaintiff’s request for nationwide injunctive relief. The order only applies to the plaintiffs’ members. As a result, the relief only applies to ABA members, TBA members, and to Rio Bank.
I am currently in discussion with outside counsel regarding the narrowness of the order and whether other steps may be taken to help find relief for WBA-member banks not covered by the order. I encourage banks that have yet to determine applicability of Section 1071 to the bank to determine whether and when it must comply with Section 1071, as applicable.
As a reminder, implementation of the Section 1071 rule is staggered. Banks that originate more than 2,500 covered credit transactions in each of the two preceding calendar years must comply with the rule no later than October 1, 2024; banks that originate less than 2,500 but at least 500 covered credit transactions in each of the two preceding calendar years must comply no later than April 1, 2025; and banks that originate less than 500 but at least 100 covered credit transactions in the previous two calendar years must implement by January 1, 2026.
A covered credit transaction is one that meets the definition of “business credit” under Regulation B unless the credit is specifically excluded by the Section 1071 rule. Agricultural purpose loans are included in the Regulation B definition. Specifically excluded credit from the definition of a covered credit transaction under Section 1071 are: trade credit, HMDA-reportable transactions, insurance premium financing, public utility credit, securities credit, incidental credit, factoring, and leases, as defined by the rule. The ability to exclude HMDA-reportable transactions from the definition of covered credit transaction applies to both HMDA-reporting and non-HMDA reporting banks.