The CFPB’s 1071 Rule is on hold. On October 26, 2023, the United States District Court for the Southern District of Texas issued a nationwide injunction that enjoins the Consumer Financial Protection Bureau (“CFPB”) from implementing and enforcing its small business lending data collection rule (the “1071 Rule”). The injunction stems from a lawsuit filed by a group of lenders and trade associations seeking to set aside the 1071 Rule on the grounds that the rule was issued using funds that were unconstitutionally appropriated to the CFPB, pursuant to the United States Court of Appeals for the Fifth Circuit’s ruling in Community Financial Services Ass’n v. CFPB, which held that the CFPB’s funding mechanism violates the US Constitution’s Appropriations Clause and separation of powers. We previously reported on the 1071 Rule litigation on our recent podcast, available here. With the court’s ruling, the CFPB is now enjoined on a nationwide basis from enforcing and implementing the 1071 Rule against any “covered financial institution,” subject to the Supreme Court’s ruling in Community Financial Services Ass’n, which is expected in 2024.
The CFPB’s 1071 Rule (which we have addressed in detail in previous Legal Updates) requires certain “covered financial institutions” that receive applications for financing from small businesses to collect and report data about their small business lending activities, with the purpose of facilitating enforcement of fair lending laws with respect to women-owned, minority-owned, and small businesses. After a lengthy rulemaking process, the CFPB issued its final 1071 Rule on March 30, 2023, with a tiered effective date between October 24, 2024 and January 1, 2026, depending on a lender’s volume of small business financing activity.
The path to the court’s ruling began shortly after the final 1071 Rule was issued, when Rio Bank, the American Bankers Association, and the Texas Bankers Association filed a lawsuit in the United States District Court for the Southern District of Texas alleging the rule was invalid because it was issued using funds that were unconstitutionally appropriated to the CFPB. In its motion in opposition to the plaintiffs’ motion for a preliminary injunction in that case, the CFPB argued that even if an injunction were to be granted, any injunction should be narrowly tailored and applied only to the plaintiffs before the court. While the court granted injunctive relief to Rio Bank and banks that are members of the American Bankers Association or Texas Bankers Association on July 31, 2023, the court declined to issue a broader nationwide injunction at that time.
The patchwork nature of the injunction caught the eye of some industry groups. In August 2023, a consortium of trade associations sent a letter to CFPB Director Rohit Chopra requesting that the CFPB ensure “parity and consistency” across financial institutions subject to the 1071 Rule. Noting that the 1071 Rule was stayed for some financial institutions who were parties to litigation where an injunction had been issued, but not other financial institutions, the trade associations requested that the CFPB pause the 1071 Rule’s effective date and compliance dates until the Community Financial Services Ass’n case is resolved by the Supreme Court. The trades’ position was strengthened when a federal court in Kentucky granted similar injunctive relief in a lawsuit brought by the Kentucky Bankers Association and a group of Kentucky banks on September 14, 2023.
After the Southern District of Texas issued its order granting a preliminary injunction in Rio Bank’s lawsuit, a consortium of depository institutions, credit unions, and commercial finance trade associations moved to intervene in the litigation and, eventually, moved for their own preliminary injunction. The intervenor plaintiffs requested that the court issue a nationwide injunction covering all “covered financial institutions” subject to the 1071 Rule, arguing that the prospect of a limited injunction and changed circumstances since the original preliminary injunction ruling risks causing smaller financial institutions with less ability to challenge the 1071 Rule to incur costs implementing compliance controls and processes “that prove unnecessary and unrecoverable.” The court sided with the intervenor plaintiffs on the remainder of the arguments, and granted the intervenor plaintiffs’ motion for a preliminary injunction.
The court then proceeded to the question of whether a nationwide injunction was merited. Finding that “[t]o limit the injunction would undermine the goals of preventing inequality in lending and harm to the constitutional structure pending U.S. Supreme Court review of the question at issue,” the court extended the preliminary injunction to all financial institutions subject to the 1071 Rule, on a nationwide basis. The court clarified that its injunction requires the CFPB to cease implementation and enforcement of the 1071 Rule against all covered financial institutions, but it does not prevent the CFPB from answering inquiries or publishing guidance materials, since these actions do not qualify as “conduct taken against any financial institution[.]”
Industry groups will likely be watching closely for the CFPB’s next move on the 1071 Rule, including whether the CFPB will extend the 1071 Rule’s effective dates to account for the period that implementation of the rule is stayed pending the Supreme Court’s resolution of the Community Financial Services Ass’n case.