On April 26, an association of Texas state banking organizations and a Texas minority depository institution filed a joint complaint against the CFPB in Texas federal court seeking to invalidate a recently finalized agency rule requiring lenders to gather and report data on loan applications from minority, LGBTQ+, and women-owned small businesses (see previous blog post detailing this rule here). The CFPB rule requires that small business lenders must collect and report on the following data points:
- the application date, the application method, the application recipient, the action taken by the financial institution, and the date the action was taken;
- the credit type, credit purpose, and amount of credit for which the applicant applied;
- the census tract of the applicant, North American Industry Classification System code, applicant’s number of employees, applicant’s time in business, and number of applicant’s principal owners; and
- the minority-owned, women-owned and LGBTQI-owned business statuses and the ethnicity, race, and sex of principal owners.
In the complaint, the plaintiffs argue that the CFPB rule would unduly burden smaller lenders whose portfolios are comprised of higher concentrations of small business loans. According to the plaintiffs, this added burden would drive smaller lenders out of the market, which would cause a decrease in the products available to all customers, including women and minority-owned small businesses. The complaint states that this impact would hinder the goals of the Dodd-Frank Wall Street Reform and Consumer Protection Act that added a limited list of reporting requirements to banks and other small business lenders to drive up the number of loans issued to minority and women-owned small businesses. The plaintiffs further rely on the 5th Circuit’s recent decision in CFSA v. CFPB (see previous blog post here) in arguing that, because the CFPB rule was issued with funds derived from unconstitutional sources, the rule itself is unconstitutional and must be set aside.
Putting it into Practice: Presently, the CFPB rule requires that lenders originating at least 2,500 small business loans annually must begin collecting data by October 1, 2024, lenders originating at least 500 small business loans by April 1, 2025, and lenders originating at least 100 small business loans by January 1, 2026. Financial services companies that offer small business loans should monitor the progress of the recently filed litigation, as well as the status of the CFSA v. CFPB case currently pending before the Supreme Court, as the outcomes of these cases will provide clarity regarding the scope of regulatory reporting requirements that small business lenders must to abide by going forward.