The Texas Bankers Association and Rio Bank sued the Consumer Financial Protection Bureau (CFPB) and its director in federal court in Texas four weeks after the CFPB published its nearly 900-page final rule on small business data collection (the Final Rule) on March 30.
The Final Rule was mandated by Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Amended Complaint included the American Bankers Association as a plaintiff on May 14. The action challenges the Final Rule and seeks an illegal judgment.
Dodd-Frank Section 1071
At its core, Section 1071 requires certain financial institutions (generally defined in the Final Rule as lenders that originate at least 100 covered transactions in each of the two preceding calendar years) to inquire whether a commercial credit applicant is “women-owned, minority-owned, or small business” and submit this data (which includes less than a dozen specific credit data points to be obtained in connection with the credit application) to the CFPB.
The Final Rule defines “covered transactions” as loans, lines of credit, credit cards, merchant cash advances, and other credit instruments used for agricultural, business, or commercial purposes.
The Final Rule compels covered financial institutions to “comply with over 80 reporting requirements that have exponentially grown by the CFPB” since the Dodd-Frank Act was introduced, notwithstanding Dodd Frank’s restricted reach.
According to the CFPB’s Small Entity Compliance Guide for the Small Business Lending Rule (Guide), the Final Rule requires covered financial institutions to “maintain procedures reasonably designed to collect applicant-provided information, which includes the applicant’s minority-owned, women-owned, and LGBTQI+-owned businesses” and report data to the CFPB annually.
The Guide states that “[a] low response rate for applicant-provided data may indicate discouragement or a failure by a covered financial institution to maintain procedures reasonably designed to obtain a response to a request for applicant-provided data.”
The Amended Complaint alleges that the Final Rule would “drive smaller providers from the [smaller commercial credit] market, causing a decrease in the products available to all customers, including minority and women-owned small businesses.”
The plaintiffs argue that entities covered by the Final Rule will need to “select new computer software…; train employees; and hire outside managers for the implementation of the information collection, report preparation, intra-company segmentation procedures, and overall privacy protection needed to safeguard the extensive a The plaintiffs claim this will cost insured banking firms “alarming costs.”
The plaintiffs argue that the Final Rule’s “cost-benefit analysis” was “incomprehensible.” “In particular, we use Bayesian independent univariate conditional multiple ordinary least squares (OLS) regression model,” the CFPB stated in its lawsuit. Since data are missing at random (MAR), we may apply a Bayesian multiple OLS regression model. Impute origination number and dollar volume statistics.
An independent univariate conditional model can yield multivariate imputations since the missing variables are monotone.” The plaintiffs say the rationale is “indecipherable” and fails to “account for the higher proportion of small business loans generated by rural, small and other community banks.”
The Amended Complaint claims the CFPB ignored many comment letters, including one from the US Small Business Administration.
As expected given the circuit split on the issue, the Amended Complaint also claims that the CFPB’s appropriations are unconstitutional, predicated on the pending US Supreme Court hearing of CFPB v. Community Financial Services Assn. (5th Circuit, October 19, 2022), which will be argued during the Court’s 2023-2024 term.
The Texas Bankers Association, the oldest bankers association in the US, and a minority-owned insured depository institution with only $900 million in assets filed the case in federal court in Texas because the amended complaint alleges that compliance with the Final Rule will cause economic harm to smaller insured depository institutions.
The plaintiffs’ claims include the failure to consider comments from the US Small Business Administration, which monitors small businesses’ economic health.
The American Bankers Association is a listed plaintiff in this action, but other industry players feel the Final Rule did not go far enough. In the National Community Reinvestment Coalition’s Final Rule report, the “[commercial credit] industry regularly expresses… overblown concerns [about compliance costs and their potential exit from the small business market], which are not supported by rigorous data analysis.”
As of this publication, the case has not been decided, but “covered financial institutions” should follow it closely because it may affect the Final Rule’s compliance deadlines or validity and enforceability.