Bankers Ask For Preliminary Injunction in CFPB Rule Challenge

Rule would require banks and credit unions to report lending activity to women- and minority-owned small businesses.

The American Bankers Association is asking a Texas federal judge to issue a preliminary injunction that would prevent the CFPB’s small business reporting rule from going into effect.

The ABA, its Texas affiliate and Rio Bank contend that the final rule, scheduled to go into effect on Aug. 29, is invalid because the Fifth Circuit Court of Appeals has found the agency’s funding mechanism unconstitutional. They argue that the U.S. Supreme Court is likely to uphold that ruling.

“Thus, absent an injunction, Plaintiffs (and their members) would be forced to spend millions of dollars preparing to comply with an invalid rule—such unrecoverable costs constitute irreparable harm,” they said.

Backstory and Context

The CFPB has issued its final rule that will require credit unions and banks to report their lending activity to women- and minority-owned small businesses. The rule, totaling more than 800 words, goes into effect in August, but financial institutions will not have to comply until next year at the earliest as there are various compliance dates depending on the size of the financial institution.

Separately, the Fifth Circuit Court of Appeals has ruled that the CFPB’s funding mechanism is unconstitutional because the funding does not go through the annual appropriations process. However, the Second Circuit Court of Appeals has ruled that the funding scheme is constitutional, and the U.S. Supreme Court has agreed to hear oral arguments in the Fifth Circuit case this fall.

Supporters of the current CFPB funding mechanism argue that in Dodd-Frank, Congress purposely attempted to insulate the agency from the political pressure that comes from being subjected to the annual appropriations process. They said further that Congress explicitly designed the funding mechanism, so it is constitutional.

Bankers’ Stance

The bankers contend that if the agency’s funding mechanism is illegal, then agency officials used invalid funds to develop the small-business rule. And they ask Judge Randy Crane of the U.S. District Court for the Southern District of Texas to issue an injunction keeping the small business rule from going into effect.

“The Rule is invalid...because the CFPB employed funds to promulgate the Rule that were wholly drawn through the agency’s unconstitutional funding scheme,” the bankers contend.

They said that each bank across the country will be forced to spend more than $100,000 to prepare for the reporting deadlines established in the new rule.

They added that even though the compliance dates seem to be at least a year away, bank examiners will watch to see if banks are preparing for compliance. Further, they said that Rio Bank expects to spend at least $20,000 through the end of the year preparing to comply with the rule.

“Absent immediate relief, the Associations’ community and mid-size bank members will be forced into a compliance regime that will drive some members out of the small business loan industry altogether,” the bankers said. “The result will be lost business for banks and, more importantly, lost borrowing opportunities for the very women and minority-owned businesses that Congress set out to help in the Dodd-Frank Act.”