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Texas trade group, local bank file suit over CFPB small lending rule

The plaintiffs say the small business lending rule is too onerous for some small businesses

The Texas Bankers Association (TBA), a Texas-based trade group, and Rio Bank, a local bank based in McAllen, Texas, have filed a lawsuit in federal district court against the Consumer Financial Protection Bureau (CFPB). The suit seeks to invalidate the CFPB’s new final rule on small business lending, which, according to the Bureau, fulfills a mandate from Congress and increases transparency while mitigating discrimination.

The suit was filed in the Fifth Circuit Court of Appeals, which is the same court that ruled the CFPB’s funding source was unconstitutional in late 2022. An appeal in that case is expected to go before the U.S. Supreme Court in their next term, likely in early 2024.

The plaintiffs allege in the lawsuit that because the CFPB’s funding was found to be unconstitutional, the new rule is not enforceable.

“The unconstitutional nature of the CFPB’s funding infects every aspect of the Rule at issue here as it would not have taken place—and certainly would not have grown into the crushing behemoth just released by the CFPB—if the agency had not been funded inappropriately and thereby lacked oversight,” the lawsuit states.

“CFPB has taken 3 pages of legislation requiring 13 data points and turned it into nearly 900 pages of regulation requiring 81 data points,” said TBA President and CEO Chris Furlow in a statement. “CFPB repeatedly exceeds its authorities and ignores required rulemaking law because its unconstitutional funding and leadership structure make it accountable to no one.

The Second Circuit Court of Appeals issued a ruling in March, however, that stated the CFPB’s funding source was constitutional, holding that it could find no basis in Supreme Court precedent for the Fifth Circuit decision — and that the Constitution itself does not support the prior ruling that invalidated the Bureau’s funding source.

The final rule at the center of the lawsuit partially aligns small business lending standards with those of the mortgage industry, including the requirement for lenders to submit data points required by Congress — in addition to data points already included in lender files.

However, duplicative reporting requirements are also reduced by the new rule, as loans reportable under the Home Mortgage Disclosure Act (HMDA) will not need to be reported under the small business lending rule.

These rules are too onerous for some small business lenders to remain in operation, according to the complaint filed with the court.

“Absent immediate relief on these claims, the Association’s community and midsize bank members will be forced into a compliance regime that will drive some members out of the small business loan industry and that will force all members remaining in the industry to spend significant sums of money preparing to comply with an illegitimate Rule—money that cannot be recovered,” the complaint states.

The CFPB has not yet filed a response to the suit.

Last month, a group of Republican U.S. House of Representatives members introduced a resolution that would block the small business rule from implementation, which is scheduled to go into effect for some lenders in October 2024.

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