A Texas bank and the state’s banking trade group filed a lawsuit challenging the Consumer Financial Protection Bureau’s rule that would require lenders to gather and report small-business loan demographic data, according to a court filing seen Wednesday by Bloomberg Law.
McAllen, Texas-based Rio Bank and Texas Bankers Association filed the complaint against the CFPB and its director, Rohit Chopra, asking to implement changes to the Equal Credit Opportunity Act made by the Dodd-Frank Act.
“Rather than advancing the goal of growing the number of loans made to minority and women-owned businesses, though, the CFPB has now issued a rule that will hinder that aim,” the plaintiffs said.
The CFPB announced a final rule Thursday mandating that lenders capture details about lending decisions, geographic information of the borrowers, and the price of credit to fight unlawful discrimination.
“Many local businesses were shuttered during the COVID-19 pandemic after they struggled to obtain credit under the Paycheck Protection Program,” Chopra said in a statement at the time. “This small-business loan census will give the public key data on this market to ensure that banks and nonbanks are serving small businesses fairly.”
The plaintiffs allege small-business loans play a more significant part in the portfolios of smaller banks, including Rio than in larger financial institutions.
While the average banking organization with $1 billion or less in total assets held over 13% of its portfolio as small-business loans in June 2021, those with assets over $10 billion held roughly 6% of their assets as such loans, the complaint noted.
The suit further contends the new rule require “banks to develop and implement new software and compliance mechanisms to comply with over 80 reporting requirements that have been exponentially grown by the CFPB since the Act requiring this Rule was passed.”
The plaintiffs claim that the new reporting requirements will drive away smaller providers in the space, creating a shortage of available products for all customers, including minority and women-owned small businesses.
According to the complaint, the CFPB ignored the lending community’s apprehensions while formulating the final rule.
The Texas Bankers Association is the oldest and largest state banking organization in the U.S., according to the complaint filed at the U.S. District Court for the Southern District of Texas. Its membership base consists mostly of small to medium-sized banks with a median asset of around $357 million. Rio is a minority depository institution with nearly $900 million in total assets and roughly 95% Hispanic clients, the document stated.
The complainants argued that given the CFPB’s unconstitutional structure, the rules promulgated by the agency should be refuted.
“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 document highlighted.
The U.S. Court of Appeals for the Second Circuit, on March 23, ruled the CFPB’s funding structure is constitutional.
A final decision by the Supreme Court is still pending and is unlikely until 2024, as it will start hearing arguments at the beginning of next term.
