Judge sides with CFPB on challenge to small-business lending rule

A federal judge has rejected claims by two bank trade groups and a private bank challenging a rule by the Consumer Financial Protection Bureau to collect data on small-business loans. The ruling marks a significant win for the CFPB, reinforcing its authority to enforce fair lending practices for small and minority-owned businesses. 

But the judge stopped short of issuing a final judgment to consider whether farm groups can intervene in the case with a new constitutional challenge to the bureau’s funding. 

On Monday, U.S. District Chief Judge Randy Crane denied the three claims made by the Texas Bankers Association, the American Bankers Association and Rio Bank, an $864 million-asset bank in McAllen, Texas, under the Administrative Procedure Act. The act governs how agencies can be challenged when issuing regulations, typically for actions that are considered to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 

The judge had choice words for the banks’ claims that the CFPB did not have statutory authority to issue the rule, and that the rule was arbitrary and capricious for failing to consider and respond to significant comments raised by banks and for failing to undertake a proper cost-benefit analysis.

“Plaintiffs’ argument is convoluted and relies on a series of inferences which clash with the substance of the statutory text,” Crane wrote. “The CFPB plainly has the authority to demand financial institutions to collect information which it might not otherwise collect during the application process.”

Banks and lenders oppose the rule, known as 1071 for its section in the Dodd-Frank Act, because the data can be used to identify which financial institutions are doing a poor job of lending to women-, Black- and Hispanic-owned small businesses. The rule was put on hold last year pending the Supreme Court’s decision in May in which Justice Clarence Thomas wrote the 7-2 opinion that the CFPB’s funding is constitutional.

The judge said the CFPB had met its duty to “reasonably consider” the issues and explain its decision.

“These cases elucidate a straightforward proposition that has seemingly evaded Plaintiffs’ understanding — that an agency does not fail to ‘consider’ a concern or suggestion simply because it reached a different conclusion,” Crane wrote in the 28-page opinion filed with the U.S. District Court for the Southern District of Texas.

The judge also criticized the bank groups for inflating data by claiming that the CFPB was demanding “81 pieces of information,” when in fact the rule requires 22 data points, of which 13 were required by statute and nine were added by the CFPB.

“For each category, the administrative record provides adequate support for the agency’s course of action,” the judge wrote.

The seven-page rule was portrayed in plaintiffs’ arguments as spanning 900 pages.

“The Final Rule is much more modest than Plaintiffs would lead the Court to believe,” Crane wrote. “Plaintiffs attempt to portray the Final Rule as much more imposing than it actually is. The bottom line is that the record before the agency simply did not paint the wholly one-sided picture that the record would require for the Court to hold that the agency did not act reasonably.” 

In June, the CFPB gave large banks and financial institutions additional time to comply with the rule, which now is expected to go into effect by July 18, 2025 for the largest lenders. A preliminary injunction remains in effect until Crane decides on the new funding challenge.