On July 31, the U.S. District Court for the Southern District of Texas enjoined the CFPB from implementing and enforcing the small business lending rule (Section 1071) requirements pending the Supreme Court’s decision in Community Financial Services Association of America Ltd. v. CFPB, a challenge to the constitutionality of the CFPB’s funding structure (we previously discussed Section 1071 rulemaking in prior blog posts here and here, and the Texas lawsuit here). In particular, the court enjoined the CFPB from implementing and enforcing the final rule against the plaintiffs and their members, but denied the plaintiffs’ request for a nationwide injunction.
The plaintiffs’ complaint relied heavily on the Fifth Circuit’s decision in CFSA v CFPB, finding the CFPB’s funding structure unconstitutional and, therefore, rules promulgated by the Bureau invalid. The CFPB’s appeal of the Fifth Circuit’s decision is currently pending before the Supreme Court (discussed in a previous blog post here). Based on the Fifth Circuit panel decision in CFSA, the court found a substantial likelihood that the plaintiffs would prevail in asserting that the Rule is invalid because it was promulgated using the CFPB’s unconstitutional funding. The injunction would dissolve if the Supreme Court reverses the Fifth Circuit’s decision, but, in that event, the CFPB would be required “to extend [the plaintiffs] and their members’ deadlines for compliance with the requirements of the Final Rule to compensate for the period stayed.”
Putting It Into Practice: Again, the injunction applies to financial institutions that are the plaintiffs and their members. Other companies must continue to comply with the final rule, which include non-depository lenders, merchant cash advance companies, and other banks. Despite this recent challenge, regulatory scrutiny over small business lending appears to be increasing, and it is vital that institutions carefully review and understand any new rules that may impact their businesses as part of their compliance process.